Financial Censorship: Crypto Will be an Integral Part of the Fragmented Global Economy

Following the Russian invasion of Ukraine, people from all over the world have sent more than $54 million to the Ukrainian government and an NGO called Come Back Alive, which is providing support to the Ukrainian military, according to the blockchain analytics firm Elliptic. 

Supporters have also been donating NFTs and stablecoins. Gavin Wood, the founder of Polkadot, made a single donation of $5.8 million.

Though the amount of donations is much smaller than the billions of dollars the US government is sending to Ukraine, crypto proved a much faster way to get money directly in the hands of those in need. 

The Ukrainian government began accepting crypto because donations via traditional banking methods could be difficult and time-consuming. Crypto makes it possible for people to send money to anyone around the world, anytime. 

Financial censorship: A lethal weapon

In the last couple of weeks, Western nations have imposed massive sanctions on Russia to cripple its economy. Russia has now become the world’s most sanctioned nation, faring even worse than Iran and North Korea. The French finance minister said earlier this month that “We are going to cause the collapse of the Russian economy.”

Several Russian banks have also been kicked out of the SWIFT bank messaging system, making it more difficult than ever for them to facilitate international money transfers. The West’s weaponization of finance has caused some serious damage to the Russian economy. The Ruble has lost approximately 50% of its value against the US dollar. 

It has hurt the people of Russia, including those against Putin’s Ukraine invasion. And they are paying for the war they didn’t want in the first place. 

The weaponization of finance at such a massive scale would raise concerns in more countries than just Russia. Nations like China and India would be more inclined to reduce their dependence on the Western financial infrastructure. And it would lead to a fragmentation of the global economy where crypto will have an active role.

Crypto doesn’t care about borders

Crypto provides banking to the unbanked, irrespective of where they live. It is censorship-resistant, borderless, and neutral. These are the exact attributes that would make it an integral part of the post-dollar, fragmented global economy. It didn’t discriminate between the Ukrainian people that needed financial assistance and the Russians that wanted to preserve their money amid a steep decline in Ruble. 

Moscow or Russian oligarchs won’t be able to use crypto to evade the Western sanctions, though, for several reasons. Intermediaries aka centralized exchanges such as Coinbase, Binance, and others have to comply with the sanctions. In fact, Coinbase has blocked more than 25,000 wallets linked to Russian entities and individuals. 

Moreover, crypto markets aren’t liquid enough for the Russians to move potentially billions of dollars. 

There’s a misconception that crypto transactions can’t be traced and thus can be used for nefarious purposes. Crypto transactions are recorded on a transparent public ledger which, combined with low liquidity, makes it an ineffective tool for the Russian state to use to evade sanctions. 

On the other hand, the size of transactions is much smaller for retail users in Russia, which poses little risks to them. It helps explain why the crypto activity has picked up significantly in Russia. The general public is converting their Ruble to Bitcoin and stablecoins like USDT and others. 

Sen. Elizabeth Warren, Federal Reserve Chairman Jerome Powell and many others argued that to ensure the sanctions are effective, the authorities must tighten access to crypto. It’s a stark reminder that there are, and always will be, risks to your money in traditional finance and centralized exchanges. 

In the future, we’ll see more people and countries turning to crypto to store at least part of their wealth in non-custodial wallets. They won’t necessarily be doing it to carry out illegal activities, but to have full control over their funds and transactions. It will give them the freedom to transact in the event of financial censorship.

Solutions like Portal have emerged to help people around the world gain control over their funds and transactions. Portal is a cross-chain DEX and self-hosted Layer-2 wallet built on Bitcoin that makes atomic swaps between Bitcoin and other digital assets fast, secure, and private. It offers DeFi services without third-party custody or control.

Sanctions: There’s always a workaround

Over the years, the US and its allies have hit Iran with massive economic sanctions. Iran, a leading oil producer, was left with an energy surplus. The country used its surplus energy to mine Bitcoin to reduce the economic impact of the sanctions. Result? Iran has become one of the world’s leading Bitcoin mining destinations.

Similarly, the Western sanctions might have succeeded in crippling the Russian economy in the short run, but Moscow would eventually find a way. With SWIFT shut out to them, the Russian banks could turn to China’s CIPS to escape the US restrictions. 

After American companies Visa, MasterCard, and American Express suspended their operations in Russia, the Russian banks started using the Chinese payment solution UnionPay. 

Moscow has already been preparing its economy for sanctions. In fact, they are used to financial censorship. Russia, one of the world’s leading oil producers, has become the largest oil supplier to China in just a few short years.

Putin has also been diversifying away from the US Treasuries and the US dollar. His war chest includes $630 billion in forex reserves, which serves as a financial shield to dull the impact of the sanctions. The country’s debt-to-GDP ratio is barely 18%. 

According to CNBC, if Putin and his aides wanted to move funds internationally, they would have already done it over a period of months through shell companies. It helps explain why, despite the West throwing almost all the financial weapons in its armory at Moscow, Putin hasn’t backed off in Ukraine yet. 

Closing thoughts

We don’t know when Russia would stop the war or whether it would spiral into a nuclear catastrophe. But the weaponization of finance has forced individuals and countries to rethink their reliance on the traditional financial systems. It will, in all likelihood, accelerate the adoption of cryptocurrencies and non-custodial DeFi platforms in the global economy. 

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.