Putin’s War Could Turn Central Banks into a Crypto Battleground


Globally, among all currencies traded for stablecoins – blockchain tokens that promise 1:1 convertibility into hard assets (primarily US dollars) – the lira’s share jumped to 26% as of the end. of last year, down from 0.3% in January 2020, according to researchers at the Bank for International Settlements. A share of 26% is very unusual, considering that the Turkish currency represents only 0.5% of the global foreign exchange market.

Previously, societies without a medium of exchange acceptable to sellers of goods, services, and assets informally “dollarized” with US currency replacing the national unit of account in day-to-day transactions. Before Indonesia banned the use of foreign currency in domestic transactions in 2015, a fifth of office towers in Jakarta charged rent in dollars.

But if the dollar was an obstacle for sovereign nations to be fully in charge of their monetary destinies, “crypto” is a perhaps greater challenge: “Adopting a crypto asset as a primary national currency carries risks important and is shorthand not recommended,” the International Monetary Fund warned in October last year, shortly after El Salvador made Bitcoin legal tender.

El Salvador may be an exception, and Turkey the result of President Recep Tayyip Erdogan’s unorthodox economic policies. But Russia has upped the ante. Biting sanctions on the world’s 11th largest economy for invading Ukraine could give crypto a big boost: Ruble-denominated trade in dollar-backed stablecoin Tether shows huge volume buildup, says Kaiko, a blockchain analytics company.

“When the banking system is hit, whether by financial sanctions or war, people flock to crypto to protect their assets and maintain liquidity,” says William Je, managing director of Hamilton Investment Management Ltd. I founded Himalaya Exchange, a cryptocurrency. exchange that launched its trading token, Himalaya Coin, last year. Hcoin now has a market value of $43 billion. “The Russians have been very active in the crypto market,” he says.

The widespread use of tokens would deprive banking systems of deposits. Tax revenue could be hit as coin transactions dodge tax watchdogs. Less official money means less seigniorage – the profit the monetary authority makes on the assets it buys by issuing low-cost cash and cash-like liabilities. Since a central bank can only print the national currency, it cannot remedy a shortage of crypto liquidity; financial stability may be compromised. By acting as a gateway for capital outflows, digital assets can amplify exchange rate volatility.

Above all, crypto is a risk to the existing financial order, in which it falls to banks to deny liquidity and store-of-value services to those whom Washington seeks to punish. By operating outside the banking system, coins on decentralized ledgers can weaken US police power. Digital assets, as US President Joe Biden stated in his March 9 executive order, can be used “as a tool to circumvent US and foreign financial sanctions regimes.” They can even avoid the scrutiny of centralized exchanges by changing hands in peer-to-peer, or P2P, transactions.

“There are real concerns that cryptocurrencies could be used for illegal activities or to evade sanctions,” says Je. “Peer-to-peer platforms are a common way to do this. However, if regulators work closely together and give clear and coordinated guidance to crypto traders, the problem can also be solved easily. One of these requirements may be know-your-customer, or KYC, rules for onboarding members of a trading platform. “It doesn’t matter if it’s peer-to-peer transfer or chat channels, you need to register with all the details,” Je says.

If the forces are aligning in favor of crypto adoption, why aren’t prices reflecting it? While Bitcoin may have initially been sold alongside other risky assets, the number of non-zero balance Bitcoin addresses has surged past 40 million to hit an all-time high, notes Bloomberg Intelligence analyst Jamie Douglas Coutts . “Bitcoin is poised to appreciate once macro forces subside,” he says, adding that the number of wallets that only bought and not sold their Bitcoin “continues to reach new highs, rising 20% over 12 months and accelerating in recent weeks”.

HODLers, crypto jargon for “Holding On for Dear Life” users, are showing greater conviction than in past bear markets. More institutional money is entering the fray. “I’ve spoken to many asset managers and investment banks and each of them has either started investing in crypto or is studying” the field, says Hamilton’s Je, former president of Great Britain’s equity capital markets. China at Macquarie Group. “Like it or not,” he says, the crypto market “will continue to exist and grow.”

Once they become widely adopted as a means of payment, any problem with digital assets – such as disruptions to a stablecoin or a drop in the price of a volatile token – could ripple through payment systems and harm the economy. real economic activity, according to the BRI study. The risks are compounded, the researchers say, by “unknown unknowns,” due to the lack of transparency over coin ownership.

Arguments that Bitcoin is too volatile to be overnight money – or volumes on P2P exchanges are too low to support mass token adoption – are valid in normal times. People don’t need a desperate alternative when their banking system is plugged into the vast reservoir of global liquidity and their currency is backed by a monetary authority with unlimited access to ample foreign exchange reserves. But when no condition is met, the rules of the game change. As they can have it in Russia.

The militarization of the dollar and the SWIFT network has sent shock waves around the world. The answer may be generalized cryptography. The pressure on monetary sovereignty that authorities feared from Meta Platforms Inc.’s plan to back Libra stablecoins has returned with a vengeance, even as that project — renamed Diem — is dead. We should take the threat seriously.

More from this writer and others on Bloomberg Opinion:

China can bypass SWIFT by going digital: Andy Mukherjee

When war strikes, even crypto can’t stay neutral: Lionel Laurent

Bitcoin Can Serve Many Masters in Ukraine War: Tim Culpan

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He was previously a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

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