WHAT CONFLICTS CAN TEACH US ABOUT ASSETS CUSTODY
Over the past few weeks, the dominant discussion across all media outlets has been the Russian invasion of Ukraine, the situation has been very precarious and has required handling with a delicacy akin to that of a seasoned neurosurgeon separating a pair of siamese twins conjoined at the head.
The consensus is that the Russian Invasion must be stopped by Ukraine’s allies but it’s 2022 not 1944 and the similarity between Kyiv and Normandy ends at the beach. The allies can’t just randomly storm the beaches to engage the enemy, the response must be measured to avoid a break out of wilder conflict with far reaching consequences.The approach has been to wage economic war against Russia by issuing sanctions that are designed to send the Russian economy into a downtrend reminiscent of the Soviet Era.
This has translated into growing Economic hardship for Russians as the Ruble has crashed to record lows, losing 30% of its value in the process. However the major victims of this conflict has been Ukrainians who have had to leave everything they know behind to seek refuge in neighbouring countries. Most of the ordinary people on either side would have voted to avoid this war if they had a choice unfortunately they couldn’t.
Though the humanitarian cost may have been abated through the valiant efforts of the Ukrainian army and the solidarity of its allies, the economic cost still lingers.
This leaves me to wonder how these people would restart their lives from ground zero with whatever little assets they were able to preserve through the war or during migration.
So How do you preserve wealth in times of conflict?
During WWII the most common method of preserving wealth for most families was by investing in precious metals. This is a sound strategy if you live outside the theatre of war, however for those who were directly affected by the war such as the Jews for instance, this strategy provided little to no security/utility for two major reasons,
- Illiquidity: Precious metals such as gold are notoriously illiquid, you can’t pay for a cup of coffee with a bar of gold.
- Risk of Confiscation: They are also at risk of confiscation, in the case of Jews it was confiscation by the Nazis. In recent times its confiscation at ports of entry during migration such as the Denmark Scandal where African/Middle-Eastern migrants had their jewelries & cash confiscated under a controversial law.
THE ROLE OF CRYPTOCURRENCIES
So the question of asset preservation remains unanswered, Real estate is obviously a non-starter as its even way more illiquid than gold and at even higher risk of confiscation. This leaves room for exchange traded financial instrument such as cash, stocks, bonds, options, etc and by extension cryptocurrencies as the most flexible options for asset management.
History has shown us that in conflict situations such as this, people’s knee-jerk approach to asset management is to withdraw all their money from the bank and sell-off their stocks, this phenomenon is called a bank run and has already occurred during this conflict. However more faith has been shown in cryptocurrencies as most people on both sides of the conflict have resorted to using it as their preferred method of preserving assets.
Russians are using cryptocurrencies such as bitcoin to escape the economic sanctions by converting their roubles to bitcoin and other cryptocurrency while Ukrainians are receiving donations from allover the world in bitcoin and also using it as a means of preserving their liquid assets during migration.
However the neutral role of cryptocurrencies in this conflict has come under heavy scrutiny. Several people including the Ukrainian Vice Prime Minister has called for exchanges to freeze cryptocurrency accounts belonging to or affiliated with Russians. This has been met with mixed reactions from exchanges, while some such as Dmarket, a Ukrainian NFT market place has taken the liberty to freeze all Russian accounts on their platform, others have pushed back on the idea sighting regulatory overreach. This means that users would have to trust their exchanges to be unwavering in their resolve not to indiscriminately freeze accounts.
NON-CUSTODIAL WALLETS
Does this quagmire spell the end of the road for cryptocurrencies as it appears to have come under the same Risk of Confiscation as Gold described above. This is not entirely the case as cryptocurrencies have similar custodial attributes like cash. Non-Custodial Wallets like Quiver, Metamask, Ledger, Trezor, Wasabi, Rainbow, etc enable users to take absolute control of their assets by giving them full control of their private keys.
Private keys are digital signatures used to sign transactions. On custodial wallets such as those on Centralised exchanges like Binance, FTX, Coinbase, e.t.c, these private keys are in custody of the exchange hence they can sign transactions on behalf of the customer. This means the exchanges have the similar levels of control over the assets as the customer and can restrict the customer’s ability to make certain transactions or even confiscate the customer’s assets.
Non-custodial wallets take this ability away from these exchanges and places it solely in the hands of the customer. Using a non-custodial wallet completely eliminates the risk of confiscation among other use cases such as offline storage, faster withdrawals, etc. However they come with their own challenges such as;
- Loss of assets: if a User loses the private keys to their wallet the assets within the wallet are lost for ever and unrecoverable. This has been a major drawback for the adoption of non-custodial wallets. However certain innovations have been developed to enable users back up their private keys to mitigate this risk.
- User Experience: Adjusting to the steep learning curve of managing a non-custodial wallet is also a major barrier to its adoption.
In conclusion, it’s an observable phenomenon that habits formed during times of conflict often tend to become ingrained in the social fabric of those affected by the conflict, several examples of this abound globally. The Nigerian civil war for instance created a need for most Nigerians of Igbo origin to often domicile their real estate assets in their states of origin rather than other states in Nigeria where most of those assets were confiscated during the civil war and never recovered.
Hence it wouldn’t be far fetched to infer that the adoption of cryptocurrencies and by extension Non-custodial wallets as a means of preserving wealth during conflicts would also become ingrained in the social fabric of most people post conflict. To learn more about Quiver subscribe to our weekly newsletter and click here to be the first to know when we launch our Beta in a couple of weeks.
