The Geopolitical Risks of Underregulated Crypto Infrastructure and Sanctions Evasion

In 2025, the intersection of cryptocurrency and geopolitics has become a high-stakes arena for investors. While regulatory frameworks in the U.S., EU, and Asia have advanced to address digital assets, underregulated jurisdictions and state-backed crypto networks have emerged as both innovation hubs and hotbeds for illicit activity. For investors, the risks are twofold: exposure to volatile markets driven by sanctions evasion and the erosion of trust in crypto infrastructure due to systemic vulnerabilities.

The Rise of State-Backed Crypto Networks

State-sponsored cryptocurrency projects have proliferated in 2025, with varying degrees of regulatory oversight. The U.S. GENIUS Act and EU's MiCA regulation have imposed strict requirements on stablecoins, mandating 1:1 asset backing and transparency. However, jurisdictions like Singapore and Hong Kong have taken a more permissive approach, balancing innovation with safeguards such as licensing regimes. In contrast, Russia's A7A5 ruble-backed stablecoin- processing over $93.3 billion in transactions-has become a tool for sanctions evasion, operating largely on decentralized platforms and bypassing centralized exchanges.

Meanwhile, North Korea has weaponized crypto through sophisticated cyberattacks, such as the $1.5 billion ByBit hack in February 2025. This theft, facilitated by social engineering and cross-chain laundering, highlights how underregulated infrastructure enables state actors to exploit technical and human vulnerabilities. The stolen funds were funneled through unregulated over-the-counter brokers and decentralized exchanges, obscuring their origins and complicating enforcement efforts.

Investor Implications: Direct and Indirect Risks

The consequences for investors are stark. Direct losses from hacks and scams have surged: North Korea alone accounted for $2.02 billion in crypto thefts in 2025, while technical exploits like address-poisoning scams drained $77 million in December. These incidents erode confidence in platforms and protocols, particularly in jurisdictions with weak oversight.

Indirect risks are equally concerning. The proliferation of state-backed tokens like A7A5 has amplified illicit flows, with stablecoins dominating 84% of illicit transaction volume in 2025. This trend has driven a 694% increase in crypto received by sanctioned entities, as nation-states leverage blockchain to circumvent traditional financial systems. For investors, this creates a dual challenge: navigating markets tainted by illicit activity while contending with regulatory crackdowns that could destabilize assets.

Geopolitical Tensions and Regulatory Responses

The U.S. and EU have responded with aggressive enforcement. The Financial Action Task Force (FATF) reported that 99 jurisdictions had implemented the Travel Rule by 2025, requiring Virtual Asset Service Providers (VASPs) to share user identity data. Meanwhile, the U.S. federal government's "Strengthening American Leadership in Digital Financial Technology" Executive Order underscores a push for regulatory clarity, though it also signals a focus on protecting the dollar's dominance.

However, enforcement gaps persist. The "Chinese Laundromat" network, used to launder North Korean funds, exemplifies how intermediaries in underregulated jurisdictions can obscure illicit flows. Similarly, Iran's $2 billion in on-chain activity via proxy networks highlights the difficulty of tracking state-backed operations. These challenges suggest that even robust regulations may struggle to contain cross-border crypto risks.

Conclusion: Navigating a Fractured Landscape

For investors, the lesson is clear: underregulated crypto infrastructure and state-backed networks pose systemic risks that transcend individual projects. While innovation in regulated markets like the EU and U.S. offers opportunities, the shadow economy of sanctions evasion and cybercrime demands caution. Diversification, due diligence on jurisdictional risks, and a focus on protocols with strong compliance frameworks will be critical in 2026.

As the crypto sector matures, the line between innovation and exploitation will continue to blur. Investors must balance the promise of decentralized finance with the reality of a geopolitical landscape where digital assets are both a tool for progress and a weapon for destabilization.