A surprising (but not too surprising for insiders) aspect of Russia's war on Ukraine is the role played by cryptocurrencies, and especially Bitcoin. In general, the invasion has not been good for digital assets. At first, they collapsed under the weight of sanctions, which on the one hand worried the markets, while on the other hand they are having economic repercussions on the energy supply in Russian hands.
Bitcoin, Ethereum and other cryptocurrencies have fluctuated wildly in recent weeks, rising as high as $39K and then remaining in the positive zone above the $38K pivot level.
Cryptocurrencies as a safe haven asset for Russians...
As far as Russia is concerned, Bitcoin and cryptocurrencies are a weapon of defence against US and European sanctions. This is because, although they have been in the running for some time, the realisation and, above all, the spread of the so-called Digital Ruble are still a long way off. This is why Bitcoin and cryptocurrencies are becoming a Russian weapon to prevent sanctions from having consequences for the economy similar to those of 2014 with the Crimea case. Another aspect not to be underestimated is that Russia could divert more energy reserves to crypto mining.
According to Arcane Research, an Oslo-based research firm, the volume of trade between rubles and cryptocurrencies has increased in recent days on Binance, one of the world's largest exchange platforms. The suspicion of many market participants is that cryptocurrencies may be used by Russian individuals or companies to circumvent sanctions and carry out otherwise prohibited transactions through official channels.
Russia has been ousted from the Swift international payments system and making international payments or financial transactions for Russians - whether citizens, businesses or banking institutions - is no longer possible. Digital payments are widely used in Russia, but now Visa and Mastercard no longer work, and Apple pay has also been stopped. Russian banks could use cryptocurrencies as an alternative to the dollar for international payments.
Cryptocurrencies are also seen as a safe haven for savings held in local currency after the massive devaluation of the rouble. Direct use of cryptocurrencies, for example to sell grain, oil or gas, of which Russia is a major exporter, seems unlikely.
Cryptocurrencies are currently unaffected by the economic sanctions imposed on Russia, but - as reported by the specialist website Cryptonews - two of the main companies involved in exchanging bitcoin and the like, Binance and Gemini, have confirmed the possibility of freezing the crypto wallets of Russian users, should this be required by international bodies.
They are also used by Ukrainians...
When the Ukrainian war broke out, the central bank ordered the suspension of foreign exchange market transactions and electronic fund transfers. Some Ukrainians turned to cryptocurrencies for safety. Meanwhile, crypto donations to Ukraine through government and private channels have reached $36 million as contributions continue to mount during the Russian invasion.
The news of bitcoin's rise comes at the same time as another, less reassuring news is spreading: the risks to financial stability associated with crypto assets are not yet systemic but need to be monitored given the global implications and inadequate regulatory backlash in many jurisdictions. Bitcoin remains the dominant crypto asset even though its market share has collapsed from 70% to less than 45%.