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By Michael Soren in Assessments —

The Ledger and the Loophole

Iran now openly offers missiles for cryptocurrency. North Korea funds its weapons program with stolen Bitcoin. As sanctioned states build parallel financial systems, the West faces an uncomfortable question: what happens when economic coercion loses its teeth?

The Ledger and the Loophole

The Ledger and the Loophole

In March 2025, Iran’s Ministry of Defence Export Center announced it would accept cryptocurrency for ballistic missiles, warships, and advanced weapons systems. The declaration was not a leak or an intelligence assessment. It was a press release. Tehran had concluded that the global financial surveillance architecture designed to prevent exactly this scenario no longer posed sufficient risk to merit discretion.

This brazenness marks something new. For decades, sanctions worked through the threat of exclusion—from SWIFT, from dollar clearing, from the correspondent banking networks that make international commerce possible. The threat was credible because the infrastructure was singular. There was no alternative to the dollar-denominated system. Now there is. Or rather, there are several, and they are multiplying.

The question is not whether cryptocurrency enables sanctions evasion. It does. The question is whether this evasion has reached a scale that renders economic coercion obsolete as a tool of statecraft—and if so, what replaces it.

The Architecture of Exclusion

Sanctions derive their power from a simple premise: modern economies cannot function without access to the global financial system, and the United States controls the chokepoints. SWIFT messaging, dollar clearing, correspondent banking relationships—these form the circulatory system of international trade. Cut off access, and an economy begins to necrotize.

This worked. Iran’s 2012 disconnection from SWIFT preceded a 50% currency collapse. Russia’s 2022 exclusion triggered immediate capital flight and forced emergency interest rate hikes. The mechanism was reliable because it was inescapable. You could not conduct meaningful international trade without touching the dollar system somewhere.

Cryptocurrency offers an exit. Not a perfect one—not yet—but sufficient for determined actors with high-value, low-volume transactions. Arms sales fit this profile precisely. A $50 million drone shipment requires moving far less value than a nation’s oil exports. The transaction can be structured, layered, and obscured in ways that commodity flows cannot.

Treasury’s Office of Foreign Assets Control has responded with designations targeting crypto-enabled evasion. Garantex, a Russian exchange, processed over $100 million in transactions linked to ransomware and sanctions circumvention before its designation. When Garantex was sanctioned, its operators simply launched a successor exchange, Grinex, which Treasury subsequently designated as well. The pattern is instructive. Enforcement creates friction. It does not create barriers.

The deeper problem is structural. Blockchain forensics firms like Chainalysis can trace transactions across public ledgers with remarkable precision. But tracing is not seizing. And tracing becomes exponentially harder when transactions move through privacy-preserving protocols, cross-chain bridges, and jurisdictions with no interest in cooperation.

In 2024, sanctioned entities received $15.8 billion in cryptocurrency—a figure that represents both the scale of evasion and the limits of enforcement. The money was visible. It was not stoppable.

Necessity as Curriculum

Iran’s crypto competence did not emerge from nowhere. It was forged in the crucible of earlier exclusions.

When SWIFT disconnected Iranian banks in 2012, the country faced an immediate crisis: how to pay for imports, how to receive payment for oil, how to maintain any connection to the global economy. The solutions were crude at first—gold smuggling, barter arrangements, front companies in Dubai. But the experience created institutional knowledge. Iran learned to operate outside the formal financial system.

North Korea followed a different path to the same destination. Lacking Iran’s oil wealth, Pyongyang turned to theft. The Lazarus Group, a state-sponsored hacking operation, has stolen over $2 billion in cryptocurrency through 2025 alone—representing approximately 13% of North Korea’s GDP. This is not supplementary income. This is a primary revenue source comparable to taxation in some functioning states.

The pattern reveals a perverse dynamic. Sanctions designed to isolate rogue states instead selected for crypto competence. The pressure that was supposed to force behavioral change instead forced adaptation. Iran and North Korea now possess operational expertise that most legitimate financial institutions lack.

Russia’s trajectory is more recent but accelerating. The 2022 sanctions triggered a forced march toward financial alternatives. Russian entities have developed sophisticated OTC networks, stablecoin corridors, and—critically—relationships with Chinese underground banking operations that provide the “last mile” interface between blockchain transactions and physical goods.

This last element matters enormously. Cryptocurrency can move value across borders. It cannot, by itself, move missiles. The conversion from digital asset to physical weapon requires human networks—hawala operators, trusted intermediaries, logistics coordinators who accept crypto on one end and deliver arms on the other. These networks existed before cryptocurrency. Crypto made them more efficient.

The Surveillance Paradox

Blockchain’s fundamental innovation was transparency. Every transaction, permanently recorded on a public ledger. This was supposed to make illicit finance harder, not easier. What happened?

The answer lies in a distinction between visibility and actionability. Blockchain forensics can identify suspicious patterns, cluster addresses, and trace fund flows with extraordinary precision. Graph-based machine learning techniques—PageRank, k-means clustering—excel at pattern recognition in high-noise environments. But identification is not interdiction.

When OFAC designates a cryptocurrency wallet, the designation is immediate and public. The funds in that wallet become untouchable for any entity subject to U.S. jurisdiction. But the wallet’s owner can generate a new address in seconds. The sanctioned funds can be moved through mixers, swapped across chains, and reconstituted in fresh wallets before enforcement agencies complete their paperwork.

The Financial Action Task Force has acknowledged this gap. Its 2024 assessment found that jurisdictions “continue to struggle with the implementation of fundamental requirements” for virtual asset oversight, “particularly undertaking risk assessments and conducting supervisory inspections.” The standards exist. The capacity to enforce them does not.

Privacy coins compound the problem. Monero, Zcash, and similar protocols use cryptographic techniques that make transaction tracing mathematically difficult or impossible. The technical literature reveals a stark binary: privacy coins either work—making attribution impossible—or they don’t work, making them useless for illicit activity. The forensic firms that claim partial success against privacy protocols are selling confidence they cannot deliver.

Zero-knowledge proofs represent the frontier of this arms race. These cryptographic techniques allow proving that a transaction is valid without revealing who sent it, who received it, or how much was transferred. The proof says “this is legitimate” while saying nothing else. Against such techniques, traditional surveillance is not merely inadequate. It is irrelevant.

The Tributary Alternative

Western sanctions assume a Westphalian world—sovereign states, clear borders, hierarchical authority. They work by threatening exclusion from a system that all states need to access. But what if alternative systems emerge?

China’s position is instructive. Beijing has not built a parallel financial system to challenge the dollar. It has done something subtler: created tolerance zones where transactions that would be sanctionable in Western frameworks proceed with tacit approval. Chinese underground banking networks serve as the structural intermediary that crypto-arms corridors cannot eliminate—not because of technological limitations, but because they provide the critical interface between blockchain’s global reach and local physical delivery.

This resembles less the Westphalian order than the tributary systems that preceded it. In the Ming dynasty’s tribute system, peripheral states acknowledged Chinese centrality while maintaining practical autonomy. Compliance was performed, not enforced. The relationship was hierarchical but flexible.

Crypto-enabled sanctions evasion may be creating similar structures. Russia and Iran do not need to build alternatives to the dollar system. They need only find intermediaries willing to facilitate transactions in exchange for relationships with larger powers. China’s “strategic ambiguity” in enforcement creates exactly this space. Transactions that acknowledge Chinese infrastructure centrality proceed. Those that threaten Chinese interests do not.

The implications extend beyond arms sales. If tributary-style networks can move weapons, they can move anything. The question becomes not whether sanctions can be evaded, but whether the concept of financial exclusion retains meaning when exclusion from one system simply means inclusion in another.

What Breaks First

The default trajectory is not sanctions collapse but sanctions fragmentation. Western financial surveillance will remain effective against actors who need access to Western markets—which is to say, most of the global economy. But a parallel system will crystallize for those willing to accept the costs of exclusion.

Arms sales will migrate to this parallel system first. The transaction profile is ideal: high value, low volume, buyers and sellers already excluded from legitimate markets. The infrastructure is already operational. Iran’s public offer to accept crypto for weapons is not an aspiration. It is an advertisement for existing capability.

The cascade effects are predictable. As crypto-arms corridors prove reliable, other sanctioned transactions will follow. Dual-use technology. Sanctioned commodities. Eventually, general trade between excluded parties. Each successful transaction validates the alternative system and attracts new participants.

Coalition discipline will erode in parallel. Research suggests that only about a third of sanctions achieve their objectives. As this becomes conventional wisdom, the political will to maintain costly sanctions regimes will weaken. Secondary sanctions—penalties on third parties who trade with sanctioned entities—will face increasing resistance from countries that see more opportunity in the parallel system than risk in American displeasure.

The winners are obvious: states with crypto competence, tolerance for operating outside Western norms, and goods that sanctioned buyers want. Russia sells weapons. Iran sells weapons. North Korea sells weapons and steals cryptocurrency. China provides the infrastructure that makes it all possible while maintaining plausible deniability.

The losers are equally clear: states that depend on economic coercion as an alternative to military force. The United States has relied on sanctions as a tool between diplomacy and war. If that tool fails, the options narrow.

The Replacement Menu

What replaces economic coercion if financial surveillance fails? The honest answer is: nothing replaces it fully. But several alternatives can partially compensate.

Offensive cyber operations target the infrastructure that enables evasion. The United States has demonstrated capability to disrupt cryptocurrency exchanges, compromise wallets, and degrade the networks that sanctioned actors depend upon. This is coercion by different means—not threatening exclusion from the financial system, but threatening destruction of the alternative system. The RAND Corporation identifies offensive cyber as among the “best power-to-coerce options” available.

The trade-off is escalation. Cyber operations against financial infrastructure cross thresholds that sanctions do not. They invite retaliation. They risk unintended consequences when attacks spread beyond intended targets. And they require ongoing operational commitment—you cannot designate a wallet once and walk away. You must continuously degrade adversary capabilities.

Export controls on enabling technology attack the problem upstream. Cryptocurrency requires computing hardware, internet connectivity, and technical expertise. Restricting access to advanced semiconductors, networking equipment, and technical training can limit adversary capability to operate sophisticated evasion networks. This approach has shown effectiveness in other domains—semiconductor export controls have meaningfully constrained Chinese AI development.

The trade-off is economic cost. Export controls hurt exporters as well as targets. They accelerate adversary efforts to develop domestic alternatives. And they require coalition coordination that becomes harder as economic interests diverge.

Targeted legal prosecution focuses on individuals rather than systems. The United States has demonstrated willingness to indict foreign nationals for sanctions evasion, money laundering, and related offenses. These prosecutions may not result in arrests, but they constrain travel, complicate business relationships, and create personal risk for facilitators.

The trade-off is limited scope. Prosecution works against individuals who have something to lose—assets in accessible jurisdictions, desire to travel, business relationships with compliant entities. It does not work against state actors willing to sacrifice individuals or against networks that operate entirely within hostile jurisdictions.

Intelligence-enabled interdiction uses surveillance not for financial exclusion but for physical interception. If you cannot stop the money, you can still stop the missiles. This requires intelligence capabilities that financial surveillance was supposed to make unnecessary—human sources, signals intelligence, overhead imagery, the full apparatus of traditional espionage.

The trade-off is resource intensity. Financial surveillance was attractive precisely because it was cheap. Monitoring transactions costs less than running agents. If economic coercion fails, the alternatives demand investment that decades of reliance on sanctions have eroded.

Frequently Asked Questions

Q: Can cryptocurrency actually be used to buy weapons at scale? A: Yes, but with limitations. Iran has explicitly offered to accept cryptocurrency for ballistic missiles and warships. The transaction profile—high value, low volume—suits crypto well. However, converting digital assets to physical weapons still requires human intermediary networks that create potential points of interdiction.

Q: Why can’t blockchain forensics stop sanctions evasion? A: Blockchain forensics can trace transactions on public ledgers with high accuracy. But tracing is not seizing. Sanctioned actors can generate new wallet addresses instantly, move funds through privacy-preserving protocols, and operate in jurisdictions that refuse cooperation. The visibility of blockchain creates intelligence, not enforcement.

Q: Are sanctions becoming obsolete? A: Not entirely. Sanctions remain effective against actors who need access to Western markets—most of the global economy. But for actors already excluded, cryptocurrency provides an alternative that reduces the cost of defiance. Sanctions are becoming a tool with a narrower effective range.

Q: What is the United States doing about crypto-enabled sanctions evasion? A: Treasury has designated multiple exchanges and protocols facilitating evasion, including Garantex and Tornado Cash. FinCEN has issued special measures against platforms like PM2BTC. But enforcement faces structural challenges: designated entities simply reconstitute under new names, and privacy-preserving technologies continue to advance faster than countermeasures.

The Honest Forecast

The most likely scenario is not dramatic collapse but gradual bifurcation. Western financial surveillance will continue to work against most actors most of the time. The dollar system will remain dominant for legitimate commerce. Sanctions will retain utility against targets that cannot afford complete exclusion.

But a parallel system will solidify. It will be smaller, less efficient, and more expensive to use than the legitimate financial system. It will nonetheless be sufficient for determined actors with high-value transactions and tolerance for friction. Arms sales will flow through this system. So will other sanctioned commerce.

The United States will respond with a mixture of the alternatives outlined above—cyber operations, export controls, prosecutions, interdiction. None will be as cheap or as scalable as financial surveillance was supposed to be. All will require sustained investment and political will.

The deeper question is whether economic coercion ever worked as well as its proponents believed. Pre-cryptocurrency sanctions evasion was already massive—the Oil-for-Food scandal alone involved over $10 billion in illicit payments. Iran advanced its nuclear program despite decades of sanctions. North Korea built nuclear weapons while under comprehensive embargo.

Cryptocurrency did not break sanctions. It provided a convenient explanation for failures that predated it. The infrastructure of economic coercion was always more fragile than its architects admitted. The ledger simply made the loopholes visible.

Sources & Further Reading

The analysis in this article draws on research and reporting from:

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