Crypto worth millions has been donated to Ukraine, exchanges are under pressure to ban all Russian users, and there are fears digital assets could be used to dodge sanctions.
This week's CoinMarketRecap podcast focuses on the invasion of Ukraine — with cryptocurrencies playing a significant role in the conflict.
As February drew to a close, Bitcoin surged by 15% in a single day — the best 24-hour performance seen in over a year. Bizarrely, this came despite a new round of economic sanctions targeting Russia… measures that had spooked the stock market.
The frenzied trading activity resulted in cryptocurrencies and equities decoupling for the first time in months. Analysts initially suggested that an explosion in trading volumes was responsible — with Russian consumers buying digital assets as the ruble's value collapsed, and Ukrainians desperately trying to find a way to take their savings with them as they fled the country.
But the reality may be more nuanced than this. As the week progressed, Citigroup argued that demand for BTC may not have been as healthy as first thought — and instead, its rally may have been triggered by investors who were merely expecting that the world's biggest cryptocurrency would be sought after by Russian investors.
In this week's episode, we speak to OANDA senior market analyst Edward Moya, who tells us what's next for Bitcoin. And amid fears that crypto could be used in an attempt to sidestep economic sanctions, we ask Chainalysis co-head of policy Salman Banaei whether this is something that may happen on a mass scale.
Also in the show, the latest on the slew of cryptocurrency donations that have been made to Ukraine — with the total now topping $50 million. Plans for an airdrop to donors helped to fuel contributions as the week drew to a close, but politicians ended up abandoning these plans in what has since been called "the greatest rug pull ever."
And as a number of big global brands sever business ties with Russia — including IKEA and Apple — cryptocurrency exchanges are coming under pressure to do the same. But while major trading platforms have vowed to freeze the accounts of sanctioned individuals and entities, they're reluctant to impose a blanket ban on all Russian consumers. We'll find out why.
What's Next for Bitcoin?
Edward Moya says BTC's rally on Feb. 28 appeared to take a lot of traders by surprise — and the cryptocurrency's utility may have been given a boost by the sudden, dramatic collapse in the value of the Russian ruble. He said:
"I think if you had Russian money and you switched over to Bitcoin, you're pretty much committed right now. You're not looking to switch back to the ruble anytime soon."
Some Bitcoiners saw the end-of-the-month surge as vindication that the cryptocurrency is a form of digital gold — a safe haven asset investors can turn to during times of turbulence in the global economy. Ed warned that "it's going to be difficult for Bitcoin to truly be a safe haven" — and further price appreciation will likely hinge on levels of adoption continuing to grow.
The OANDA analyst told us that BTC remains a risky asset right now — and if Ukraine leads to a greater inflationary shock during the summertime, with a real risk of energy prices rising even further, this would prompt the Federal Reserve to be "ultra aggressive" in tightening monetary policy. Equities would then tumble because growth prospects would deteriorate. Ed added:
"In that environment, you're not going to see safe haven flows into Bitcoin. You would start to see panic selling."
Earlier this week, Fed chairman Jerome Powell indicated that the U.S. central bank still plans to increase interest rates later this month — warning that soaring levels of inflation still need to be tackled despite the uncertainty that the Ukraine invasion has triggered.
Ed stressed that higher interest rates don't necessarily need to be disastrous for Bitcoin — and predicted the crypto market can handle gradual increases, with imminent rate hikes already priced in. He believes market conditions may get more problematic if rates are increased aggressively. And although the analyst is bullish on the long-term prospects for BTC, he cautioned:
"This is gonna be a tough year because it might not necessarily have a stellar year as we're so spoiled and used to. You might continue to see investors focus on other altcoins that are in the earlier stages of their growth. And I think that that could really limit some of the bullish upside you see with Bitcoin."
Will Russia Use Crypto to Evade Sanctions?
The West has taken pretty drastic measures to cripple Russia's economy and isolate the country on the world stage as punishment for its invasion of Ukraine. Foreign assets belonging to Russian oligarchs, and even Vladimir Putin himself, have been frozen. The U.S. has also slapped sanctions on the country's central bank — stopping it from accessing a "war chest" of $630 billion.
All of this has prompted media speculation that cryptocurrencies, which lack regulation, could become a hotbed for evasion. Democratic politicians in the U.S. have written to the Treasury Department to ask how the government plans to counter this — and the EU also says it's taking steps to prevent this from happening.
But according to Salman Banaei, the co-head of public policy at Chainalysis, there has been little evidence of cryptocurrencies being used to sidestep sanctions so far — and even if this was to happen, it would be easy to detect thanks to the transparency that blockchains deliver. Another problem is this: with the total market capitalization of all cryptocurrencies currently standing at $1.75 billion, the industry simply isn't big enough for what the Kremlin would need to achieve.
Explaining that blockchain technology ensures that funds linked to sanctioned entities can easily be traced, he added:
"In banks, they have these dye packs that they use in order to make it hard for bank robbers to get away with their stolen loot, because the dye packs will explode. Cryptocurrencies operate in much the same way."
Crypto exchanges have said that they will ensure that any and all accounts that belong to sanctioned individuals or companies will be frozen — and Banaei told CoinMarketCap that no specific addresses have been sanctioned so far.
Banaei conceded it is possible that sanctioned entities may choose to use exchanges that do not enforce Know Your Customer checks, but added that many of these platforms lack liquidity.
Looking ahead, he believes that more sanctions will be imposed by the Biden administration and others in the weeks and months ahead — and fears that ransomware could become a bigger problem as well, saying:
"Russia's going to be increasingly interested in ways of deterring retaliation from the Western world. And one of the tools that we know they've used is ransomware. It has become a revenue source for them as well as a public policy tool for the Russian government. So we are anticipating, unfortunately, some increase in ransomware attempts."
Interestingly, there are signs that some within these ransomware groups are dissenting against Russia's invasion of Ukraine — with defectors releasing chat logs that may "blunt their ability to operate as effectively as they have in the past."