Crypto, Black Markets and Shadow Financing

Sanctions are designed to restrict. They aim to cut off access to capital, isolate economies and disrupt the financial lifelines that sustain states during conflict. Modern financial systems provide powerful tools to enforce this isolation: centralised clearing networks, correspondent banking relationships, dollar-denominated settlement infrastructure and the SWIFT messaging system that connects over 11,000 financial institutions worldwide. Control those chokepoints and, in theory, you control the flow of money into and out of any targeted economy. In practice, financial pressure rarely produces complete economic shutdown. Instead, it produces adaptation. And adaptation, sustained under pressure over years, produces infrastructure.

Modern sanctions rely on control over formal financial infrastructure. Banks, payment systems and global clearing networks provide the channels through which international trade and finance operate. Restrict access to these systems, and a country's ability to transact globally becomes severely constrained. But these systems are not the only channels through which value moves. They are simply the most visible, the most documented and the most accessible to regulatory intervention. When access to formal finance is restricted, alternative mechanisms expand. These mechanisms are often less efficient, less transparent and more costly than the systems they replace, but they are functional. And in wartime, functionality is enough.

The fundamental limitation of financial sanctions is structural rather than operational. Western financial architecture was built by states that assumed other states would want access to it. The dollar's dominance, SWIFT's connectivity and the correspondent banking system all rest on the premise that international actors prefer formal integration to informal isolation. That premise held for most of the post-war period. It is now actively contested by a growing number of states and non-state actors who have concluded that the costs of operating outside formal finance are lower than the costs of being subject to it. Each sanctions episode that fails to achieve its political objectives while successfully damaging an economy's civilian population reinforces this calculation for every government watching.

Informal financial systems have existed for centuries, and they have survived every attempt by formal regulatory architecture to eliminate them precisely because they do not depend on that architecture. The hawala network, originating in South Asia and now operating across the Middle East, Africa, Central Asia and significant diaspora communities in Western cities, transfers value through a system of trust obligations between brokers rather than through any movement of money. A sender deposits funds with a hawala broker in one location. A message is conveyed to a corresponding broker in the destination. The recipient collects the equivalent sum. No money crosses a border. No banking system is involved. No transaction appears in any regulatory record.

Under sanctions pressure, these systems scale rapidly. Traders settle transactions through intermediaries in third countries. Goods are exchanged directly for other goods rather than currency. Payments are routed through complex chains of accounts specifically designed to obscure origin and destination. These networks are difficult to monitor and structurally resistant to elimination. They rely on trust, longstanding relationships and decentralised human networks rather than centralised institutions with identifiable chokepoints. Disrupting a correspondent banking relationship takes a single regulatory decision. Disrupting a hawala network that operates across four continents through personal relationships developed over decades is a categorically different problem, and one for which the current sanctions toolkit has no effective answer.

Digital currencies have introduced a genuinely new dimension to shadow financing, though the extent of their role is frequently overstated in both directions. Cryptocurrencies allow value to be transferred across borders without relying on traditional banking systems. Transactions occur directly between parties on distributed ledgers, with the degree of privacy depending heavily on which specific network and method is used. For sanctioned actors, this offers a potential workaround to the correspondent banking restrictions that are the primary mechanism of most modern sanctions regimes.

The reality of crypto-based sanctions evasion is more nuanced than either its proponents or its critics typically acknowledge. Most major cryptocurrency networks, including Bitcoin and Ethereum, are pseudonymous rather than anonymous. All transactions are permanently recorded on a public blockchain. Blockchain analytics firms including Chainalysis and Elliptic have developed sophisticated tools for tracing cryptocurrency flows, identifying wallets associated with sanctioned entities and monitoring exchanges for illicit activity. The US Treasury's Office of Foreign Assets Control has sanctioned multiple cryptocurrency addresses and exchanges. Conversion of cryptocurrency into usable fiat currency typically requires interaction with an exchange, most of which operate know-your-customer and anti-money-laundering programmes that create exactly the paper trail that sanctions evasion requires avoiding.

Where cryptocurrency has proved operationally significant for sanctions evasion is in specific, targeted use cases rather than as a wholesale substitute for the formal financial system. North Korea's Lazarus Group has stolen an estimated $3 billion in cryptocurrency from exchanges and decentralised finance protocols since 2017, according to the UN Panel of Experts. These funds are laundered through chain-hopping across multiple blockchain networks, mixing services and privacy-enhancing coins before eventually being converted into usable currency through peer-to-peer exchanges or over-the-counter brokers operating in jurisdictions with weak enforcement. Iran has reportedly used cryptocurrency mining revenues to generate dollar-equivalent income outside the banking system. Russian oligarchs investigated by European authorities have been found to hold significant cryptocurrency reserves as an alternative store of value outside the reach of asset freezes.

The most economically significant mechanism of sanctions evasion, however, is not cryptocurrency but commodity trade. Energy, minerals and agricultural goods can be exchanged through alternative arrangements that bypass traditional financial systems entirely, because the physical movement of goods provides its own settlement mechanism. Oil plays a central role in most major shadow financing networks, not because it is uniquely suitable for evasion but because it is the single most valuable commodity in international trade and because the states most subject to energy sanctions are also, in most cases, significant oil producers.

Russian oil exports since 2022 provide the most comprehensively documented contemporary case study. Following the imposition of the G7 oil price cap and European import bans, Russian crude continued to reach global markets through a combination of mechanisms that have been extensively documented by maritime intelligence firms, investigative journalists and government agencies. Shipments are transshipped through ports in third countries including Turkey, India, the UAE and several Asian jurisdictions, where the cargo is blended with oil of different origin or simply relabelled. Ships transfer cargo at sea between vessels, with the receiving vessel operating under a different flag and ownership structure. AIS tracking signals are disabled or falsified. Ownership is structured through layers of shell companies incorporated across multiple jurisdictions. Insurance is provided through alternative pools outside the reach of Lloyd's of London and other major Western underwriters, primarily through Russian state-linked entities or opaque offshore arrangements.

Shadow financing depends structurally on intermediary states willing to act as connectors between sanctioned economies and global markets. These states provide access to logistics networks, financial services, port infrastructure and trade documentation that would otherwise be unavailable to sanctioned actors. They are not necessarily ideologically aligned with the sanctioned state, nor are they necessarily acting in knowing violation of the sanctions regime. Many are simply pursuing their own commercial and geopolitical interests in an environment where the Western financial system's coercive power creates profitable arbitrage opportunities for those positioned between it and its targets.

Turkey has emerged as one of the most important intermediary states for Russian trade since 2022, with Turkish exports to Russia increasing sharply and Turkish banks processing a significant share of Russia's remaining international financial transactions before the tightening of secondary sanctions pressure in 2024. The UAE has served a similar function, with Dubai's role as a global trading hub providing both the commercial infrastructure and the regulatory environment for significant volumes of goods and financial flows that would not survive scrutiny in Western jurisdictions. India has conducted substantial oil purchases from Russia in rupees rather than dollars, demonstrating that a major economy can maintain normal commercial relations with a heavily sanctioned state without triggering punitive consequences from Western regulators, provided it manages the political optics carefully. China has expanded its use of CIPS and yuan-denominated settlement for trade with Russia and other sanctioned states, building financial infrastructure that serves its own long-term interest in reducing dollar dependence while simultaneously benefiting sanctioned partners.

One of the most consequential and least anticipated effects of the aggressive deployment of financial sanctions is the innovation they drive. When traditional systems become inaccessible, actors develop new methods of conducting trade and finance that are often more resilient and more difficult to monitor than the systems they replaced. This is not a new phenomenon. The history of financial regulation is in large part a history of innovation outpacing oversight, followed by oversight catching up, followed by further innovation. What is new is the speed of the cycle, the global scale of the actors involved and the degree to which state resources are being deployed to accelerate it.

Russia has invested significantly in expanding SPFS, its domestic SWIFT alternative, which now connects over 550 financial institutions across 24 countries and processes a growing share of Russia's international financial messaging. China has expanded CIPS to the point where it processed $17 trillion in transactions in 2023, a 27 per cent increase on the previous year. Both systems remain well below SWIFT in scale and reach, but the trajectory is established and its momentum is compounding. The global financial system is no longer singular. Alongside the formal, regulated, dollar-denominated architecture exists a growing network of informal and alternative mechanisms capable of functioning independently when necessary. The shadow economy of war is not an exception to the global financial order. It is becoming a structural feature of it.