The State of Cryptocurrency and the Russo-Ukraine Conflict
Introduction
Cryptocurrency was born in 2008 upon the release of the Bitcoin protocol. Designed by a pseudonymous individual Satoshi Nakamoto, it was released stealthily, gathering little attention in the beginning. Cryptocurrency, an asset class worth trillions today, started as a basic experiment attempting to build a “Peer-to-Peer Electronic Cash System” (Nakamoto). Essentially, instead of relying on a central party to keep record of transactions and balances, Bitcoin uses an append-only, immutable, and distributed ledger, made possible with blockchain technology. Using a clever mix of cryptography, math, and game theory in its design, Bitcoin has been successfully running for over 13 years, settling over $60 trillion in volume (LeClair).
A couple years after Bitcoin’s release, another revolutionary idea was born. Ethereum, a new blockchain, allowed for computer code to be processed as transactions, enabling a vast ocean of applications establishing itself as the world’s distributed computer. Code on the blockchain, or smart contracts, allowed for complex decentralized processes to run, enabling digital ownership of assets, on-chain tokens pegged to the US dollar, trustless loans and other financial instruments, and so on. While still highly experimental, decentralized finance is becoming a reality, allowing anyone with a mobile device and an internet connection to access a financial system.
Over the years, cryptocurrency has been met with criticism, skepticism and disdain, especially from those with power and influence. Legendary investor Warren Buffett said at his most recent shareholders’ meeting: “one thing I’m pretty sure of is that [cryptocurrency] doesn’t produce anything” (Prater), while his partner Charlie Munger, another widely respected investor, claimed that he “[tries] to avoid things that are stupid and evil and make [him] look bad … and bitcoin does all three” (Prater). Representing the voices of many in the banking sector, CEO of JPMorgan Chase, Jamie Dimon, has also been a vocal critic, publicly showing his disdain for cryptocurrency. “In 2017, Dimon called Bitcoin a ‘fraud.’ In October 2021, he said Bitcoin is ‘worthless’” (Locke). Research in academia has proven that “[cryptocurrencies] have no exposure to most common stock market and macroeconomic factors” (Tsyvinski) and that “there is a strong time-series momentum effect and that proxies for investor attention strongly” (Tsyvinski), suggesting that 1) cryptocurrencies are a legitimate hedge against traditional assets and that 2) cryptocurrencies are able to be financially modeled (contrary to comparisons of crypto to casino gambling). Despite that, cryptocurrency is still often compared to ponzi schemes, the tulip mania, and most of the infamous financial scandals that one can think of.
This paper will explore cryptocurrency and narratives surrounding it, covering debates such as whether it can ever serve as a real currency, or if it has any real value in the first place. Through reviewing existing literature on cryptocurrency and scouring for reputable news sources reporting on the recent Russo-Ukrainian conflict, I make the claim that cryptocurrency can be a legitimate and important way to transact during a time of massive societal distress. This paper argues that cryptocurrency exceeded expectations in its biggest test on the world stage yet, first in gathering funding quickly and efficiently for Ukrainians in need, second in providing a means for transaction when the traditional financial system in Ukraine and Russia faltered, and finally, in retaining a neutral stance, allowing anyone to use the financial system no matter who they were.
Ukrainian Conflict and Crypto
During the Russo-Ukrainian conflict, cryptocurrency has been integral to supporting those in need, by raising funds and channeling donations to them. According to Illia Polosukhin, a Ukrainian blockchain developer, “Deputy Minister Alex Bornyakov said [in March that] crypto donations have been ‘essential” and that by March 23, 2022 — the time of publication of the article — “crypto donations to Ukraine since the invasion [totalled] almost $100 million.” (Polosukhin) According to Bornyakov, “the national bank is not really operating, [and] crypto is helping to perform fast transfers, … [getting] results almost immediately.” (Polosukhin) The donations totaling $100 million, raised from regular citizens, are still sizable and impressive when compared to the Biden Administration’s total of $2 billion in commitment to US security assistance to Ukraine (The White House). During that time there were logistical issues with using centralized and traditional ways of donating money, such as the inability to quickly build out donation infrastructure, or the inability to reach Ukrainian banks. In contrast, crypto transfers were near-instantaneous. Donations were also efficient, as cryptocurrency processes money the same way whether it is $10 or $10 million, allowing donations of larger sums without processing for days at banks, or being charged a percentage based fee for foreign exchange.
While cryptocurrency was crucial for donations and contributed significantly towards financial support for those in need, it also sparked controversy by allowing Russian oligarchs to transact, providing economic ability to the opposition during the war. During the war, several high level Russian officials and oligarchs with strong ties to Russian president Vladimir Putin were effectively blacklisted from the global financial system, having assets frozen in foreign countries indefinitely. This was done by the United States and other allies in an effort to discourage Putin’s advance into Ukraine. To make matters worse, major crypto exchanges “put forth defiant statements” (Ingram) when Ukraine tried to ask them to freeze accounts with Russian ties , according to an article with the relevant title: “How the Ukraine conflict became a turning point for cryptocurrency” As a result of this, Russian oligarchs allegedly used cryptocurrency to regain financial ability, partially avoiding imposed sanctions. Because cryptocurrency allowed the so-called opposition to circumvent a strategic effort in an international conflict, it has raised concern among Western media and regulators. This dual dynamic is summarized best by the Vox article ‘War in the time of crypto’– “In the Russia-Ukraine conflict, which side is crypto helping? Both” (Stewart).
Further Analysis
One common critique against cryptocurrency is how its pseudonymity can allow for money laundering, encouraging criminal activity. In the early days of Bitcoin, there was a significant amount of drug trafficking and other crimes enabled by cryptocurrency. The most infamous case was the Silk Road, an online anonymous marketplace that allowed exchange of Bitcoin with drugs, weapons, and any other illegal object or service that has value. Despite being shut down in 2013, the Silk Road, among other instances of crimes being enabled by the inherent private and permissionless capabilities of cryptocurrency, continue to influence the public to associate cryptocurrency with crime. The old adage of ‘first impressions matter’ rings doubly true with cryptocurrency– despite its creation and continued existence as a forever neutral tool/asset.
Ultimately, the appropriate implementation of cryptocurrency is the key to its successful adoption and value-add to the world. Crypto-anarchism, or total freedom plus unlimited privacy is not the right alternative to the current system. However, with proper implementation, a hybrid system with both traditional finance and decentralized finance can have its merits. One avenue is to gather better control on the on-ramps and off-ramps to cryptocurrency, and implement more specific compliance surrounding how users can go between the traditional financial system and the decentralized one. This can encourage technological innovation and promote the adoption of decentralized finance and all the value it creates, while keeping cryptocurrency users accountable and allowing governments to audit the flow of funds, and the people behind it, in pursuit of minimizing illicit financial activity. There are many recent developments in blockchain and cryptography that allow for even smarter implementations of cryptocurrency while maximizing financial security, but exact solutions are beyond the scope of this paper.
One may question why this is needed in the first place. Mixers, onramps and offramps, ZK proofs…what’s wrong with doing what we’ve been doing all along? This is a fair and common argument against cryptocurrency and decentralized finance. Why fix something if it isn’t broken– reinvent the wheel, and replace it with something still in its development stages and often associated with crime?
While some hardcore crypto-enthusiasts may disagree, the main goal of cryptocurrency is not to completely overhaul the entire financial system, or overthrow those more favored in the current economic paradigm. Currency fulfills two main roles– store of value and medium of exchange. While it seems arbitrary (and unlikely) that buying a cup of coffee or giving a child allowance will one day be replaced with cryptocurrency transactions, it is incredibly attractive for individuals, or even institutions, to store value and wealth in something proven neutral and unwavering. Matt Huang, Cofounder of Paradigm, a top blockchain investment firm, makes the comparison between bitcoin and gold: “Gold has been trusted as a store of value for millennia. Importantly, the supply of gold on Earth is scarce. Confidence in this scarcity rests in humanity’s understanding of nature: that gold cannot yet be cost-effectively synthesized (despite alchemists’ best efforts throughout history). Gold also has many other desirable properties, such as being easy to recognize (no tarnishing), easy to divide, easy to measure (by weight), and easy to verify (through melting), so it is no surprise that gold replaced predecessors to become a global standard.” (Huang) Bitcoin has the equivalent properties of scarcity (only 21 million will ever exist) and verifiability (code is law), except is even easier to transport (transferring $1B in bitcoin can be done in a few clicks, versus the challenge of moving multiple tons of gold), and even more difficult to economically manipulate (as gold mining (or supply) can somewhat be manipulated). While fiat financial systems allow for governments to manipulate the money supply effortlessly, often at the expense of the wealth of common people by diluting their share of the economy, this same type of manipulation is impossible with cryptocurrency. With every passing month and year, cryptocurrency continues to build up confidence in its technology, gradually establishing itself as the premier store of wealth and hedge against individual governments and power systems.
For many places in the world, there is a dire need for cryptocurrency, significantly more important than one’s investment selection or portfolio hedging. Unlike the conflict in Ukraine where many lost the ability to use the banking system, the majority of the population in developing countries do not have a banking system in the first place. With no way to store value that the global banking system recognizes, many in developing countries are caught in a generational poverty trap, unable to break out of either a corrupt government leeching off its citizens with predatory monetary supply, or a faulty financial system that has currency hyperinflating, incapable of storing wealth. Cryptocurrency is not an alternative to, rather, the financial system for those not fortunate enough to enjoy the benefits of the decent yet exclusive financial system of the developed world.
Conclusion
Over the years, cryptocurrency has been playing an increasingly large role in the global stage in terms of how value is transacted. Although many ideas presented in this paper are not novel and have been circulating around for years, the recent conflict has put a lot of existing narratives of cryptocurrency to the test. Through its contribution in helping those in need in the Russo-Ukrainian conflict, crypto has shown the world its viability as an alternative to the traditional financial system.
Living in the developed and free world allows citizens to centralize control to a small group of vetted politicians and leaders, leading them to often dismiss alternatives. Cryptocurrency is a chance at a currency and a financial system that is trustless and not under the tight control of a certain group of individuals. It might never replace the traditional financial system, but it will still apply pressure on those with power to be more cognizant of the priorities of the majority. For those not lucky enough to be under the umbrella of the United States’ decent financial system, cryptocurrency can be the best chance in generations to store wealth and transact value, providing an alternative to corrupt government systems or fraudulent financial systems. I believe cryptocurrency can do a lot for the world.
Works Cited
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