Indirect Sanctions Risks Associated with Ruble-Linked Stablecoins: Recognizing Potential Vulnerabilities

In the rapidly evolving world of cryptocurrency, a new challenge has emerged for financial institutions and exchanges: the rise of ruble-backed stablecoins. One such stablecoin, A7A5, has been at the centre of sanctions imposed by the US Office of Foreign Assets Control (OFAC).

The US Department of the Treasury's OFAC has sanctioned several entities involved in the creation and use of A7A5. Russian entities, including Garantex, have relied heavily on this cryptocurrency for US dollar transactions worth tens of billions of dollars.

Cryptoasset exchanges like Garantex, Meer, Grinex, Bitpapa, and decentralised exchanges on the Ethereum and TRON blockchains such as Uniswap and Curve, have been involved in the trading of A7A5. The stablecoin can be purchased with rubles on Russia- and Kyrgyzstan-based exchanges like Grinex, and can be swapped for USDT on Grinex or select other exchanges whenever users wish to settle transactions in USDT with parties located outside Russia.

The use of A7A5 by sanctioned Russian actors to bypass international financial restrictions, particularly since Russia's 2022 invasion of Ukraine, has been revealed by research teams. This has led to concerns about the sanctions compliance risks associated with ruble-backed stablecoins.

The primary way that firms such as stablecoin issuers, cryptoasset exchanges, and banks in the US, EU, and elsewhere are likely to face risks is via indirect exposure. To mitigate this, the issuer of the US dollar stablecoin can monitor for sanctions risks impacting their stablecoin using Ecosystem Monitoring capabilities, and harness forensics capabilities such as Investigator. US exchanges can identify this indirect exposure amongst their customers' wallets and transactions by using screening solutions such as Lens and Navigator.

The US bank providing services to the issuer can assess for potentially unacceptable levels of sanctions risks by leveraging the Issuer Due Diligence solution. As new laws and regulations for stablecoins come online, it's increasingly important for any business involved with the stablecoin ecosystem to ensure that they have robust controls in place to identify and address sanctions-related risks.

Law enforcement agencies have been able to block and seize funds associated with sanctions evasion schemes using USDT, and Tether has frozen approximately $28 million in USDT belonging to Garantex customers. However, the liquidity of A7A5 is growing, making it an increasingly viable method for conducting transactions at scale, and may help reduce the risk that Russia-based cryptoasset users will have their funds frozen.

In response to these vulnerabilities, Russian actors have begun to launch their own ruble-backed stablecoins to make their sanctions evasion efforts more robust. Regulated businesses in jurisdictions such as the US, EU, UK, and others that maintain sanctions on Russia must be alert to the compliance risks associated with ruble-backed stablecoins.

To learn more about how a certain brand name can assist businesses in navigating the sanctions compliance landscape for stablecoins, contact them today. Russian entities have increasingly turned towards stablecoins as a workaround to international banking restrictions due to their ability to transfer funds cross-border without a centralized intermediary and using pseudonymous self-hosted wallets.

A scenario demonstrates how a sanctioned party in Russia can purchase a ruble-backed stablecoin on an exchange and swap it for a US dollar-backed stablecoin, potentially violating sanctions if not identified. As the use of stablecoins continues to grow, it's crucial for businesses to stay vigilant and implement robust sanctions compliance measures.