Comply or Resist: Can Crypto Remain Decentralized Throughout Geopolitical Conflicts?

Russia’s military offensive in Ukraine has led to numerous sanctions from Western countries. 12 days into the conflict, it became the most sanctioned country, which deeply affected its economy and 144 million population. Russian governmental banks were the first financial institutes to be targeted. A few days later, Visa & Mastercard announced the suspension of all operations for Russia-issued plastic cards outside Russia. The Russian ruble exchange rate has dropped dramatically, and traditional cross-border payment methods became unavailable for most Russian citizens. 

Many have dubbed crypto the only way out for those who wanted to secure their savings, fled the country as political refugees, or for Russian people living abroad who lost access to their bank accounts. However, the sector has been seeing a lot of attention from regulators, as the line between staying true to decentralization and having to comply gets blurred. 

So is crypto still a valid way of defending individuals’ financial capabilities in uncertain times, or will it become politized?

Crypto, protecting financial freedoms

Many investors see crypto as a store of value or a tool to speculate and generate potential profits via a volatile but high-growth asset class. However, Satoshi Nakamoto created Bitcoin as the first cryptocurrency in 2009 to serve as a peer-to-peer (P2P) electronic cash system.

Indeed so. Powered by a highly resilient, permissionless, and community-governed blockchain, anyone can access the Bitcoin network with a computer or smartphone device and a stable internet connection. While there are no intermediaries due to their P2P nature, cryptocurrency transactions are transparently recorded on the distributed ledger and can be audited publicly.

Lacking centralized authorities like governments and large corporations, the decentralized architecture of cryptocurrencies offers users complete control over their finances without relying on the legacy banking system. Crypto was meant to hand financial freedoms back to people, connecting the world more efficiently by enabling affordable borderless and trustless payments.

On top of that, El Salvador has proven crypto can be a way to save collapsing economies, as the country adopted Bitcoin as legal tender. As a nation that heavily relies on remittances (accounting for 24% of the GDP in 2020), sending and receiving BTC cross-border transactions via the Lightning Network is an instantaneous process and costs only a fraction of conventional services’ fees. While citizens can avoid the USD’s inflation this way, the proceeds from the Salvadorian Bitcoin adoption have allowed the government to build a BTC city near the base of a volcano as well as construct a veterinary hospital and 20 new schools.

A shortcut to adoption

Of course, deflationary digital assets like Bitcoin – where the new flow of coins is reduced by 50% roughly every four years until all the 21 million BTC hits the market and its inflation rate becomes zero – can serve both as alternative payment methods and investment vehicles. The latter feature comes in especially handy when a nation’s citizens struggle with hyperinflation (which was over 65,000% for the Venezuelan bolívar in only 2018) or a significant and sudden loss of purchasing power.

Given the nearly 36% drop (falling from $0.01341 to $0.008614) in ruble’s rate since January 1 and limited access to cross-border transactions, it’s no wonder even some of the most conservative Russians are increasingly registering on crypto exchanges and considering using decentralized finance applications. According to the findings of a recent report, the USD/RUB pair set a new record on Binance’s platform on February 28, featuring a $34.94 million daily trading volume.

At the same time, over $108 million of cryptocurrency has been donated to Ukraine by March 9, 2022. While this substantial sum demonstrates how truly borderless digital assets are, they also offer a way for Russian citizens opposing the conflict to help Ukrainians in need without requiring their government’s approval or waiting to hear their standing on the war.

Some saw it as a potential to make a significant leap in crypto adoption. Regulators, however, are concerned about crypto as a possible way of Russian oligarchs evading sanctions and are doing their best to tighten the screws. 

Against the nature of crypto?

We can observe that while we expected cryptocurrency to be decentralized, in this circumstance, some exchanges and platforms working with crypto are put under a lot of pressure. 

At first, large centralized exchanges (such as Binance) wanted to stay neutral. However, as the war escalated, some exchanges have started refusing to provide services to Russian individuals who appeared on sanction lists. The latter decisions of crypto projects are rather unusual and seem to go against the nature of crypto. 

It should be noted that exchanges like Binance, Coinbase, and Gemini that seek to comply with sanctions are operated by centralized companies that have to comply with local regulations (that includes blocking the accounts of sanctioned individuals and companies). Moreover, it is also worth adding that, despite calls from individuals and Ukraine’s government, centralized exchanges have refused to ban non-sanctioned Russian and Belarusian users. And, unless required by law, they will likely follow this practice in the future.

Whether or not centralized crypto market players will decide to restrict their services to the citizens of sanctioned nations, the increasing political pressure on crypto will facilitate the adoption of decentralized finance solutions. Since DeFi projects are governed by their communities, and the market remains unregulated, governments may find it hard to enforce laws related to the Ukraine-Russia crisis in this sector.

Overall, I expect the current political pressure to cause at least a minor short-term division in the digital asset community, especially between centralized providers and DeFi projects. In the long run, however, as society is starting to realize the true power of crypto and how they can leverage it to achieve financial sovereignty, it will give a significant boost to adoption.