Russian Bitcoin and other cryptocurrencies could be part of future sanctions

Washington is considering a novel area for possible further sanctions against Russia: cryptocurrencies.

Targeting the country's access to cryptocurrencies, such as bitcoin and ether, would take sanctions policy into uncharted territory. Blocking transactions would be challenging, since by nature private, digital currencies are designed to exist without borders and for the most part outside the government-regulated financial system.

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The Biden administration is in the early stages of exploring the area, with the aim of disrupting economic activity in the country, The Wall Street Journal reported Friday, citing an administration official. Sanctions on Russia's crypto activities would need to be crafted in a way that didn't destroy the broader crypto market, which may make imposing them difficult, the official said.

Steps by regulators in recent years to have greater oversight of crypto transactions could give governments leverage, for instance, to ask crypto exchanges and brokerages to block transactions in certain countries or with certain government-issued currencies, such as the ruble.

Cryptocurrencies make up a greater part of Russia's financial system than most other nations due to a distrust in its banking system, said Marlon Pinto, director of investigations at London-based risk advisory firm AnotherDay. A Russian government report estimates that there are more than 12 million cryptocurrency wallets, where the digital assets are stored, opened by Russian citizens and the amount of the funds is about 2 trillion rubles, equivalent to about $23.9 billion.

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Russia is the third-largest country for bitcoin mining, the energy-intensive and mathematically complex process by which new bitcoins are harvested, according to August 2021 data from the University of Cambridge.

Russia's government has a hot-and-cold attitude toward cryptocurrencies. The country's central bank proposed outlawing cryptocurrency operations last month, calling for a ban on cryptocurrency issuance and operations, stopping banks from investing in them and blocking the exchange of crypto for government-backed currencies. The central bank has also called for a ban on cryptocurrency mining.

Yet President Vladimir Putin said in January that Russia has "certain competitive advantages" with it regarding electricity surplus and a trained workforce. Russia's Finance Ministry has submitted draft regulations to the government that would allow residents to invest in cryptocurrencies through licensed entities though cap the amount of rubles they could invest. The continuing dispute prompted Mr. Putin to publicly call for a compromise last month.

One motivation to target cryptocurrencies is that they could potentially be used to get around other sanctions that focus on the traditional banking and payments system.

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Iran, which faces strict sanctions from the U.S. that have limited its access to global financial markets, has used cryptocurrency mining to circumvent sanctions, according to analytics firm Elliptic.

Like Russia, Iran is a major oil producer, allowing it to use that fuel to power bitcoin mining and reap the digital currency in exchange, using it to buy imports. This allows Iran to avoid sanctions on payments through Iranian financial institutions.

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Enacting sanctions on cryptocurrencies would be difficult, analysts say. Major cryptocurrency exchanges work with regulators who ask for information on clients and suspicious transactions. But increasing in popularity are peer-to-peer cryptocurrency transactions that lack a central intermediary.

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com and Vivian Salama at vivian.salama@wsj.com