Crypto’s Position in an Unprecedented War is Unique and Precarious

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At the time of writing, we’re approaching the third week of Russia’s invasion of Ukraine. While there’s still some hope that the worst of the conflict can be brought to a conclusion sooner rather than later, the general consensus appears to be that the impact of this war will be felt across the world for a long time to come. The far-reaching sanctions that Western countries have placed on Russia, along with the exodus of western brands, are sending the markets into a tailspin.

At this point in the evolution of cryptocurrency, the sector is as vulnerable to these seismic world events as almost any other. The markets are one factor to consider, as the price of Bitcoin has proven somewhat vulnerable to broader volatility. However, there are also more fundamental questions around cryptocurrency’s role in this unprecedented crisis.

Undoubtedly, cryptocurrency donations have proven to be a powerful crowdfunding tool in the military and humanitarian efforts for Ukraine. Within ten days of the invasion, the Ukrainian government had raised $50 million worth of cryptocurrency, which it is now reportedly spending on military supplies such as bulletproof vests. This demonstrates the key advantage of crypto over fiat in such a scenario – that it can be made available instantly, without navigating fee-taking intermediaries and immediately put to use – even in the midst of a war.

Markets Show Remarkable Resilience

If there were any concerns about the value of the donations plummeting due to market uncertainty, crypto prices have proven to be remarkably resilient in the face of unprecedented global upheaval. Indeed, we haven’t yet seen anything like the volatility of March 2020 when Covid-19 fears hit the markets and Bitcoin lost half of its value in just two days.

The earlier part of February had brought hopes of a bull market as prices briefly exceeded $45,000 for the first time since early January. However, BTC fell to a low below $35,000 in the immediate aftermath of the invasion before going back up to hover below $45,000 in the first days of March. Currently, bulls are struggling to crack the $40,000 resistance.

There’s a lot going on right now that could create further volatility and broader market uncertainty. Firstly, there was upward price pressure, most likely resulting from Russian citizens turning to cryptocurrencies as a means of mitigating their losses from a crashing rouble. Russian daily trading volumes reportedly hit year-to-date highs as sanctions began to bite.

However, Russian crypto activity could be under threat from a number of fronts.

A Shaky Future for Crypto in Russia?

Firstly, Western governments have expressed concerns that cryptocurrencies could provide a safe haven for individuals under sanctions. On March 2, German Finance Minister Christian Lindner confirmed to Bloomberg that G7 and EU countries are working together on preventing the use of crypto to avoid sanctions.

Centralized cryptocurrency exchanges are invariably required to comply with sanctions in the same way as any other financial institution, meaning that they’re compelled to freeze the accounts of any sanctioned individuals or entities. However, there have been calls for exchanges to ban all Russian users – a line which many operators have refused to cross, citing the principles of accessible finance and censorship resistance.

Nevertheless, some exchanges have taken steps to demonstrate to regulators that they’re taking their obligations seriously. For example, Coinbase has confirmed it’s blocking 25,000 cryptocurrency addresses linked to Russian individuals or entities believed to be engaging in illicit activity.

Locking the Defi Exits

Of course, regulators can impose rules on centralized exchanges, but the decentralized finance space holds billions of dollars of crypto in unregulated platforms and protocols. Even if regulators can’t enforce rules against DeFi platforms, they can make it very difficult for anyone to be able to convert their funds to fiat currencies. Japanese regulators are already working with the country’s Virtual and Crypto Assets Exchange Association to find ways to block activity from sanctioned individuals.

Elsewhere, the Biden administration seems set to sign a much-anticipated executive order this week that’s expected to outline the government’s strategy for dealing with digital assets, including a possible CBDC. This development has been in the pipeline since long before Russia invaded Ukraine, but it’s possible that recent events may have informed some last-minute changes.

So it seems that as this war brings the world to a sudden but pivotal inflection point, crypto is dragged into the fray along with just about every other global asset class. The ultimate question is, will regulators deem cryptocurrency too dangerous to exist in a war situation? And if yes, what does that mean for the future of cryptocurrency in the free world?

An Aligned Approach is the Only Effective Way

The most intelligent commentary on these questions acknowledges that a piecemeal approach to regulating a borderless asset simply won’t work. One opportunity for the crypto sector is to use the unprecedented cooperation between governments over recent weeks as a call to action.

We can point to regulatory initiatives such as the FATF Travel Rule, which was rolled out quickly and effectively, precisely because it introduced a common standard that allows crypto operators some consistency for dealing with a global client base. 

An aligned approach to regulation, aimed at stamping out illicit activity while protecting the status of crypto as a fast, effective, and borderless means of transacting, would be far more effective than wildly diverse rules between different nations.

In any event, operators in the cryptocurrency space need to be especially vigilant during these tumultuous times. There’s a need to stay on top of the news and have teams on standby to implement changes at very short notice if needed. Ensure that systems are stress-tested and ready to cope with volatility and surges of activity resulting from ongoing uncertainty. However, most importantly of all, we need to stand with Ukraine as it seeks to defend the very principles of freedom and democracy that are so close to the heart of the global crypto community.

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skalex
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