Bitcoin on the rise: cryptocurrencies as blockade breaker?

Since the start of the war in Ukraine, cryptocurrencies have been on the rise. Experts suspect that this is a circumvention of Western sanctions against Russia. The USA now wants to take action against this.

After Russia’s attack on Ukraine, more and more investors are stocking up on cryptocurrencies. Since the beginning of the war, Bitcoin has risen by more than 28 percent from around $34,300 to over $44,000, according to the Coinbase platform. Yesterday alone, the rate of the oldest and largest cyber currency increased by seven percent. The second largest currency, Ethereum, has also gained around 29 percent in value since last Thursday.

According to experts, the war and Western sanctions are driving more money into the anonymous and decentralized crypto sector. Bitcoin trading has skyrocketed, especially in Russia and Ukraine. Transactions between the Russian ruble and crypto assets have doubled since the invasion, according to research group Chainalysis, hitting $60 million a day as of the start of the week. In Ukraine, crypto exchange Kuna even tripled its daily trading volume.

USA wants to present strategy

“Bitcoin could be a potential safe haven for Russian oligarchs to avoid sanctions as there is no censor on the bitcoin network and cryptocurrency trades,” said Ipek Ozkardeskaya, an analyst at Swissquote Bank. Cryptocurrencies are beyond the control of banks and states because transactions on blockchain technology do not need an intermediary. The mere assumption that Russian billionaires could increasingly use digital money as a safe haven has already caused prices to skyrocket.

The USA also apparently considers cryptocurrencies to be a blockade breaker. A strategy is being worked on to prevent Russia from using Bitcoin to circumvent the sanctions imposed, according to reports from Washington. This draws on experiences with Iran and Venezuela, against which there are also sanctions. The government wants to ensure the maximum effectiveness of the sanctions against Russia, it said.

At the weekend, western countries decided to exclude some Russian banks from the Swift international payment system and to freeze the balances of the Russian central bank. As a result, the Russian currency, the ruble, lost massively in value. However, economic sanctions only have an effect if payments are actually processed through state-controlled banks.

Crypto exchanges to ban Russian users

That is why Mykhailo Fedorov, the Ukrainian Deputy Prime Minister, on Sunday called on “all major crypto exchanges to block the addresses of Russian users”. However, Binance, one of the largest crypto exchanges in the world, initially resisted: “Unilaterally deciding to ban people from accessing their cryptocurrencies would go against the very reason cryptocurrencies exist.” The exchange Kraken also announced that it will not freeze the accounts of its Russian customers without a legal obligation. The US exchange Coinbase also stated that it did not want to impose a blanket ban on all Coinbase transactions with Russian addresses.

However, it is questionable whether the use of cryptocurrencies to circumvent sanctions can actually succeed. “Should Russia succeed in using crypto assets to participate in economic life despite a possible Swift exclusion, there is a risk of a global regulatory shock,” said analyst Timo Emden from the analysis service of the same name. “It shouldn’t be long before the thumbscrews already in place are tightened.” It also seems unlikely that Russia will actually use cryptocurrencies as a normal means of payment after the Swift exclusion, at least in the short term.

“Russia must first build the necessary infrastructure to be able to use Bitcoin as a general means of payment,” said Philipp Sandner, an economist at the Frankfurt School of Finance & Management, the “Manager Magazin”. Similar to PayPal, the Russian government must first provide all citizens and companies with a “gateway” for payment transactions. “That should take twelve months rather than six.”