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Throughout my academic journey, I have studied the intricacies of political communication at Louisiana University and the Higher School of Economics. However, five years ago, I discovered blockchain technology and became deeply interested in it. Because of this new interest, I became an editor for the policy and regulation department within a major English-language media organisation.
Unlike many in the fast-growing cryptocurrency world, I don’t claim to be an unwavering or committed follower of digital currencies. Despite this, participating in the field has provided me with a unique perspective on various economic and political issues worldwide.
It’s fascinating to observe how different nations navigate their engagement with the realm of digital currency, each with varying degrees of success, particularly in the face of unprecedented international sanctions.
The ongoing conflict between Russia and Ukraine has numerous ramifications, both public and private. Among the latter are ripple effects on regulations of cryptocurrency both domestically within these countries and worldwide.
As early as March, Ukraine has seen a surge in donations made using cryptocurrency, with amounts reaching tens of millions of dollars. The situation highlights a global trend where individuals prefer to donate in cryptocurrency rather than resorting to cross-border banking services. Moreover, the potential for enhanced security through blockchain technology, which permits money transfers to be conducted without any state intervention, contributes to this trend.
In an effort to streamline the process, Ukrainian officials have established a website solely for collecting digital donations to address defense and humanitarian needs. Moreover, in mid-March, President Volodymyr Zelensky approved legislation that authorized the use of digital assets within the country.
While the donations have become a source of pride for crypto enthusiasts, they are also causing concern among crypto skeptics. The belief is that digital money can not only aid Ukraine’s defense mechanism, but also enable Russia to evade sanctions. Thus, for the first time in their history, cryptocurrencies may have gained significant political power. Five years ago, political slogans played a crucial role in popularizing the use of cryptocurrency as both a tool to challenge the traditional capitalist system and a potential path towards creating a “decentralized democracy.”
In recent times, cryptocurrency lobbyists, particularly in the US, have shifted their focus from political slogans to economic arguments and have invested a lot of time in creating a more respectable and no longer rebellious image for the industry. Decentralization discussions have increasingly been replaced by financial market language, while the “pirate” romanticism has been replaced by the willingness of crypto platforms to negotiate with major investors and government regulators. The notion that cryptocurrencies may help Russia avoid Western sanctions has led to the reappearance of political bias in the industry, which had been forgotten.
Amidst these suspicions, major cryptocurrency platforms like American Coinbase and Chinese Binance were forced to make statements announcing their strict compliance with restrictions imposed by the US and the European Union against Russia. Cryptocurrency industry experts quickly explained that the digital money market’s small size makes it impossible for Russian capital to be hidden in volumes that could help save the country’s economy from isolation.
Undoubtedly, sanctions and the withdrawal of international payment systems from Russia can spur a more active adoption or use of cryptocurrency, only those with selective imagination can deny this. Moreover, in the current situation, it appears that Russia would be making a logical decision to legalize crypto, as digital currency can help facilitate international transactions to some extent. Additionally, it could be done quickly with the Kremlin as they are able to make the necessary decisions almost immediately.
This is a matter of theory and, in reality, the decision was not made almost six months after the start of hostilities. Why? And is it worth waiting for it in the near future? While these questions can be answered, let’s focus on the current state of cryptocurrency regulation in the world.
Why countries don’t like digital currencies so much – and why El Salvador has embraced them
Any national currency is never just a neutral means of payment. Money is also a political tool, specifically a tool of monetary policy conducted by global central banks. Replace a single national currency with an unlimited number of private currencies, and this tool will simply stop working properly, and the state will lose one of the levers of control.
So the ability to pay for any goods and services online bypassing licensed commercial banks – potentially provided by cryptocurrencies – is a threat to the state by definition.
Therefore, cryptocurrencies are not recognized as a legal payment method practically anywhere on the planet. Of course, there are exceptions to this general rule – for example, in El Salvador. Bitcoin is recognized as an official payment method there: crypto ATMs have been installed on the streets, and some catering networks already accept payment in digital currency. In addition, President Nayib Bukele invests part of the state budget in bitcoins, and also promises to build a whole city for mining – “Bitcoin City” – at the foot of the local volcano Conchagua.
El Salvador is a special case. Firstly, since 2004 it does not have its own currency, and before bitcoin was recognized as an official means of payment, this role was fulfilled only by the US dollar. Secondly, this is a very poor country, with a significant portion of its population engaged in the informal sector. Furthermore, many Salvadorans work abroad, and when they transfer their earnings home, they lose money on commissions (which means the Salvadoran economy also suffers). Local authorities hope that bitcoin will solve these problems. However, economists, to put it mildly, doubt that this will work: after the collapse in the value of bitcoin, the country’s authorities have already lost half of their investments.
Very few countries in the world dare to undertake such a large-scale implementation of digital currency, as well as a complete ban on it. Yes, cryptocurrencies have long earned a reputation as a means of laundering the capital of oligarchs and drug traffickers. However, this is not a big obstacle for law enforcement officials, as they have long learned to track the transactions that interest them. You may be surprised, but such a possibility is actually provided by blockchain technology.
Anonymity of cryptocurrency transactions is nothing more than a popular misconception. In reality, the status of a user can be rather determined as “pseudonymous”. Information about each transaction on the largest public blockchains is available to anyone in the form of data on the wallet addresses of the sender and receiver. And in many cases, by tracking the chain of transactions, it is possible to establish a connection between the wallet and a specific person. For example, when money is withdrawn to a cryptocurrency exchange account, to which the owner’s personal data is linked.
There are few examples of countries that rigidly and consistently restrict cryptocurrencies. One of them is China, whose authorities in 2021 finally banned their citizens from any operations with digital currencies that do not have official status. At the same time, China launched its own digital currency from the Central Bank of China, the electronic yuan, and began actively promoting it.
Because it is possible, of course, to dismiss digital currencies as a long-drawn-out and annoying joke (although one with a capitalization of 3 trillion dollars at its peak). But it is better to try to use them somehow – and China has understood this well. The local Communist Party plans not just to replace all private digital currencies with one state one. As soon as the technical possibility for this arises, countries receiving Chinese investments will likely become a platform for cross-border use of the electronic yuan. In the future, this will raise its status both as a tool for international trade and as a reserve currency.
We are used to associating China with a digital dystopia, but in this case, its financial policy, albeit with reservations, may seem attractive to democratic regimes. And it already has – for example, the European Union has started testing the digital euro. However, in general, it cannot be said that Western countries have taken a consistent course on cryptocurrency. For example, in the United States, the regulation of digital currencies remains the responsibility of specialized executive agencies and individual states, while Congress regularly holds hearings on the topic – but so far refrains from specifying federal legislation.
Congress members have very different views on cryptocurrencies. Some are advocating for state-level restrictions, such as Democrat Senator Elizabeth Warren, who sees crypto as a serious threat to the well-being of private investors. Meanwhile, Republicans are quietly pushing for the idea of humane regulation of private cryptocurrencies, while also trying to nip in the bud any talk of a digital dollar, which the US Federal Reserve could issue. In their opinion, a digital dollar could become another tool for financial surveillance of American citizens.
As can be seen from this brief overview, the mere existence of cryptocurrencies is a significant factor in both internal and external policies of modern states. And this is true not only for China, the European Union, or the United States, but also for Russia. The digital ruble is also being tested, by the way, but the issue is not so much about it.