Crypto evangelists have promoted buying Bitcoin as a safe haven against cratering currencies and political turmoil. Now, as Russia's invasion of Ukraine heaps humanitarian and financial crises on top of runaway inflation, the world is getting a closer look at whether cryptocurrencies might meet those expectations.
Even as cryptocurrency donations for Ukraine support approach the $100 million mark, buying Bitcoin is still, to say the least, a bumpy ride. The cryptocurrency dived more than 11% to below $35,000 on Feb. 23 as news broke of Russia's invasion. It rebounded 28% over the next six sessions, flashing safe-haven signs. Then, after a pullback, Bitcoin jumped 10% on Wednesday as an executive order from President Joe Biden focused broad federal attention on cryptocurrencies, their management and their markets.
But, with other "risk" assets sliding again late in the week, Bitcoin fell back below $39,000.
New Uncertainties Create Global Crisis
The intertwined uncertainties of Russia's assault, consumer and commodity prices and governments' responses create yet another global crisis. They come heaped on the back of a pandemic and economic collapse, testing the $2 trillion crypto market. Meanwhile, the Bitcoin constituency — from its libertarian core fan base to newer institutional investors — is still grappling with the young asset, with just a 13-year history. Is it a currency, an inflation hedge, a main course for investment-risk appetite, a scam or something else entirely?
"Those are the main two competing factors: The ideological-utilitarian perspective on the benefits of crypto assets versus the financialized investment component," said Matt Weller, global head of research at Forex.com. "Those are sort of pushing in opposite directions."
Nations around the world could hit cryptocurrencies with tighter regulations, amid worries Russia's elite will use them to shuttle money beyond the reach of sanctions. Experts say dodging the crackdown would be difficult via crypto, but not impossible.
Elsewhere, the usual hurdles remain to buying Bitcoin and other cryptocurrencies.
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Millions in crypto donations have poured into Ukraine, some in the form of NFT artwork. A non-fungible token is a blockchain-based digital asset, often a visual image. NFTs allow investors to buy unique, one-off pieces of digital work of artistic or social importance.
But the volatile digital asset is not a stable place to park money. Non-sanctioned Russians fleeing the ruble's collapse could find themselves boxed out of the world's financial system too. And the already cumbersome crypto ecosystem they'll have to rely on can become even more challenging if internet access falls prey to hack attacks or sanctions.
On Wednesday, the crypto world cheered President Biden's executive order promoting the "responsible development" of digital assets.
The executive order asked U.S. agencies to come up with policy recommendations "to address the implications" of the rapidly growing digital-asset market, the White House said. It also calls for research on a possible U.S. central bank digital currency.
"The rise in digital assets creates an opportunity to reinforce American leadership in the global financial system and at the technological frontier, but also has substantial implications for consumer protection, financial stability, national security and climate risk," the White House said in a statement.
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The order was months in the making, administration officials said Tuesday. They downplayed its timing relative to Russia's invasion. Either way, investors began buying Bitcoin in earnest on the news. The cryptocurrency rallied to nearly $42,000 during the day. Bitcoin then dropped below $38,300 on Thursday, as aggressive growth stocks struggled.
Cameron Winklevoss, the early Bitcoin investor and president of the crypto exchange Gemini, said on Twitter that the White House's action "paves the way for thoughtful national crypto regulation." Others were less impressed. Bill Barhydt, CEO of the crypto investment app Abra, called the order "a big nothing burger with a side of psychobabble."
Meanwhile, Sen. Elizabeth Warren was drafting legislation that would strengthen reporting and verification of customers and transfers to private crypto wallets, NBC News reported on Tuesday.
Risk Assets
Russia's invasion follows two years of spikes and cliff-dives for Bitcoin. Even as it went mainstream, serious questions lingered over what Bitcoin really was, and what it could potentially be.
A great flood of Bitcoin buyers arrived with the coronavirus pandemic early in 2020 as waves of stimulus cash risked weakening traditional currencies. Adoption by PayPal and other major businesses helped. So did the institutional investors that began buying Bitcoin. Meanwhile, crackdowns on the industry by nations including China helped keep uncertainty levels high.
After more institutional and conventional investors rolled in, the ups and downs of the cryptocurrency's price became more synchronized with other "risk assets," like growth stocks, to be dumped when times get difficult. The price of Bitcoin hit a high of $68,990.90 in November. But then it sank. Over the past month, Bitcoin's price has met resistance at around $45,000.
Concerns about the Fed's bolder-than-expected efforts to roll back pandemic-related stimulus have weighed on the cryptocurrency, as well as the broader stock market.
Proponents argue that inflation is a reason for buying Bitcoin as the buying power of other currencies declines.
"You saw that the stimulus was going to be leaving a lot faster," said Edward Moya, senior market analyst at OANDA. "I think there was this belief that, yeah, the Fed's going to tighten. But things are going to be still fairly accommodative."
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As anxieties built up over inflation and tensions along the Ukrainian border, Bitcoin prices fell along with the broader market. When the invasion began Feb. 24, Weller notes, investors sought shelter in U.S. bonds and gold. One place they didn't flock to, he said, was Bitcoin. It fell as traditional investors ran from risk.
But in the days that followed, sanctions bore down on Russia's economy and crushed the ruble. With energy prices surging and ATM lines in Russia stretching across blocks, the narrative switched. More money piled into cryptocurrencies, possibly flashing signs of safe haven potential. Or maybe just as a possible showcase of the digital asset's humanitarian potential, for both desperate Russians and Ukrainians.
On Feb. 24, total ruble-based trading volume in Bitcoin and other cryptocurrencies mushroomed, climbing 181% from the prior day, according to research firm CryptoCompare. Trading volume in Ukraine's hryvnia also surged. On Feb. 28, cryptocurrency volumes in both those currencies jumped again.
On the stock side of the equation, the S&P 500 staged a deep dive, then rebounded on Feb. 24. Growth stocks, gauged by the iShares Russell 1000 Growth ETF, bounced 3.2% on Feb. 24, rallying through Feb. 28.
Buying Bitcoin To Support Ukraine?
Meanwhile, as of March 10, Ukraine's government and an NGO backing the military have brought in $63 million in crypto-based donations. That's according to data from blockchain analytics and compliance firm Elliptic. The nation is working with a private exchange, which helps with security, Alex Bornyakov, Ukraine's deputy minister for digital transformation, told Yahoo Finance.
The donations, Elliptic said, included $5.8 million from Gavin Wood, a co-founder of the Ethereum blockchain. They also included a CryptoPunk NFT worth upward of $200,000. Elsewhere, Ukraine DAO, a donation effort formed by Russian feminist punk group Pussy Riot and others, raised nearly $7 million through the auction of an NFT of a Ukrainian flag.
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The ruble's crypto-trading action eased somewhat after Feb. 28, although it appeared to hold up among buyers and sellers using Ukraine's currency. The rally for buying Bitcoin itself settled as well, at least until Biden's news Wednesday. The action did little to settle the question of whether one investment narrative — a currency that transcends central banks, or a roller-coaster for Wall Street to jump aboard when it's feeling lucky — might overtake the other.
"They can coexist to an extent," Weller said. "Maybe this is just the cynic in me. But it seems like once something starts to hit Wall Street and get financialized, there tends to be no turning back, just because there's such a massive pool of capital that is trying to generate outsize returns."
Sanctions, Regulations, Evasions
The sanctions on Russia from the U.S. and other nations hit quickly and in massive volume. They aimed to disconnect Russia's banks and the nation's elites from much of the world's financial system. Other restrictions sought to strangle Russia's access to semiconductors and other technology that could bolster its aerospace industry, military and communications.
Almost immediately, worries grew that buying Bitcoin and other cryptocurrencies, which exist outside the world's traditional banking network, offered those targeted by sanctions a workaround.
Analysts, however, point to blockchain, the shared ledger network that underpins Bitcoin transactions, making it easier to trace illicit activity. Moving large amounts of funds off that network tends to raise compliance red flags.
Russia's economy, measured by gross domestic product, is not as large as some might expect — falling roughly between that of Florida and New York. Even so, analysts note that liquidity of cryptocurrency markets is not sufficient to play any significant part in helping the country recover its losses on the ruble.
"There just isn't even sufficient crypto there to enable Russia to manage among some of the very substantial disruptions it could face," David Carlisle, director of policy and regulatory affairs at Elliptic, said in a presentation this month.
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No 'Widespread Evasion'
Him Das, acting director of the U.S.' Financial Crimes Enforcement Network, or FinCEN, said in a statement Monday that the agency had "not seen widespread evasion of our sanctions" via cryptocurrency.
Analysts say wealthy and well-connected Russians often have a web of front companies through which they sift funds. But they say crypto-based sanction-dodging could happen in smaller degrees. And they note that other U.S.-blacklisted nations, like Iran and North Korea, offer something of an instruction guide to shady fundraising via digital assets.
Iran, an Elliptic analysis found, has used Bitcoin mining — or the computerized process of clearing transactions — to bypass the U.S.' comprehensive embargo. Bitcoin miners receive the cryptocurrency for their work. Iran can, in turn, use those Bitcoins to pay for imports, circumventing sanctions on the nation's financial infrastructure, Elliptic said. North Korean hackers, meanwhile, heisted some $400 million in assets from cryptocurrency platforms last year, according to the research firm Chainalysis.
Sanctioned individuals in Russia could also divert money through smaller crypto exchanges. Such exchanges might look legitimate but have shaky compliance protocols. And they might be complicit in a group's money-laundering or ransomware ambitions. The U.S. last year sanctioned two exchanges on allegations of facilitating ransomware transactions.
Ari Redbord, head of legal and government affairs for blockchain forensics firm TRM Labs, points out another industry weakness. His firm identified roughly 340 crypto businesses, located in or tied to Russia, that had insufficient compliance controls in place to eliminate the risk of illicit activity.
Siloing, Burnout, Compliance
Enforcement can get complicated. Carol Goforth, a University of Arkansas professor who follows crypto-asset regulation, said regulatory agencies tend to look at crypto along the lines of their enforcement area.
Echoing prior remarks, she said the SEC, for instance, looks at crypto as a security. The U.S. Commodity Future Trading Commission, meanwhile, sees it as a commodity. For the IRS, it's property, she said.
"It makes it duplicative and very difficult for the entrepreneurs to find a compliant path forward," Goforth said. "Unless they are trying to comply with all of them, which is often extremely difficult and expensive, it is very difficult to know for sure if you're safe."
Among other issues, compliance staff at financial institutions are working through a tornado of new restrictions and designations to monitor. That includes those on already-sanctioned groups. That workload has arrived as anxiety over cybersecurity attacks remains high. Todd Conklin, counselor to the deputy secretary of the U.S. Treasury Department, said during a talk with TRM Labs this month that he worried about burnout among cybersecurity personnel.
Skating To The Puck
With regard to Russia, the private sector is pulling back as regulators try to dig in and enforce sanctions. Redbord, a one-time assistant U.S. attorney who later worked for the Treasury Department, said businesses could get more proactive about the way they manage risk as the Russia-Ukraine crisis intensifies and sanctions pile up.
"Another scenario is you just start to see businesses de-risk and de-platform average Russians, because they just don't want to be involved in any of this," he said. "And maybe they're also trying to skate to where the puck is headed, in order to avoid what's potentially coming down the pike by way of sanctions."
As of March 10, the Yale School of Management had recorded more than 330 companies that pulled out or suspended operations in Russia. Names ranged from General Electric to American Express, Mastercard and McDonald's. Also, Starbucks, Apple and Nike.
'Ordinary Russians' Buying Bitcoin
How that economic exodus might affect other crypto activity longer-term isn't clear. Ukrainian officials have called on cryptocurrency exchanges to block Russian users. The exchanges so far have balked.
Exchange executives argue that they're already following existing sanction guidelines. Coinbase CEO Brian Armstrong said the exchange checks sign-ups against global watchlists, then blocks transactions from addresses that could come from sanction targets.
"Some ordinary Russians are using crypto as a lifeline now that their currency has collapsed," he tweeted last week. "Many of them likely oppose what their country is doing, and a ban would hurt them, too. That said, if the U.S. government decides to impose a ban, we will of course follow those laws."
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Changpeng Zhao, CEO of Binance, the world's largest crypto exchange, echoed that sentiment.
"Should a coffee shop in Paris refuse to serve a Russian customer? Or take their wallet while they're at it? The answer to that is no," he wrote in a blog post this month. "We are not going to unilaterally freeze millions of innocent users' accounts."
Neither exchange, when reached, would provide details about sign-ups out of Russia or Ukraine after the conflict began. They also declined to discuss any challenges related to staying in line with sanctions. Coinbase, in a March 6 blog post, said it had "not seen a surge in sanctions evasion activity" in the days after the invasion.
Learning Curve To Buying Bitcoin
Within Russia and Ukraine, the percentage of cryptocurrency use is slightly higher than it is in the U.S. Nearly 13% of Ukrainians owned cryptocurrency, according to estimates from TripleA, a crypto payments company. That compares to around 12% of people in Russia and 8% in the U.S. Ukraine ranked No. 4 in a Chainalysis report last year measuring worldwide cryptocurrency adoption.
"Crypto became even more convenient than the banking system," Bornyakov told Coindesk in a story published Tuesday.
Still, buying crypto or selling it gets a lot more difficult, if not impossible, without an internet connection. Ukraine has suffered severe internet outages as Russia's onslaught intensifies. For crypto-newcomers attempting to convert assets to cryptocurrency, getting a new account verified on an exchange can take days.
'Difficult Very Fast'
For many, staples of the crypto vocabulary — blockchain, the decentralized vision of the Internet known as Web3, or the blockchain-based financial services known as DeFi — still seem like a distant planet.
"Even in an average day, if someone was like, I want to learn about this world of Web3 and I have all the time in the world, and I can rely on my friends for help, it's still a pretty involved endeavor," said Bryan Hernandez, president of the investment platform Structure.
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He later added: "When you layer on top of that a violent conflict, things are going to get difficult very fast."
Users in Russia would also be moving their money from one concentrated economy to another. Among the millions of people buying Bitcoin, the top 10,000 investors owned around 5 million of them, according to a study published in October from researchers at MIT and the London School of Economics. Some 19 million are in circulation today. Bitcoin's supply is designed to top out at 21 million.
"Yes, there is friction," Redbord said of learning about cryptocurrencies. "Maybe this will motivate folks to try to take some of the friction out and come up with solutions to it."
