What happens to cryptocurrency during a war? It’s true that the entire world has been in uncharted waters, so to speak, in the era of COVID-19 in many ways. Add what many are calling the largest conflict in Europe since World War Two, and you have a recipe for much potential fear and uncertainty in many sectors including virtual currency.
The First Crypto War?
Some are calling the Russian invasion of Ukraine the first crypto war, stating that the “digital asset front” is second in importance only to the actual fighting.
And while that sort of statement doesn’t take into consideration the long-term human suffering aspect of any war in terms of what’s actually important or not, investors are right to be worried about the future of crypto. And not just because of the actual hostilities on the ground from an unprovoked attack on a sovereign nation.
But before we examine that, what’s happened in crypto since the Russian attacks on Ukraine began? There has been high demand in Ukraine for Bitcoin, Ethereum, and the Ukraine DAO.
There are reports of Russian investors attempting to invest crypto in offshore options in places like the United Arab Emirates according to one report from Reuters. Those offshore investment attempts include trying to use virtual currency to buy real estate in the UAE.
Ukrainian fundraising via virtual currency is not a legal issue, but attempts by Russian oligarchs, government officials, and quasi-government actors to bypass western sanctions definitely is, and that is one reason why investors should be more concerned about the future of crypto.
Crypto Prices And War
When the Russian invasion of Ukraine began some sources including Reuters reported an 8% drop in Bitcoin, which was attributed to a sell-off of assets by Ukrainian investors (at least in part). That price dip did not persist, though, and sources report the coin is up 12% since the start of hostilities.
There have been news stories about the feasibility of Russia avoiding U.S. and European sanctions via crypto currency. While one side of the “Can they or can’t they?” question involves the observation that a comparatively low amount of global assets are tied up in cryptocurrency, Russian development of crypto includes work on an official digital state currency or “digital Ruble”.
If Russia is able to sidestep international banks and regulation via cryptocurrency, sanctions may not have the intended effect or may fall far short of acting as a deterrent.
Federal Law, Know Your Customer, And Other Issues
International laws govern banks, fiat currency, investments, and other aspects of the global finance marketplace. Three areas that pertain to both war and peacetime relevant in the crypto space are:
- International desire to regulate practices that could be used to launder money or sidestep sanctions.
- A U.S. government push to develop an official cryptocurrency and regulate crypto in general.
- A general high-tech push against hacking, ransomware, and fraud.
When the United States government becomes interested in something like crypto, and actually makes noises about regulating it, those with a sense of history sit up and take notice. Why? Because of past government decisions about highly technical issues where the decision-makers had little or no technical expertise. And that is a recipe for trouble, especially in crypto.
Regulators Who Don’t Know What They Are Regulating
The Communications Decency Act of 1996 is an excellent example. This federal law made it a crime to “knowingly” transmit “obscene or indecent” media to anyone under the age of 18. This law was passed with the Internet in mind, but with no technical understanding of how the law would actually be enforceable.
Ultimately this law was overturned by the Supreme Court for being overbroad and a violation of protected speech under the First Amendment. But the larger problem remained unaddressed–how was the federal government supposed to actually regulate “decency” on the internet?
When the lawyers keen on regulating crypto get those regulatory wheels moving, there are no guarantees history won’t repeat itself when it comes to people with no training, context, or experience making decisions about crypto and the law.
The motivations behind regulating crypto are decent enough; who wants to be left behind when there are new innovations in trustless transactions, and peer-to-peer trading?
Who wants to ignore potential solutions to problems related to the weaknesses of fiat currencies, and who wants to basically remain a Luddite in a time of incredible change?
But regulation should not be done in an expertise vacuum. It should be well informed by crypto users and those with expertise in the technology. Lawyers and politicians who have to be told what an NFT is should have no say in matters related to the technical administration and governance of crypto without an informed panel or group to advise them.
And not all government regulation is benign. In China, development of a virtual yuan tied to the fiat currency of the same name has implications far beyond the evolution of money in that society.
Any authoritarian government with an interest in tech and crypto is sure to infect that technology with state-level spyware measures, tracking, and/or other anti-privacy measures as a means of hedging its bet on its own citizens. And that brings us full circle back to war and crypto.
War And Crypto
There are may articles online discussing the war between Russia and Ukraine as it relates to crypto, using plenty of historic comparisons to how gold was used as an investment during the last two World Wars as a barometer of what may happen with cryptocurrency going forward.
But looking to those conflicts and societies of decades past could be a mistake if you’re trying to read the “tea leaves of history”.
Instead, what pundits and technology writers ought to be doing is looking forward with the understanding that the most likely end result of the war on Russia from a crypto perspective? That thanks to the sanctions on Russia and that nation’s attempts to side step them, more international scrutiny and regulation of cryptocurrency is coming.
If you don’t believe that, you are invited to consider the last time a major game-changing technology was developed and deployed by a country where no prior regulation or even understanding of the technology existed.
The new tech was unveiled to the public on two occasions, and ever since there has been a very strong international interest in regulating and controlling that technology for the protection of all involved.
We’re talking about the technology developed in the 1940s that led to the use of the atomic bomb in the war in the Pacific. No, cryptocurrency does not have the same destructive potential nor does it pose the same kind of existential threat to the entire globe.
But the level of international scrutiny on crypto leads some thinkers to believe that an international consensus on virtual currencies may not be far behind the end of the war in Ukraine, whenever that may be.