Cryptocurrency’s Influence in the Ongoing War, and Implications Thereof
As a result of their actions leading to the ongoing war in Ukraine, Russia faces devastating economic repercussions.[1] Following sanctions from the United States, European Union, and several other major nations, Russia’s national currency, the ruble, fell to a value of less than 1 U.S. cent in March 2022.[2] As the ruble’s value plummeted, Russian citizens flocked to banks and ATMs in an attempt to convert their money to another currency before it lost all value.[3] Many Russians lost their savings in the weeks following the sanctions, but some did not. The difference was in cryptocurrency.[4]
As Western sanctions froze the assets of Russia’s central bank and the money transferring capabilities of certain private banks, trading volumes between bitcoin and the ruble saw a nine-month high.[5] The spike was also reflected in the trading volumes between the ruble and Tether, a stablecoin that maintains a 1:1 peg with the U.S. dollar.[6] As a stablecoin, Tether (USDT) is fully backed by U.S. dollars, and maintains the same value as the U.S. dollar by increasing or decreasing the amount in circulation.[7] In March 2022, Ukrainian Vice Prime Minister Mykhailo Fedorov directly asked Tether to halt all transactions from Russians, but the company declined, unwilling to cut off all Russian accounts.[8] By converting their money to crypto, Russian citizens are able to store their money in a medium totally free from sanctions and as stable as whatever currency they choose. This is allowing tens of thousands of Russians to flee the country without losing their savings, as their new cryptocurrency can be used or converted into the currency of whichever country they enter.[9]
The mechanism through which these cryptocurrencies are able to avoid sanctions is the blockchain, an online ledger that records transactions, allowing for decentralized peer-to-peer money transfers.[10] Transactions are recorded in a timeline known as a block, which becomes sealed and added to the chain of blocks when filled.[11] Smart contracts, or self-executing agreements that are automatically carried out when certain conditions are met, can be used to automatically record the transaction, placing it into the chain without any third-party interaction.[12] Going back in the chain to change the transaction data is impossible as of now, but the lack of a third-party maintaining the ledger allows currency to be held free from governmental influence, as there is no regulating party nor central authority for the blockchain.[13] Cryptocurrency’s utilization of the blockchain also allows Russians to store their money in a medium free from the inflation that is currently sweeping their economy. With the ruble losing 40% of its value due to the previously mentioned sanctions, Russians will have to pay significantly more money for items they need to live.[14] By converting their rubles to Tether, however, Russians have the ability to store their money in a currency that self-corrects to stay on par with the value of the U.S. dollar.[15] Even converting rubles to bitcoin, a cryptocurrency much more volatile than a stablecoin, will currently provide more economic stability than Russia’s national currency.[16] This allows Russians to keep the value of the money they already have, even presenting an opportunity for gain by converting their money back to rubles when there is some promise of recovery, essentially buying the dip in their national currency.
While the immediate case displays the value of cryptocurrency in a country facing dire economic threat, the implications for citizens in other countries attempting to avoid certain economic realities are massive. In Venezuela, for example, inflation is making their national currency, the bolivar, so invaluable that citizens are willing to quit their jobs to farm fake currency used in popular video games.[17] The payment for selling these fake currencies comes in the form of bitcoin, which allows Venezuelans to earn money free from the hyperinflation that the bolivar is currently experiencing. As another example, the average interest rate for a savings account in the United States is 0.06% APY.[18] With the annual inflation rate in the United States at 7.9%, Americans are actually losing money by keeping their savings in a traditional bank account.[19] With a stablecoin like yUSDC, however, Americans can earn 9% APY while keeping their savings in a crypto pegged to the US dollar.[20] The lack of a middleman in such transactions means more money in the pocket of individuals, less reliance on inefficient institutions, and a bad omen for traditional banks.
Beating inflation is one thing, but what if we took these implications one step further? I posit that once cryptocurrency becomes more widely utilized, individuals will have a real ability to shape national and international politics. By early March, roughly $100 million worth of cryptocurrency had been sent to support Ukrainians, with the Ukrainian government itself raising over $50 million via donations.[21] With only 10% of the global population actually owning cryptocurrency, imagine how much money could be raised if cryptocurrency was more widely held.[22] Rather than waiting on world leaders and diplomats to bring an end to Russian aggression, individuals could choose to fund the Ukrainian military to the point of total financial dominance.
Politics aside, the use of cryptocurrency could change the way we provide humanitarian relief. Many criticize humanitarian organizations like the American Red Cross, which faces serious bottleneck problems when distributing aid and is suspiciously opaque about how it spends its donations.[23] When an earthquake leveled Haiti in 2010, the American Red Cross raised over $500 million dollars in donations.[24] Five years later, however, the Red Cross had only built six permanent homes for Haitians.[25] Rather than donating to the Red Cross and wondering where the money went, cryptocurrency has the potential to put money directly into the pockets of those who need it.
The war in Ukraine is showing us how cryptocurrency has the potential to sidestep the failures of traditional national fiat currencies. Whether it be international sanctions, hyperinflation, or natural disasters, we are beginning to see the benefits of a fully decentralized vehicle for financial transactions. Runs on the bank, transaction delay times, and consumer banks generally are ripe for extinction, and power is being put into the hands of individuals. It may take time, and a lot of faith from individuals hesitant to turn their money virtual, but the possibilities for change are endless.
Footnotes
