Every Bitcoin helps: How the war in Ukraine became a turning point for Bitcoin
- Demand for Bitcoin has surged on both sides of the Ukrainian conflict
- There is a monetary war happening in parallel to the armed conflict
- The sanctions imposed on Russia may lead to the breakdown of the US-dominated monetary order
- Bitcoin may emerge as an even bigger global monetary force
After weeks of sabre-rattling, Russia began a large-scale military offensive against Ukraine on 24 February. Just before the conflict began, Russia sent out mixed messages with regards to Bitcoin. The central bank repeated its desire for a total ban while Putin and the ministry of finance pushed back and argued for greater legal clarity. The latter won out and Russia rolled out legislation establishing a legal framework for the cryptocurrency sector. After weeks of sabre-rattling, Russia began a large-scale military offensive against Ukraine on 24 February. Just before the conflict began, Russia sent out mixed messages with regards to Bitcoin. The central bank repeated its desire for a total ban while Putin and the ministry of finance pushed back and argued for greater legal clarity. The latter won out and Russia rolled out legislation establishing a legal framework for the cryptocurrency sector. As we argued elsewhere, these measures seemed to foreshadow the implementation of heavy economic sanctions. The central bank was motivated by an urge to exert more control over the rouble in case of a run on the currency, while the central government wanted to keep an alternative payment rail open in case of devastating sanctions.
As for Ukraine, the country had taken steps earlier. The day after El Salvador made Bitcoin legal tender, on 8 September 2021, Ukraine passed legislation to legalise and regulate cryptocurrencies. The intention behind the law was to attract foreign investment, foster innovation and brand Ukraine as a high-tech nation. Following these steps, as Fortune reported in January 2022, “Ukraine has been positioning itself to be the main decentralized finance hub of not just Eastern Europe but the world as a whole.” It ranked fourth in the most recent Chainalysis Global Crypto Adoption Index and the volume of its cryptocurrency transactions even surpassed fiat interbank exchanges for some time.
The disastrous repercussions of the Russian invasion have led hundreds of thousands of Ukrainians to find solutions in their dire time of need. The financial system has all but collapsed with people unable to retrieve their life savings. One of the safest and most practical solutions people turned to is Bitcoin. This choice is logical. Bitcoin is safe, convenient and easily accessible. It is also decentralised and permissionless, which means it relies on no government or financial institution. Gold is impractical and difficult to find in such situations while local fiat is increasingly worthless. Thus, as the Wall Street Journal reported on 1 March, the demand for Bitcoin has risen sharply and has been trading at considerable premiums to the Ukrainian hryvnia.
Bitcoin is acting as a safe-haven asset in these unfortunate times. This is not unusual. Last year, the Guardian reported on the elevated use of Bitcoin in the world’s conflict zones. Libya and Syria were among the top ten nations that had the highest proportion of online searches related to Bitcoin. Their findings suggested “that countries with high levels of instability are proportionally more interested in digital assets than more developed nations.” This is in line with our own analysis and we expect this trend to continue and intensify. It is important to remember that safe-haven assets don’t only exist to preserve great wealth, but also emerge from the practical needs of the many.
Beyond the general population, the Ukrainian government and other NGOs have also officially requested donations in Bitcoin and other cryptocurrencies. It is reported that this measure has allowed them to raise over $35m and counting. Bitcoin has been the preferred method to donate to date.
As Bitcoin is universally accessible, it is also witnessing a surge on the Russian side of the conflict. Russians fearful of confiscations and tightening bank controls are turning to it in droves. Trading volumes reached a nine-month high, during the conflict, just as the rouble collapsed. There is also a very serious chance of an imminent bank run taking place. The central bank has already lowered reserve requirements and doubled interest rates in desperation.
On the flip side, there is also the fear that the Russian government or Russian companies will use Bitcoin to circumvent sanctions. This may be possible when considering the preparations Russia took before the conflict, but there are reasons this may not materialise. For the same reasons Bitcoin is an unwise choice for criminals, it may also be unwise to use for potential sanction-busters. All transactions would be publicly viewable on the blockchain and substantial transactions would be easy to spot. This means that if any circumventing parties were caught on the blockchain, their web of transactions could be instantly mapped out. It is unlikely, yet possible, that companies in countries abiding by the sanctions would undergo such enormous risk involving heavy financial penalties and potential jail time. Bitcoin does not change the fact that dealing with designated Russian entities is illegal. As Politico reported, Treasury officials think that “Laundering large amounts of money through a dizzying array of digital wallets and exchanges is expensive, time-consuming and would likely be visible in the broader crypto market, given the massive investment portfolios of individuals and institutions named in the sanctions.”
The conflict has led to the imposition of severe sanctions that could have serious repercussions on the global monetary order. Russia has been kicked out of the SWIFT system. SWIFT is a messaging system between banks and is meant to facilitate international banking transactions. Sanctions also targeted Russia’s foreign exchange reserves and $630bn of the central bank’s reserves were frozen, as they were held by foreign central banks. These measures are symbolic of the monetary war that is occurring contemporaneously to the armed conflict. Much like the armed conflict, the monetary war is unlikely to stop soon and may lead to a series of unintended consequences.
Primary among these consequences is an acceleration of the war on the US global monetary order, which has been taking place for years. Both Russia and China had started to take steps to cut their dependence on the US dollar in the run up to the Ukrainian conflict. Most recently, they agreed to a 30-year gas pipeline deal that would be settled in euros. Before this, Russia had increased its trade in euros to the detriment of the dollar, sold off US treasuries and increased its euro reserves while decreasing its dollar reserves. The Russian central bank also now holds more gold and renminbi than it does US dollars. China has been taking similar measures. They have been stockpiling gold, facilitating access to the renminbi to dozens of countries and working on an alternative payment system.
The sanctions brought about by the conflict in Ukraine are likely to expedite these efforts. The culmination of these efforts would be of enormous geostrategic significance. It could mean the end of the US-dominated global monetary order. This, in turn, would lead to several competing monetary centres of power. The dollar would still be a dominating force but it would be followed closely by the euro and another system based around China. This fractured system would give Bitcoin the space it needs to emerge as a global monetary force driven by grassroots adoption. The continued erosion of fiat currencies and subsequent economic crises will keep driving grassroots adoption towards Bitcoin. Bitcoin will then emerge as the preferred popular solution.
We may already be witnessing the early signs of this development as Bitcoin has surged and is seemingly decoupling from traditional markets. On 28 February, Bitcoin went up by 17% while the S&P and Nasdaq were flat. There appears to be a clear sentiment shift towards Bitcoin and away from fiat and precious metals in this crisis. Fiat has turned out to be futile and precious metals are nowhere to be seen due to their sheer impracticality. Investors are gradually catching up to the realisation of people on the ground. This is a major development and could be a turning point for Bitcoin.
One of the elements that could endanger this development is the prospect of tough regulations because of a fear that Bitcoin is being used to circumvent sanctions. Tough regulations could also emerge when the risk of Bitcoin to the US dollar is deemed too important. There are rumours that the Biden administration is currently mulling tougher sanctions in the cryptocurrency space. The scope and impact of these new measures are yet to be seen. Crypto exchanges such as Binance and Kraken have resisted calls to ban all their Russian clients this far, but have abided by sanction requirements.
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