Crypto Isn’t the Sanctions Haven Its Jump Suggests

(Bloomberg Opinion) -- The price of Bitcoin surged on Tuesday for a second consecutive day, despite the selloff in other risk assets, as Russia’s invasion of Ukraine buoys cryptocurrency transactions in those countries, partially in response to the sweeping sanctions from the U.S. and other world powers. So are markets essentially cheering the dodging of sanctions? Is good news for crypto actually bad news for the world?

It’s not as simple as that. Ruble-denominated crypto trading pairs have jumped since the U.S. announced its first sanctions on Russia on Feb. 22, according to research firm Chainalysis. As the researchers wrote on Twitter, it’s possible some of that may represent illicit funds. Hryvnia-based crypto trading also jumped initially, although the increased volume has been less persistent. According to Chainalysis, the volumes “could also be driven by individuals in both countries reacting to the recent devaluation of the ruble and hryvnia and attempting to preserve their savings.” Bitcoin has climbed about 11% since Friday, and Ether is up 8% even as stocks and other risk assets have slipped.

Ukraine and Russia are ranked No. 4 and No. 18 in Chainalysis’s Global Crypto Adoption Index, and in that sense, it’s understandable for their residents to stash their money in crypto amid the mayhem. The hryvnia isn’t falling as much as the ruble, but it is getting hit. Crypto may be a decent option for some Ukrainians; the last thing they need is for their savings to be depreciated away as Vladimir Putin wages a bloody invasion of their country. Perhaps that’s a victory for crypto innovation.

But if crypto is being used to dodge sanctions — and it certainly stands to reason that it’s happening to some extent — there’s no way that activity is good for assets like Bitcoin. As my colleagues Ben Bartenstein and Allyson Versprille reported, the White House’s National Security Council and the Treasury Department have solicited the help of crypto exchanges to stop such transactions. Ultimately, dodging sanctions will do nothing to help the crypto industry make friends in Washington.

In theory, cryptocurrencies’ appeal is that they’re not issued or controlled by any state or central entity. That has made them popular with Libertarians, Venezuelans living through hyperinflation and, of course, some internet extortionists, drug dealers and general money launderers. Skeptics in Congress and at regulatory agencies frequently cite crypto’s illicit use, but there’s significant debate over whether the mainstream digital currencies are truly useful for criminals at all because the radical transparency of technology like the Bitcoin ledger facilitates tracking. Last month, the U.S. seized some $3.6 billion in Bitcoin stolen in a 2016 hack, underscoring that the authorities have developed the expertise to follow the on-chain money trail. Yet criminals must be finding some success or they wouldn’t keep doing it.

To be sure, Chainalysis says the transparency of the blockchain makes it likely that bad actors will get caught, and specifically sanctioned people probably moved their money well in advance of the sanction announcements, but it’s hard to underestimate the brazenness and stupidity of some criminals.

So the bump in demand may help prop up prices for a few days, but it appears that the illicit impact — if any — is modest; crypto’s boosters should hope that remains so. As the asset class fights for broader adoption, no one is ever going to look favorably upon anything that undercuts efforts to punish a ruthless dictator for a senseless war.

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

Jonathan Levin has worked as a Bloomberg journalist in Latin America and the U.S., covering finance, markets and M&A. Most recently, he has served as the company's Miami bureau chief. He is a CFA charterholder.

©2022 Bloomberg L.P.