The Crypto Crisis: From Ban to Bank of Russia
The dynamic nature of international politics has its toll on the decisions that leaders take. Before the unfolding of the Ukraine Russia Crisis, and the sanctions that followed suit, Russia’s take on Crypto Mining was staunchly different to what it stands at today. Towards the end of January Russia proposed to impose ban on the mining of crypto currency.
In January, Russia claimed that it is considering banning the crypto currency stating that it is a threat to financial stability of the country. In addition, it undermines the autonomy and sovereignty of the monetary policies drafted within Russia. This announcement came along a global wave of clamping down on cryptocurrencies. Governments worldwide from Asia to the United States has expressed their displeasure, and went ahead to ban it. The belief that crypto shadows state agency is increasingly gaining ground. Since economy is a major pillar of government’s control, any intervention in it is considered a direct dilution of state’s sovereignty. Leaders fear that this would drive the nations on a path of statelessness where the decentralization of power and economics would facilitate the system. Furthermore, Russia has always been against the idea of crypto. It argues that it could be used to fund terrorist’s activities, or for money laundering. Russia’s central bank reported that “speculative demand determined cryptocurrencies rapid growth”, characterizing a financial pyramid. It also cautioned against bubbles in the market that might end up destabilizing the finance system. As soon as the central bank notice these trends, it raised an alarm instructing financial institutions in the country to avoid any operations with cryptocurrencies, and demanded to have some mechanism in place that could nullify any transition that trades crypto against fiat currencies.
Russia’s central bank further indicated that it would collaborate with the regulators based in countries where any exchanges of crypto are duly recorded. They would collect the information regarding Russian clients. Earlier, China also had a similar crackdown where it banned all transactions, and mining of crypto along with targeting blockchain and crypto stocks. However, Russia expressed that it doesn’t have any plans to go the China way.
Russia takes up third places in bitcoin mining, with the United States and Kazakhstan on first and second respectively. Crypto mining, according to the Bank of Russia, is causing concerns with energy use. Bitcoin and other cryptocurrencies are "mined" by powerful computers competing to solve complicated mathematical puzzles against others connected to a worldwide network. The process consumes a lot of electricity and is frequently run-on fossil fuels. Therefore, the best way out is to ban them all. In August, Russia accounted for 11.2 percent of the worldwide "hashrate," a word used to describe the amount of computing power used by bitcoin network computers. Nevertheless, Russia was not against the idea of digital currency, and is planning to introduce its own digital rouble.
The change in the picture got introduced following the breakout of a full-fledged war between Ukraine and Russia. Canada, the European Union, Japan, New Zealand, Taiwan, the United Kingdom, and the United States have announced sanctions against Russia that target banks, oil refineries, and military exports. In the light of these circumstances, the chances of Russia using cryptocurrency to sail through the sanctions have hiked. The US Treasury Department said it was restricting Russian President Vladimir Putin's ability to use the country's $630 billion in foreign reserves. This decision was taken following removal of several Russian banks from SWIFT (the Society for Worldwide Interbank Financial Telecommunication) that provides a secured messaging community for trillion-dollar worth of transactions. But the increasingly reliance of the people on crypto has put a serious dilemma in front of the world leaders. The diminishing value of US dollars has gravely undermined the relevance of sanctions in a serious situation like war.
According to Chainalysis a famous blockchain statistic site, over 74% of ransomware purchases in 2021; totaling more than $400 million in bitcoin went to groups that are "very likely to be associated with Russia in some way." However, relying completely on crypto would not be an option for Russia because major players of the world like Europe, Asia and the US has already banned the use of crypto. Some options like SUEX and Chatex services are only options available for Russia. The only way out for Russia using the crypto route is to mine it to produce assets that can be later changed into cash or can become a mode of payment for imports. A tactic that Iran is allegedly deploying to evade sanctions. Moreover, the amount of money that would be required to move to override sanctions is humungous. Countries still have not developed the required infrastructure to run their entire economy via blockchains and crypto. Russia’s banking sector is pegged at nearly $1.4 trillion, a number that fully intact crypto states like Iran and North Korea could come closer to. Therefore, the crypto route might be of some relief but not a complete game changer as for now. Another issue that Russia might face with crypto is that most of these transactions are stored on blockchains that are publically available. Hence, it would be comparatively easy to trace any big transaction. The firm can set up alerts to see when transactions happen right away. However, other tokens, such as monero, have been designed with anonymity in mind.
The entire debate comes down to readiness of the states to alter policies and provide infrastructure that could support their decisions. In less than a month, Russia went from banning the use of crypto currency to almost shifting its entire economy on it. At a national level such currencies might pose the risk of undermining the sovereignty of financial system, but they are also becoming at international cause of concern. They are diluting sanctions as a tool of deterrence while also facilitating terror groups along with cyber attackers to operate at full potential with all the required funds and zero risk of getting traced. Therefore, this issue needs to be addressed immediately before it makes the enemies of peace filthy rich, and let them exploit the resources to further their hawkish agendas.
References
1. Jonathan Ponciano, “Russia May Use Cryptocurrency To Try And Evade Sanctions—But Here’s Why That Will Be Hard”, Forbes, 2022.
https://www.forbes.com/sites/jonathanponciano/2022/02/28/russia-may-use-cryptocurrency-to-try-and-evade-sanctions-but-heres-why-it-will-be-hard/?sh=f36cd717ca43
2. List of sanctions against Russia after it invaded Ukraine, Al Jazeera, 2022.
List of sanctions against Russia after it invaded Ukraine | Russia-Ukraine war News | Al Jazeera
3. Angela Lopez, “Russia Bans Crypto”, ibasetrading, 2022.
4. Crypto Ban in Russia's Use & Mining Following the Worldwide Crackdown (ibasetrading.com)
5. Putin Backs Crypto Mining Despite Bank of Russia’s Hard Line, Bloomberg, 2022
6. Putin Backs Bitcoin (BTC), Crypto Mining Despite Bank of Russia’s Ban Plans - Bloomberg
7. Aakansha Chaturvedi, “Ukraine crisis: Can Russia use cryptocurrency to circumvent sanctions?”, msn, 2022.
https://www.msn.com/en-in/money/topstories/ukraine-crisis-can-russia-use-cryptocurrency-to-circumvent-sanctions/ar-AAUvTSp
8. Srestha Roy, “Crypto will not save Russia from sanctions”, TechStory, 2022.
9. Crypto will not save Russia from sanctions - TechStory
10. “Crypto Mining Drives Electricity Consumption in Siberia”, cryptonews, 2022.
11. Crypto Mining Drives Electricity Consumption in Siberia – crypto.news
Pic Courtesy-Surya Prakash at unsplash.com
(The views expressed are those of the author and do not represent views of CESCUBE.)
