Blood Coins

In the turbulent days around the imposition of a partial SWIFT ban on Russian institutions and sanctions on the country’s central bank, cryptocurrencies rallied.

Although news of the draconian measures to punish Vladimir Putin for invading Ukraine was met with consternation across assets, crypto managed a strong showing as the ramifications of severing Moscow’s access to the global financial system began to set it (figure below).

While generally jeering the war, some crypto proponents cheered the notion that Bitcoin could serve as a vehicle for a sanctioned central bank to evade international sanctions. Not because they supported the Kremlin. Rather, because despite the world being aghast at Putin’s actions, some were disturbed to learn that the US Treasury can, in fact, effectively confiscate currency reserves.

Some market participants in traditional assets were quick to suggest “investors” bought Bitcoin in an effort to shield themselves from the expected inflationary impulse. Commodities logged the largest weekly gain in history and crude surged towards $120/bbl.

Of course, if crypto’s knee-jerk rally following the SWIFT bans and the CBR sanctions really was predicated on inflation concerns, it’s odd that it fizzled entirely by the end of the week. The commodities rally didn’t abate. The simpler explanation is that crypto saw buying interest from Russians — regular people, sanctioned individuals and everyone in-between.

“Crypto markets recovered strongly following the announcement of more stringent sanctions on Russia,” JPMorgan’s Nikolaos Panigirtzoglou wrote, adding that,

The breakdown of the financial system in Ukraine and Russia coupled with the freeze by Western governments of the foreign assets of Russian entities such as those of the Russian Central Bank or Russian oligarchs, is raising expectations that crypto markets will be used more widely in the future not only by normal people in Ukraine or Russia where their fiat currencies are collapsing but also more broadly by the rich or even central banks in order to protect their assets from government sanctions and circumvent the traditional banking system. A major incentive for economic agents to hold either gold or cryptocurrencies is that they are not attached or depend on any government and could thus serve as a hedge in a catastrophic scenario where the traditional financial system breaks down.

Panigirtzoglou went on to cite Kaiko in noting that ruble-denominated Bitcoin volumes rose sharply following the invasion and again following the financial sanctions, “suggesting that some Russian citizens have been responding to the collapse of their currency by shifting towards crypto.”

“We are already seeing a surge in Russian ruble… cryptocurrency transactions on centralized exchanges, which could consequently be the first crypto companies targeted with sanctions,” Kaiko said, in a blog post documenting the same market dynamics.

The data provider went on to note that the “plummeting ruble and reduced access to the US dollar amid waves of sanctions could particularly heighten the appeal of USD-pegged stablecoins.” Specifically, USDT-RUB volumes jumped to 10-month highs and “accounted for higher volumes than BTC-RUB markets,” according to Kaiko’s data (figure below).

If you’re wondering whether the same spike was observed in volumes for BTC-USD markets, the answer is no. “For context, trade volume for BTC-USD markets only underwent a slight surge during last week’s volatility, hitting one-month highs,” Kaiko said.

There are (at least) two major problems with this.

First, it underscores the fact that the crypto universe offers multiple avenues for sanctioned states, persons and entities to evade measures aimed at disincentivizing a war.

You might immediately protest that the situation is unfair. The US invasion of Iraq should’ve been similarly disincentivized, but because the US issues the world’s reserve currency, no country had the capacity to do to America what America is currently doing to Russia. But that’s a separate discussion. For our purposes here, the point is just that in a pinch, pariah regimes and those closest to them (e.g., oligarchs in Russia) can now avail themselves of an entire ecosystem to preserve their wealth.

You’ve likely seen reports in the media about seized yachts and villas. Consider, though, that a savvy oligarch could hide millions in Bored Ape Yacht Club NFTs. You think I’m joking, but I’m most assuredly not. The floor price (i.e., the minimum you’d need to pay if you wanted to purchase one right now, without trying to convince the owner to accept a lower bid) is about $250,000.

Forget Bitcoin for a moment. An oligarch who sets up a MetaMask wallet and funds it with tens of millions in Ethereum has limitless options, including converting that Ethereum to a USD-pegged stablecoin and anonymously depositing it with a DeFi platform for a double-digit interest rate paid out in — you guessed it — USD-pegged stablecoins. Or, providing liquidity on a DeFi exchange using a stablecoin liquidity pair, minimizing the risk of impermanent loss while maximizing yield, depending on the pair and the platform.

All of that takes place outside the financial system and, assuming the funds remain on-chain, the transactions, profits and interest earned are mostly untraceable.

That brings us neatly to the second problem. Lacking an easy way to go after DEXs, centralized exchanges would presumably be the first point of attack for regulators. Because inexperienced crypto investors and traders use centralized exchanges (like Coinbase), they’ll be the first to see their funds scrutinized. As in any other market, small, unsophisticated investors will lose, while whales operate with virtual impunity on-chain.

In his note, JPMorgan’s Panigirtzoglou wrote that “similar shifts towards cryptocurrencies were seen previously in other emerging countries suffering from steep losses in the value of the domestic currency such as Venezuela, Brazil and Turkey.” Note the difference, though. In Venezuela, Brazil and Turkey, domestic economic policies exacerbated currency depreciation, forcing locals to find ways to preserve what little money they had. In that context, you could easily argue that crypto served a noble purpose.

With the (obvious) caveat that the Russian people aren’t responsible for Putin’s war of conquest in Ukraine, and are thus just as “entitled” (if you will) as citizens in Venezuela, Brazil and Turkey to convert their depreciating local currencies to Bitcoin, if the cryptoverse serves as a lifeline for a regime whose actions impoverish the masses, then one could easily argue it (crypto) is doing more harm than good by forestalling the demise of dictatorial and/or inept governments. Venezuela has its own cryptocurrency, but that’s a story for another day.

As Kaiko put it last week, “Russia’s invasion of Ukraine places the cryptocurrency industry in a unique and precarious position, needing to balance sanctions enforcement while lacking the power to restrict transactions on decentralized networks.”

I should note, again, that crypto disciples weren’t excited about the prospect of Bitcoin (or any other token) as a life raft for a pariah regime, especially not one perpetrating a war. In the NFT space, thousands of collectors rallied around Ukrainian creators, buying millions in digital art in an effort to express solidarity. It was a nice gesture, but let’s be clear: The amounts paled in comparison to what was likely laundered through crypto by sanctioned individuals and entities responsible (either directly or in “guilty by association” fashion) for the suffering brought upon the very same local artists and their families.

At the end of the day, crypto adherents simply can’t bring themselves to point out the flaws (any flaws, really) in the decentralized religion they espouse and the tokens they worship like so many consecrated Communion bread coins.

After all, the whole episode seemed to validate one of Bitcoin’s key premises. Or at least in the minds of believers it did.

A Wall Street Journal column called “If Russian Currency Reserves Aren’t Really Money, the World Is in for a Shock,” fanned the flames. “Thank god for Satoshi. Without him every country in the world would have to choose between having their assets frozen by DC or Beijing,” Balaji Srinivasan mused, citing the Journal. “Rather than USD or RMB, they can now choose BTC.”

Amen?