The Practical Use of Crypto
The whole concept of cryptocurrencies is getting more and more popular every day. A lot of countries are integrating crypto as a payment method for certain services. For example, you can even pay with crypto for some KFC chicken wings in Canada.
However, can a country forget all traditional currencies and payment methods and function purely on cryptocurrencies? This scenario would definitely come in handy in a lot of different situations - for example, when a country is facing massive sanctions from other countries. If this was the case, maybe crypto could even help evade these sanctions?
Let's take a real-world example of the biggest sanctions in history placed by the Western world on Russia during the military crisis in Ukraine to try to answer these questions. Keep in mind that these sanctions include the denial of a lot of financial tools, too - SWIFT, VISA, MasterCard, and so on.
Also, I’d like to stress again that this situation could happen in any other country around the world - Russia, in this case, is just a real-world example. Keep in mind that it should only be viewed as a case study!
So, let’s get right to it.
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Sanctions in Russia
So, you probably know the massive military crisis that happened in Ukraine which was forcibly initiated by Russia.
Please note that the situation is extremely complex and horrible, so I won’t go into any political talks regarding it. Instead, let’s focus on the topic at hand.
Due to the unjustifiable aggression, Western countries - the United States, the EU, and a few others - issued a lot of various sanctions against Russia. Many of these sanctions targeted specific, high-ranking Russian oligarchs - most, however, were aimed at Russia’s economy.
In addition to these said sanctions, many Western companies also halted their business within the country, during the time of the crisis. So, let’s take a closer look at these sanctions and withdrawals.
For starters, probably the biggest blow to the Russian economy was the partial denial of SWIFT within the country.
What is SWIFT? Officially, the term SWIFT is abbreviated as “The Society for Worldwide Interbank Financial Telecommunication”.
So in short, SWIFT is a financial worldwide messaging service. It’s like a niche internet or even a social network, just between banking institutions. To be more specific, it’s a tool that banks worldwide use to communicate transactions between one another.
SWIFT doesn’t deal with the transactions directly, but instead, it allows banks to communicate these transactions in the form of messages to one another, and it serves 32 million financial messages per day on average! So yeah - now you see, it's a really massive network.
Allow me to illustrate SWIFT operations with an example, so that you could understand it even better.
Let’s say, you have a friend named Tom, and want to send $10 to him, via a bank transfer. However, Tom uses a different banking platform.
As you make the transaction, your bank messages Tom’s bank about it - it informs Tom’s bank that there’s a transaction incoming, from you to Tom and that it’s $10. All of this information is relayed via the SWIFT network.
Without SWIFT, banks would need to rely on emails and poor encryption-possessing messages - as you can probably understand, this is far from ideal, since we’re talking about financial operations here.
In order to understand the magnitude of the SWIFT ban in Russia, think of it this way - in 2020, there were a bit over 20 million messages per year sent on the Bank of Russia SPFS system (“System for Transfer of Financial Messages” - a Russian alternative to SWIFT). By comparison, during that same year, there were over 110 million messages sent in Russia via SWIFT and other non-Russian bank messaging services.
However, as of March 7th, 2022, there were 7 Russian banks banned from using SWIFT. It was also stated that, if Russia continues its aggression against Ukraine, more banks would be included in the ban too.
With all of that being said, what did all of this meant for Russia, in the first place?
Well, to put it simply, Russian banks weren't able to communicate with banks located in other countries and were, thus, cut off from the rest of the world. Russians weren't able to send and receive money to and from foreigners, payments were frozen, and credits weren't possible to be issued. According to the announcement of the SWIFT ban, the Russian ruble crashed by 30%, in price.
The next huge blow to the Russian economy was the announcements made by VISA, MasterCard, and American Express. All three companies seized their operations within the country - if you resided in Russia, and owned any of the three debit cards, you were not able to perform any transactions with them. Even international electronic payment methods like PayPal stopped supporting transactions in Russia.
This was huge for obvious reasons. Take VISA, as the simplest example - it’s probably the most popular payment facilitator in the world, being supported on the vast majority of online marketplaces, and used by over 2 billion (yes, you heard right - “billions”!) people around the world.
Naturally, there were MANY more finance-related sanctions imposed on Russia - these are just among the most notable ones. Summing all of that up, however, it’s safe to say that these sanctions and major financial company withdrawals from the country were crippling to the Russian economy.
Now, then… Where does crypto come into all of this?
Cryptocurrencies as a Tool for Russia to Avoid Sanctions?
As financial sanctions continued to be imposed on Russia, many people began questioning whether the country could use cryptocurrencies to mitigate some of the effects of these sanctions. In order to understand how this could be possible, you first need to get familiar with the term “KYC”.
KYC stands for “Know Your Customer”. It’s a set of financial regulations that all banking and financial institutions around the world must comply with, to some extent. Essentially, these institutions must collect information about their customers (identify them), in order to identify and prevent any and all potential fraud, money laundering, and other types of defrauding activities.
Traditional banking institutions comply with and enact some very strict KYC checks. This is because, by default, traditional banks are very strictly regulated. With cryptocurrencies, things are a bit more in the grey area.
First, you have DEXs - decentralized cryptocurrency exchange platforms. Individuals who trade on these platforms are able to remain completely anonymous in doing so. As you can imagine, Russian citizens were not an exception in this regard - theoretically, DEXs could have helped Russians avoid all of those aforementioned sanctions.
The situation isn’t all that much better with centralized exchanges, either. While many of them do comply with KYC laws and regulations, this compliance is often very surface-level, and not in-line with other, traditional financial institutions. That’s because crypto regulation is still a very uncertain topic, and there are a lot of grey areas and loopholes.
One of the best examples of this would be Kraken, a well-known and highly-respected cryptocurrency exchange. Kraken CEO, Jesse Powel, has said that the exchange will comply with the sanctions as much as the legalities of the matter are concerned, but that the platform won’t ban Russian users outright, since this would be unfair, granted that there are plenty of people in the country that did not support Russia’s actions in Ukraine.
To top it all off, Russia developed the so-called “digital ruble”, a virtual version of the country’s currency. Back in 2020, Russia’s Central Bank had pointed out that the digital ruble would make Russia “more independent” from the West, and ease many potential sanctions that other countries could impose on them.
So, with all of that in mind, what’s the answer here - could cryptocurrencies truly pose a risk of mitigating, or even nullifying the sanctions imposed on Russia?
Well, I think that no - not even by a long shot. Allow me to elaborate on this, and explain why I think so.
Devaluation
The very first problem for countries sanctioned like Russia is the devaluation of money.
Devaluation is basically the deliberate downward adjustment of the value of a country's money relative to another currency, usually US dollars.
So, think of it this way: imagine there is a bank: 50% filled with, say Russian rubles, and 50% with US dollars. One day, everybody starts bringing their rubles to the bank to get US dollars in exchange. Guess what happens? Banks start accumulating more rubles and losing dollars. Which one do you think will grow in price, and which one will become worthless?
Because of the massive and constant demand for dollars, the ruble will definitely start to go down each time a new babushka brings her already low-valued rubles into the bank, compared to the US dollar, which will grow like crazy. The same will happen with rubles and Bitcoins - the Bitcoin price will grow, because the enormous demand will affect the market, and the ruble will keep going down to the bottom.
From the governmental point of view, this move is lethal, and they will never allow their own currency to lose value, in exchange for an uncontrolled, not government-specific one.
So, to be clear, if your average Russian starts using crypto, this will devalue the ruble even more - that, in turn, would weaken Russia’s power. It is said that the Russian Central Bank is actually cracking down on crypto, altogether!
Additionally, very recently, the Russian government issued new laws that limited Russian citizens from sending, receiving, and transacting with any foreign currency, such as USD.
Specifically, upon receiving foreign currency, Russian citizens had to convert 80% of the total sum into rubles in three days, or risk getting fined. So, even if you resided in Russia, and traded your cryptocurrencies into USD or EUR, you would need to switch it to rubles, almost immediately.
This comes with not one, but TWO additional problems - the fact that the ruble was tanking in price, and was very volatile, as well as the fact that there simply wasn't enough liquidity on the market for the entirety of Russia to swap between crypto and some traditional currency.
Mass Adoption
The second issue that sanctioned countries such as Russia face is mass adoption.
Let's say you have a jar of 100 candies. A child comes and eats 97 candies, all at once. However, you manage to stop the child right before he eats all 100 candies, so there are 3 left. Now, do you think that the 3 candies left will make a big difference for the child's health?
How does this tie into what we’re talking about today? Well, a lot of attention was placed on crypto, in regards to Russia and the sanctions - I'm talking about the mainstream media, many politicians, and so on. What the above example illustrates is that cryptocurrencies were way too small for them to make a difference, in the grand scheme of things!
Around 3% of the global population actually hold crypto, in any form. Following that, people usually hold small amounts of crypto, too - very few have all of their life savings invested into the space. A popular number that I’ve seen thrown around online is 10% - so, sure, let’s say that 10% of crypto holders have their life savings invested into the space.
So, less than 0,3% of the total global net worth is currently in crypto. Let’s transfer this example to Russia - even if 0,3% (and I’m being generous with this number) of Russians hold a lot of cryptocurrencies, that’s still a very small number. In circumstances like these, sudden and unexpected mass adoption within the country is simply impossible.
Where is the rest of all the money, though? Where’s the 99,7%?
Two places - people’s pockets, and bank accounts.
Instead of focusing on crypto, all of the sanctions should be focused on traditional banking and money flow mechanisms - again, crypto is just too small to make a real difference for them!
Another barrier to mass adoption is your partners. Internally, Russians have no problems getting and spending their rubles, but if they do business with foreign companies, this is a big issue.
Why?
Imagine that you’ve swallowed all of the sanctions, and decided to jump into the crypto bandwagon to help your business survive. The problem will appear on the other side - that of your foreign partners.
As an example, your business is to retail iPhones, and you order them in bulk from international distributors - foreign companies. Even if you become crypto-friendly, it will not change anything, because overseas companies that you deal with will still be aware of the entire situation. No big foreign distributor will sell you iPhones officially, in exchange for crypto!
The same situation can be applied to ordinary Russians, as well. Say, a babushka’s grandson has emigrated into the US and is helping her by sending part of his income every month. Now, his task is to learn how to make those same transactions, but in crypto! On top of that, he will then need to teach his old babushka to use crypto, too. For a big chunk of the old population in Russia, this is a huge "no-go" option.
Speaking of mass adoption and partners, a comment that was often made is that Russia could have simply traded with China, with the help of crypto. Well, cryptocurrencies are banned in China, at least at the time I’m writing this section - same as Russia, the country doesn’t look favorably on decentralized and anonymity-preserving currencies.
Do you really think the great Communist Party of China will agree on crypto matters, just to give you a better option to buy an iPhone plastic cover, fake Ipad, or a couple of low-quality gadgets on AliExpress using crypto?
Even if this situation was more lenient, that wouldn’t really change much, since you then have to think about the entire supply chain, how the trades would happen, and how they could be hidden from the rest of the world.
Spoiler alert - they couldn’t.
Privacy
The third issue that sanctioned countries such as Russia face is privacy.
In Russia - cash is the king. Think about it this way - normally, you were getting lots of cash in suitcases, and spending it the same way. Buying your Lambo, a house, or simply a burger on a street in cash - this is the reality in Russia, and nobody cares how you got your money. With crypto, it's all impossible. People would be afraid to be tracked and taxed - it’s a big deterrent for most Russians!
Cryptocurrency transactions aren’t as untraceable as you might think. While your trades are anonymous, on the very basic level, there are special companies that are dedicated to analyzing on-chain data, for different types of cryptos.
So, if you trade Bitcoin, your address might eventually be flagged as being located in Russia. This, in turn, would prevent many centralized exchanges from offering their services to you, and cause a lot of additional issues.
This is especially so true when you consider the fact that US Senators were looking into the topic by raising the question of how Russia could use digital currencies to overcome and avoid the sanctions imposed on the country.
Granted that the US was looking into the matter, it was very possible that there couldn't really be a major loophole for Russians to use when it comes to crypto.
Now, I can hear you asking - what about privacy coins? Couldn't Russia have used those, in order to avoid sanctions?
Alright, let’s take a look at them. Specifically, let’s take the most popular privacy coin - Monero - as an example.
Monero, at the time of writing this section, had a market cap of around $3 billion. That’s a large number, for a cryptocurrency that was created to be virtually untraceable! However, the total GDP of Russia was $1,5 trillion. So, Monero makes up 0,2% of the total GDP of Russia. Once again, as you can probably imagine, that’s practically nothing, in the grand scheme of things.
So, here’s an example. Let’s imagine that ALL of the $3 billion worth of Monero would be accessible to be used in Russia. That’s impossible, but for the sake of this example, let’s just assume that.
If that was the case, only 2 out of 1000 Russians would have access to Monero, on average. Again, though - this is assuming that the entirety of the Monero market cap is located in Russia and that the GDP is spread out equally throughout the country. In reality, that number is much, MUCH worse.
Conclusions
So, could a country function only on cryptocurrencies? Could crypto substitute traditional currencies and become the one and only payment method? Well, as of now, no, that's definitely not possible.
Even though crypto is seemingly everywhere in the news, and everyone’s talking about mass adoption, it’s still WAY too small and too complicated for countries to use it as the main currency, and this is why it’s a huge opportunity for us to dive in as early adopters!