As sanctions against Russia mount, an unlikely ally comes to the rescue of Moscow: cryptocurrencies. The International Monetary Fund warned on Tuesday that the use of, for example, bitcoin could undermine the effectiveness of financial sanctions.
Since the start of the foray into Ukraine, there has been a sharp increase in crypto trading volumes in both rubles and Ukrainian hryvnia. In the Russian case, that peak is now behind us. It could be that these were transactions by ordinary citizens who wanted to secure their dollars via bitcoin, to later exchange them back abroad. But an unknown volume now goes through ‘defis’, decentralized crypto exchanges where it is more difficult to find out who is doing what, and whose traded volumes are less easy to track.
It is possible that now the Russian state is also partly switching to crypto transactions to collect payments for its oil and gas exports. Last month, the deputy speaker of the Russian parliament already said that countries such as China and Turkey can pay in bitcoin if necessary.
Russia has a rich crypto tradition. With 11 percent of the annual global production of crypto coins, it is in third place after the United States and Kazakhstan. For a while, it seemed that Moscow wanted to curb those crypto activities. As late as January of this year, the Russian central bank said the use and mine of crypto, for the sake of financial stability, energy consumption and the sovereignty of the monetary policy of the central bank itself. That aversion was not isolated. Authorities everywhere view cryptocurrencies with suspicion, especially since these types of coins circumvent official policies. One-party states appear to be especially sensitive to this: China banned all crypto transactions and mining activities last year.
Circumstances for Russia have since changed dramatically. While the Russian central bank also denounced the excruciating energy consumption of bitcoin mining as a risk factor in January, energy is currently a way out for the country. The IMF stated this week that “mining energy-intensive blockchains such as bitcoin could allow countries to convert their energy supplies that cannot be exported into cash.” This ‘monetization’ ‘takes place outside the financial system in which the sanctions are imposed’. In other words: turn gas into bitcoin, and you still earn.
There are also other, and perhaps more important, developments on this front. The sanctions against Russia set a firm precedent, and are now speeding up the use of alternatives to the US dollar just about everywhere – the dominance of this currency is what makes such sanctions so effective. ‘Stablecoins’ like tether, which promise to be always and fully convertible into dollars, are becoming a more attractive alternative – as long as they don’t collapse.
It’s still small beer compared to the size of the official financial sector, but still: financial sanctions are of course in place, but unintentionally contribute to financial instability. And, if there is going to be even more mining in the future, also for the climate problem. The global energy consumption for mining bitcoin is already almost twice as large as the energy consumption of the whole of the Netherlands. And, as ING already calculatedfor the energy consumption of a single bitcoin transaction you can 200 times do the laundry. That will soon also fall under the collateral damage from the war.
As Moscow, you don’t even have to throw a nuclear bomb anymore to destroy the planet.
Maarten Schinkel writes about economics and financial markets.
A version of this article also appeared in NRC in the morning of April 21, 2022