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Cryptocurrency is the answer to sanctions imposed on Russia

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In The Handmaid’s Tale, one of the first things the newly crowned dictatorial government does is cut off people’s access to their own money. However, not everyone’s assets are withheld; only those the state deems ‘unsavoury’ are subjected to its whims.With the ongoing Russia-Ukraine crisis,  this fictional account seems closer to reality. The crisis has underlined the need to start shifting to a decentralised, apolitical, digital currency system, capitalising on advances in blockchain technology and cryptocurrency to keep the citizens’ money protected.

For Russia, being threatened with sanctions is nothing new. In the past decade, the US has cited the annexation of Crimea, malicious cyber activities,  and interference in elections as some of the reasons for inflicting penalties. Currently, the US, UK, EU, Canada, Switzerland, Singapore, and Japan have imposed sanctions primarily targeting the Central Bank of Russia and severely limiting access to Russia’s foreign reserves. Some Russian banks have also been disconnected from SWIFT, a global cooperative simplifying cross-border financial transactions. These threats have always been dangling over Russia like a double-edged sword, but letting it fall would simply accelerate the development of circumventive technologies. One can take the example of North Korea when it was disconnected from SWIFT in 2017 and quickly shifted to crypto-assets, placing it further outside America’s sphere of influence.

Also read: How Modi govt has given legal sanction to cryptocurrencies in India, through the backdoor

Cryptocurrency and Russia

In 2014, when the UK requested SWIFT to exclude Russia, the Central Bank of Russia started developing its own Russian equivalent to replace SWIFT – SPFS. However, SPFS has a laundry list of limitations that makes adoption difficult. A better alternative is CIPS, a payment system developed in China. Backed by China’s economic power and free of the hurdles in SPFS, CIPS could emerge as a mainstay in the Eurasian region, allowing Russia to reroute its payments through China. The ‘no-limits”’pact between Russia and China further strengthens this proposition. However, CIPS is only 0.3 per cent the size of SWIFT. Russia’s biggest trade partner is China, and we can already see Russian banks start to sign up to CIPS, but this system will need time to be scaled up.

It will be some time before cryptocurrency too is ready to be deployed as an all-encompassing alternative. Right now, Russia’s daily foreign exchange transaction value, $50 billion, is approximately the entire value of Bitcoin transactions worldwide. However, the fact remains that crypto is far ahead of the race than SPFS and CIPS. For one, technological advantages make it a better upholder of data privacy. Moreover, crypto is decentralised, meaning that it is mostly free from governmental influence. There are still numerous limitations to overcome, such as the high transaction fees associated with Ethereum, but new blockchains are being developed, like Solana, to handle huge volumes efficiently.

Even as S&P 500 and Nasdaq fell by 1.6 per cent and 1.5 per cent his past week, cryptocurrencies like Bitcoin and Ether experienced a rise in value. Ordinary Russian citizens are buying crypto like never before in an attempt to protect their savings. While it might be too late for Russia to pivot entirely, as large cash flows on the blockchain can be flagged, this situation is a valuable lesson for countries all across the globe.

Unlike conventional portrayal, crypto does not just line the pockets of Russian oligarchs. Just as crypto could potentially help countries evade sanctions, it is also currently being used to provide aid to the Ukrainian army. An estimate by Forklog states that organisations have raised over $58 million in crypto, used by Ukraine to purchase critical supplies, including food, gas, and military equipment.

Recently, Ukraine’s Minister of Digital Transformation, Mykailo Federov, asked some major crypto exchanges to block the addresses of all Russian users. Exchanges like Binance and Coinbase rejected his request, emphasising that although action would be taken according to the sanctions imposed, ordinary Russian citizens would be affected. After all, the 10,000 odd anti-war protestors arrested by the Russian government indicate that it is Putin who wants this war, not Russia.

Sanctions depend on the morals of those who impose them, but the hypocrisy of the west in criticising actions that are eerily similar to what they have done in the past makes for a perilous situation where these sanctions could have numerous malevolent, as well as unintended, consequences. Moreover, sanctions create scarcity. Paradoxically, this allows authoritarian regimes to thrive, as the government now has more control over how the limited resources are distributed. Ordinary citizens become collateral damage in this multi-dimensional chess game. The current scenario is a warning to all nations that the quick adoption of apolitical digital currencies is crucial, given how unpredictable geopolitics can be.

The author is a student at IIT Madras. Views are personal

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