Stablecoins, Sanctions, and the Rise of CBDCs

Stablecoins have become a key battleground in the attempt to circumvent international sanctions, but their role is far more complex than a simple tool for evasion. While they operate on blockchain infrastructure, they are not free from the intermediaries that sanctions depend on. Unlike the SWIFT and correspondent banking networks controlled by sanctioning countries, centralized stablecoin issuers like Tether (USDT) and Circle (USDC) have themselves become critical chokepoints for enforcement. This dynamic explains both why U.S. authorities have successfully frozen tens of millions in illicit assets and why sanctioned actors - particularly Russian entities since 2022 - have been forced to develop bespoke, non-compliant stablecoins to maintain economic activity.

The Mechanics of Sanctions Evasion

International sanctions enforce restrictions through financial intermediaries. Regulatory bodies like OFAC (US) require banks and, increasingly, cryptocurrency issuers to screen transactions and freeze accounts. The use of stablecoins for sanctions evasion has not eliminated this dependency but rather shifted its battlefield. This has become a dynamic "cat-and-mouse" game:

1. Phase 1: Using Compliant Stablecoins: Initially, sanctioned actors (like those in Russia) used mainstream, dollar-pegged stablecoins like USDT (Tether), moving them through lightly regulated exchanges, such as the OFAC-designated Garantex.

2. Phase 2: Enforcement at the Intermediary: This strategy proved flawed. Because USDT is controlled by a central issuer (Tether), that issuer acts as an intermediary. In compliance with U.S. sanctions, Tether has repeatedly frozen wallet addresses associated with Garantex and other sanctioned entities, proving that these "decentralized" assets still have a "centralized" off-switch.

3. Phase 3: Creating Bespoke, Non-Compliant Systems: This enforcement forced sanctioned actors to evolve. They recognized the risk of using compliant stablecoins and, in response, created their own infrastructure. A prime example is the privately-owned A7A5 ruble-backed stablecoin.

Real-world evidence demonstrates the scale of this new phase. The A7A5 stablecoin, issued from Kyrgyzstan and reportedly backed by the sanctioned Russian state-owned Promsvyazbank (PSB), was designed specifically to bypass compliant issuers. Blockchain analytics firms like Elliptic reported in 2025 that A7A5 was facilitating over $1 billion in daily flows. The entity's founder, sanctioned Moldovan oligarch Ilan Shor, has even claimed his network processed the equivalent of $89 billion over ten months. These mechanisms involve purchasing the stablecoin, transferring it internationally, and converting it to local currencies. All entirely outside the reach of compliant intermediaries. The pseudonymous nature of blockchain wallets compounds this problem, but the true challenge has shifted from tracking public blockchains to identifying and sanctioning the new non-compliant issuers.

Stablecoins as Banking System Alternatives

Beyond illicit use, stablecoins present a fundamental challenge to traditional banking by providing genuine utility.

• Financial Inclusion: Approximately 1.4 billion adults worldwide remain unbanked. Stablecoins provide access to digital payment systems using only a smartphone, bypassing the need for physical banks.

• Remittance Costs: The economics are compelling, though nuanced. While an on-chain stablecoin transfer itself may cost less than 1% in network fees, this figure often ignores the crucial on-ramp and off-ramp fees required to convert fiat currency to and from the stablecoin on an exchange. Even so, for many, this remains more efficient than traditional remittances, which average 4-8% in fees with multi-day settlement.

• Store of Value: In Argentina, Venezuela, and Lebanon, populations use dollar-denominated stablecoins like USDT as essential stores of value to escape currency hyperinflation, preserving their purchasing power where local monetary policy has collapsed.

• DeFi Access: Decentralized finance (DeFi) protocols built on blockchains extend these benefits. Users can access lending, borrowing, and insurance products without a bank account—services impossible in traditional systems for unbanked populations.

This adoption reflects deep-seated problems with traditional banking. Correspondent banking networks are expensive and slow. Estimates suggest $45 billion annually could be saved through decentralized settlement. Moreover, bank failures like Silicon Valley Bank in 2023, demonstrate how concentrated risks can undermine confidence in traditional oversight.

Economic Factors Driving Adoption

Stablecoin growth reflects profound economic shifts. Persistent inflation (2021-2024) eroded confidence in some fiat currencies, while geopolitical fragmentation incentivized alternatives to the U.S.-dollar-dominated SWIFT system.

In response, regulators have moved to control the risks. The landmark U.S. GENIUS Act (2025) establishes the most comprehensive framework to date.

• It requires federal or state licensing for nonbank issuers.

• It classifies them as "financial institutions" under the Bank Secrecy Act, mandating full AML/KYC compliance and sanctions adherence.

• It mandates one-to-one backing with cash and Treasury securities, with monthly public disclosures and attestations.

This regulation aims to bring stablecoins inside the regulatory perimeter, making them safer but also ensuring issuers like Tether and Circle function as compliant enforcement points.

However, widespread stablecoin adoption creates new economic risks. It could trigger rapid capital flight from emerging markets as populations shift savings into dollar stablecoins, weakening central banks' ability to manage their own economies.

Central Bank Digital Currencies

Recognizing both the opportunities and the threats, central banks worldwide accelerated the development of Central Bank Digital Currencies (CBDCs). These are digital currencies issued directly by central banks, combining digital efficiency with government backing.

• Market Impact: Research, such as a 2023 study from the Bank for International Settlements (BIS), suggests positive CBDC rhetoric measurably reduces stablecoin supply, with pro-CBDC communication correlating with 100-200 basis point declines in stablecoin issuance.

• Global Progress: China leads CBDC implementation. As of mid-2023, the digital yuan (e-CNY) had reportedly processed a cumulative 1.8 trillion yuan (approx. $250 billion) in transactions since its pilot launch. The European Central Bank is developing a digital euro, and the U.S. Federal Reserve is studying a digital dollar. Juniper Research forecasts global CBDC transactions reaching 7.8 billion by 2031, up from 307 million in 2024.

If CBDCs achieve widespread adoption, they would likely "crowd out" private stablecoins for most domestic retail use. CBDCs eliminate the risk of an issuer failing, offer immediate settlement, and are fully compliant by design.

For sanctions enforcement, CBDCs represent the ultimate tool: enabling instantaneous, programmatic asset freezes and transaction restrictions.

If CBDCs Succeed…

If CBDCs achieve central bank visions by 2035, the financial architecture would be fundamentally transformed.

Central banks would gain unprecedented monetary policy capabilities, such as applying interest rates directly to holdings or programming stimulus money to be spent in specific ways.

Commercial banking would face structural disintermediation. If populations hold CBDCs directly with the central bank, commercial bank deposits could decline substantially, reducing their lending capacity.

Financial inclusion would accelerate but would come with total government oversight. While unbanked populations would gain payment access, all transactions would become fully traceable. In authoritarian countries, this could enable financial censorship, allowing a government to restrict spending or seize funds for political reasons.

This would possibly lead to a bifurcated global financial system: a government-controlled CBDC bloc for Western-aligned countries, and alternative blockchain networks for those seeking to evade U.S. dollar hegemony and sanctions.

The role of stablecoins in sanctions is a dynamic "cat-and-mouse" game, not a simple story of evasion. Compliant, centralized stablecoins have proven to be effective chokepoints for sanctions enforcement. This, in turn, has driven sanctioned actors to create bespoke, non-compliant networks in friendly jurisdictions.

This same feature that enables sanctions attempts - bypassing slow, costly bank infrastructure - also provides genuine economic benefits: faster payments, lower costs, and financial access for excluded populations.

CBDCs represent the regulatory response, promising stability and control at the potential cost of privacy and financial freedom.

The fundamental tension remains: financial efficiency conflicts with government policy objectives when actors want to evade those objectives. The future will likely involve ongoing, fierce competition between centralized private, centralized public, and decentralized or non-compliant systems, each offering a different trade-off of efficiency, control, and risk.