Russia’s invasion of Ukraine brought about condemnation by global leaders and this then led to the imposition of sanctions in order to compel it to stop a further invasion. As the sanctions deepen, a big question on the financial front is whether crypto can provide a breather for the country to cope with the financial curbs. Bitcoin and other forms of cryptocurrencies have had a long history and significance in times of financial turmoil and markets. In this article, we explore what are the aspects to be considered when it comes to crypto being in the spotlight in the Russia Ukraine conflict.
What do the sanctions target?
The sanctions placed by Western powers on Russia effectively target the Russian economy. By imposing these curbs, prominent Russian figures and the elite and even certain organisations can no longer do business with America or access their accounts that are in Western banks. This puts a halt to the cash inflow in the Russian economy and curbs the pending power of many. In addition to this, Russian banks have also been removed from SWIFT which is an interbank messaging system.
According to a joint statement written by global powers including the United States, Canada and European allies, “This will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally.” This move essentially will make it impossible for Russian banks to have any form of communication with banks that are beyond their borders, and further would sever its ties with global financial markets.
This obstruction to the flow of cash has brought Bitcoin into the spotlight and raised three important questions.
Can crypto be used by Russia to avoid sanctions?
Bitcoin and other forms of cryptocurrency are decentralised. While money in an economy is usually controlled by an entity such as a bank, crypto is not controlled. However, that being said, it is possible to track the flow of funds when crypto is used between accounts. Hence even if it is being used to avoid sanctions, the activity would still be able to be monitored.
Vijay Ayyar, vice president of corporate development and international at crypto exchange Luno in an article to CNBC said “The biggest misconception about crypto remains that it is untraceable and is primarily used for nefarious purposes, which couldn’t be further from the truth. Liquidity in crypto is still a fraction of the global currency market, and hence moving large amounts of money using crypto is difficult.”
In addition to this, in spite of crypto being a digital currency, the laws and sanctions that have been imposed by the United States are applicable to all firms that carry out transactions.
Brian Armstrong, CEO of cryptocurrency exchange and wallet Coinbase tweeted that “it would be a mistake to think crypto businesses like Coinbase won't follow the law. Of course, we will. This is why we screen people who sign up for our services against global watchlists and block transactions from IP addresses that might,” thus backing the fact that it would prove difficult for Russia to have transactions done through crypto.
That being said, experts are exploring the option of Bitcoin having achieved some sort of ‘digital gold’ status.
Is crypto becoming digital gold?
The worsening situation in Ukraine had Bitcoin seeing a massive spike and this was evidence that in times of turmoil, the cryptocurrency could prove a safe asset, one that has a store of value. Hence the question of whether one can actually go on to compare the cryptocurrency with gold. But experts do not agree with this claim.
One of the reasons is that the cryptocurrency proves risky and thus does not retain market value in crisis situations. As Lux Thiagarajah, head of trading and account management at crypto financial services company BCB Group pointed out. “A safe haven is an asset that retains its value during times of market turbulence. Crypto has aggressively sold off since it was clear the Fed (U.S. Federal Reserve) was going to hike rates faster than anticipated which in turn saw stocks sell-off. This is not the definition of a safe haven.”
In spite of this argument, one cannot deny that crypto has come to the aid of many during the ongoing crisis, which brings us to the final question regarding Bitcoin in times of war.
Has crypto proven its worth?
Crypto has had a journey of highs and lows as far as acceptance from the market and economies, but during the conflict, instead of resorting to traditional modes of payment, people began donating to Ukraine through crypto and raised a whopping $50 million-plus according to analytics firm Elliptic. The reason why it was favoured?
Faster transactions speeds, lower fees of international transactions and less hassle. Garrick Hileman, visiting fellow at the London School of Economics said in an article to CNBC, “When critical infrastructure is out or there are concerns about how quickly something can get through the traditional banking system, as long as you have internet and a computing device you can transact. That has been one of the promises of crypto. Some of the original value propositions of cryptocurrencies are seeing validation.”
Has crypto proven useful for Ukraine? Certainly. Will it prove useful for Russia to avoid sanctions? That remains to be seen.