How The Russia-Ukraine Conflict Could Affect Crypto

With missiles dropping into Ukraine, so has the price of many cryptos. The problems don't stop there as Russia plans to evade US sanctions.

(Image credit: newsbtc.com)

Hours after Russia officially invaded Ukraine, Bitcoin continued its first quarterly slump as Russian forces fired missiles into Ukraine. Bitcoin fell to $34,324, its lowest since January 24, and other coins like Ethereum fell in suit.

With the introduction of war and instability into the equation, the obvious consequence is the sell-off of riskier assets, which include cryptocurrencies and all decentralized financial investment vehicles. Cryptocurrencies are a poor choice for investors seeking stability in periods of market turmoil, in contrast to traditional hedges against risk like gold and U.S. Treasury securities.

Bitcoin's safe haven narrative has almost completely fallen apart as the rising possibility of military conflict, and the worsening U.S.-Russia relationship puts the wider financial market in risk-aversion mode," Yuya Hasegawa, a crypto market analyst for Bitbank in Japan.

When the United States imposed sanctions and barred Americans from doing business with Russian banks, oil and gas companies in 2014, after the country’s swift invasion of Crimea, the hit to Russia’s economy was swift and immense. Economists estimated that sanctions imposed by Western nations cost Russia $50 billion a year.

Now in 2022, the global market for cryptocurrencies and other digital assets has ballooned, which is good news for Russia and bad news for the US and its allies imposing sanctions.

As history looks to repeat itself, the Biden administration enacted fresh sanctions on Russia over the conflict in Ukraine, aiming to hinder its access to foreign capital and prevent exports like oil and natural gas from leaving its borders. However, Russian intelligence has predicted this move from the United States, and its entities are preparing to blunt some of the worst impacts of the sanctions by making deals with anyone around the world willing to work with them. As the Ruble weakens, Russia plans to use digital currencies to bypass this problem and continue its world trade with other partners around the globe.

In the past, sanctions have been some of the most powerful tools the United States and European countries have used to influence the behavior of nations they don’t consider allies without military conflict. The United States, in particular, is able to use sanctions as a diplomatic tool because the dollar is the world’s reserve currency and used in global payments worldwide. However, with the introduction of mainstream cryptocurrencies, the American government is increasingly aware of the potential for cryptocurrencies to lessen the impact and power of sanctions.

To apply sanctions, a government makes a list of people and businesses its citizens must avoid. Anyone caught engaging with a member of the list faces heavy fines. Banks around the world play a major role in this level of enforcement. They are able to see where the money comes from and where it is going. Anti-money laundering laws require them to block transactions with sanctioned entities and report what they see to authorities. Banks have to abide by “know your customer” rules, which include verifying their clients’ identities. However, crypto exchanges and other platforms that facilitate the buying and selling of cryptocurrencies and digital assets are unable to track transactions as well as banks can, even though they are supposed to follow the same rules.

As long as Russia avoids using the dollar or any other physical currency, they could, in theory, evade the sanctions placed on them by the United States and its allies.

The Russian government has already been developing its own central bank digital currency for years, a so-called digital ruble that it hopes to use to trade directly with other countries willing to accept it without first converting it into dollars. In October 2020, representatives of Russia’s central bank told a Moscow newspaper that the new “digital ruble” would make the country less dependent on the United States and better able to resist sanctions.

An alternative option could also be cyber hacking techniques like ransomware that could help Russia steal digital currencies and makeup revenue lost to sanctions. In this case, the reputation of digital assets could be at stake for a very long time, and the instability crypto is currently facing may continue into the future indefinitely.

Russia isn’t the first country to attempt to find a way to evade US sanctions. Iran and North Korea are among countries that have used digital currencies to mitigate the effects of Western sanctions, a trend that U.S. and United Nations officials have recently observed. North Korea, for instance, has used ransomware to steal cryptocurrency to fund its nuclear program, according to a U.N. report.

Countries will not stop until they find a way to work around US sanctions. While cryptocurrencies have been viewed as an overall beneficial financial vehicle, the grip that the United States has over the global economy is loosening at a frightening rate. If the United States isn’t able to find another way to gain back its control over decentralized assets, here at home and abroad, then the US will be in hot water in the coming years as more and more investors and countries use crypto to exploit the system the United States has worked so hard to build over the last couple of decades.