Crypto Geopolitical Stress Test – Geopolitics

IIt would have seemed far-fetched to assert in 2009 that the nascent cryptocurrency technology would, in less than twenty years, become a major political force that countries would use and fight against in times of peace and in times of conflict. Yet over the past couple of years there have been major shifts in the global economic landscape, with countries taking an interest in the asset and the underlying system that supports it; largely because of the explosion in prices suffered by Bitcoin in 2021. Reactions to the technology have been diverse with many countries such as: Botswana, Iran, Brazil and Switzerland seeking to regulate it as legitimate financial tools, while China has adopted a Outright ban and El Salvador has adopted bitcoin as legal tender.

Globalization has made the world more integrated and interconnected and in no area is it more apparent than in the economic sphere. Financial markets and the global supply chain have intertwined the economic interests of various countries and fostered cooperation among them for continued shared prosperity. With a liberal world economic order, one would expect states to move closer together; yet this was not necessarily the case. The expectation of an eventual evaporation of the national interest in favor of a global interest proved to be an illusion as the underlying tension between states and international institutions grew. Although it may seem ironic, globalization has led to the centralization of power in global institutions such as the International Monetary Fund (IMF), the World Bank and even the SWIFT banking system, which have often been militarized by countries like the United States against geopolitics. rivals, which led to notoriety decline relevant to these same institutions. It is in this context of turbulent geo-economic development that cryptocurrencies emerged and developed.

Whereas before the 2020 decade cryptocurrencies had been noticed by various countries, some of which had started first regulations, no country viewed the growing ecosystem as a parallel economy to the global financial architecture. It was considered a weird oddity with terrific technology enabling a financial bubble akin to the infamous tulip mania; however, the inflection point came amid Iran’s ejection from the SWIFT financial system. Despite strong criticism from countries such as Germanythe United States pulled Iran out of the global financial system, putting the country in a corner that forced it to embrace bitcoin as a way to survive as confirmed in 2021. This event prompted various regional powers to create a new payment system to serve as an alternative to SWIFT to avoid sanctions. The European Union, Russia and China both boast of an alternative payment system, INSTEX, SPFS and CIPS respectively; while India is currently studying the possibility of creating its own payment system.

Nevertheless, as attractive as these alternative payment systems are, they still suffer from the problem of centralization due to the currencies used. The same currencies that are used in the payment system are issued by a single country. This means that in the event of substitution of the dollar as the currency of international trade by a new currency, the issuer of this currency will have the same capacity to impose sanctions and isolate political rivals. It is the simple exchange of one economic hegemon for a new one and the imposition of a new global interest that favors whoever controls the system. The technical basis of cryptocurrencies offers a remedy for the centralized financial system, which has become a tense geopolitical hotbed in recent years. In fact, the current has so far provided major stress tests of the resilience of the cryptocurrency system: the Russian-Ukrainian war.

Martial law and the limits of traditional finance

Last year, Ukraine took an open stance towards cryptocurrencies based on its expansion technology industry. The vast potential of the industry has come to be interconnected with cryptocurrencies due to the growing adoption over the years driven by the surge of P2P (Peer-to-Peer) platforms, indicating strong adoption of the tool by the population. In fact, Ukraine had recorded the 4and largest volume of cryptocurrency usage in the world, making it one of the top emerging hubs in the world according to on-chain analysis. It is therefore not surprising to see that in the months before the conflict Ukraine has legalized cryptocurrencies as legitimate digital assets. This meant that Ukrainians had much more freedom within the law to explore cryptocurrencies through legal means instead of a gray area.

The result of cryptocurrency laws and tensions with Russia was the reason for the growing adoption of cryptocurrencies in daily life which eventually overtook the use of fiat inside Ukraine as a whole. This existing phenomenon proved invaluable to citizens once Russia finally invaded and martial law was put in place, which suspended the issuance of foreign currency as well as the replenishment of e-wallets with digital currency. While most traditional digital wallets connected to banks have been frozen, the suspension by the implementation of martial law has not affected cryptocurrencies because the entire payment system itself is parallel to the system traditional finance. In fact, the widespread adoption of cryptocurrencies in times of conflict reveals the technical resilience of blockchains in the face of cyber warfare.

Cryptocurrencies rely on blockchain technology in an interconnected decentralized global computing system to secure transactions. While it is a energy-intensive effort, the level of security it provides is unequaled in order to disrupt the entire system; should conduct a 51% network attack, which is functionally impossible in established blockchains such as Bitcoin and Ethereum due to the high energy and computing power used. Comparatively speaking, traditional banking systems are easily destroyed by simple cyberattacks such as the distributed denial of service attacks that have occurred in the pass and have already occurred in Ukraine as well as. This means that the use of traditional banking tools is not viable during times of conflict due to their weakness against cyberattacks. Additionally, cryptocurrencies also have the technical ability to transact offline through the use of mesh networkswhich adds another point of resilience to the network.

The resilience of the cryptocurrency network as well as the flexibility of the global interconnection caught the attention of the Ukrainian government which set up a wallet addresses to receive Bitcoin, Ethereum, USDT stablecoin and PolkaDot as donations. Since the publication of the wallet addresses, Ukraine has received a total of $20 million.

The future horizon

Currently, the US dollar is on the verge of losing its dominance as an international trading currency. The share of dollar reserves held by central banks are already steadily falling since the creation of the Euro at the end of the 20and century. The combative foreign policy as well as the authoritarian use of economic sanctions as a weapon have prompted countries to seek alternatives in order to promote their own economic interests. Yet, as the competition for the new hegemonic currency begins, it would be prudent for countries to consider whether an attachment to a traditional financial market is even viable for international trade.

The militarization of the international payment system is a risk that all players face when dealing with a hegemon. As the ejection of Iran and Russia from the SWIFT system shows, participation in the international trading system is subject to specific rules that are often dictated by the powers that dominate the financial system. More often than not, this means that the architecture in place favors countries whose interests align with the global interest, and that interest is invariably dictated by the power that created the architecture in the first place.

Therefore, states must engage in debates on whether to join a fully decentralized system to safeguard their own ambitions or create their own payment system to compete with others. Although centralizing payments is an attractive model even for controlling citizens at the national level, as is the case in Canada with the trucker convoythe case of the Russian-Ukrainian war should demonstrate that decentralized finance gives a flexible economic backbone to defend against digital economic attacks.

[Photo by Max Pixel]

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