It would have seemed far-fetched to affirm in 2009 that the fledgling cryptocurrency technology, in less than twenty years, would become a major political force that countries would utilize and contend in times of peace and in times of conflict. Yet, in the last two years, major changes have been brought upon the global economic landscape as countries have become interested in the asset and the underlying system behind them; in no little part due to the explosion in price experienced by Bitcoin in 2021. Reactions to the technology has been diverse with many countries such as: Botswana, Iran, Brazil and Switzerland seeking to regulate it as legitimate financial tools, while China has enacted an outright ban and El Salvador has adopted Bitcoin as legal tender.
Globalization has made the world more integrated and interconnected and in no sphere it is more apparent than in the economic sphere. Both the financial markets and the global supply chain have intertwined various countries economic interests and fostered cooperation between them for a continued shared prosperity. With a liberal economic world order, it would be expected that states would become closer to each other; yet that was not necessarily the case. The expectation that there would be 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. While it may seem ironic, globalization has led to the centralization of power inside of global institutions such as the International Monetary Fund (IMF), World Bank and even the SWIFT banking system that have often become weaponized by countries such as the United States against geopolitical rivals, which has led to the noticed decline in relevance of these same institutions. It was in this context of turbulent geoeconomic development that cryptocurrencies emerged and grew.
While before the decade of 2020 cryptocurrencies had been noticed by various countries, some of which had started early regulations, no country saw the growing ecosystem as an economy parallel to the global financial architecture. It was seen as an odd curiosity with a terrific technology empowering a financial bubble akin to the infamous tulip mania; however, the inflection point came amidst the ejection of Iran from the SWIFT financial system. Despite heavy criticisms from countries such as Germany, the United States removed Iran from the global financial system backing the country into a corner that forced it to adopt Bitcoin as a way to survive as was confirmed in 2021. This event has prompted various regional powers to create a new payment system to serve as an alternative to the SWIFT as 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 to create a payment system of its own.
Nevertheless, as attractive as these alternative payment systems are, they still suffer from the centralization issue 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 case of the substitution of the dollar as international trade currency by a new currency, the emitter of that currency will have the same ability to impose sanctions and isolate political rivals. It is the mere trade of an economic hegemon for a new one and the imposition of a new global interest that favors whoever controls the system. The technical base of cryptocurrencies offers a remedy to the centralized financial system, which has become a tense geopolitical focal point in recent years. In fact, the current has so far provided major stress tests of the resilience of the cryptocurrency system: the Russo-Ukraine War.
Martial law and limitations of traditional finance
Last year, Ukraine had adopted an open stance towards cryptocurrencies based on its expanding tech industry. The vast potential of the industry has ended up interconnected with cryptocurrencies due to the growing adoption throughout the years driven by the surge of P2P (Peer-to-Peer) platforms, indicating a strong grassroots adoption of the tool. In fact, Ukraine had registered the 4th highest volume in cryptocurrency use worldwide, marking it as one of the main emerging hubs globally according to on-chain analysis. It is not a surprise then to see that in the months leading up to the conflict Ukraine 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 grey area.
The result of the cryptocurrency laws and the tensions with Russia were the reasond for increasing adoption of cryptocurrencies in daily lives that eventually overtook the use of fiat inside of Ukraine as a whole. This existing phenomena proved invaluable to the citizens once Russia finally invaded and martial law was implemented, 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 were frozen, the suspension through the implementation of martial law did not affect cryptocurrencies as the whole payment system itself runs parallel to the traditional financial system. In fact, the widespread adoption of cryptocurrencies during times of conflict reveals the technical resilience of blockchains against cyberwarfare.
Cryptocurrencies rely on the technology of blockchain in an interconnected decentralized worldwide computer system in order to secure transactions. While it is an energy intensive endeavor, the level of security that it provides is unparalleled as in order to disrupt the entire system; one would need to conduct a 51% attack on the network, 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 taken down by simple cyberattacks like distributed denial-of-service attacks which have occurred in the past and have already occurred in Ukraine as well. This means that the use of traditional banking tools is not viable during the periods of conflict due to their weakness to cyberattacks. Additionally, cryptocurrencies also have the technical ability to conduct transactions offline through the use of mesh networks, which adds another point of resilience to the network.
The resilience of the cryptocurrency network along with the flexibility of global interconnection caught the attention of the Ukrainian government who set up wallet addresses to receive Bitcoin, Ethereum, USDT stablecoin and PolkaDot as donations. Since the posting of the wallet addresses, Ukraine has received a total of $20 million.
The future horizon
At the current point in time, the US dollar is poised to lose its dominance as the international trade currency. The share of dollar reserves held by central banks have been already steadily falling since the creation of the Euro at the end of the 20th century. Combative foreign policy along with the overbearing use of economic sanctions as a weapon has incentivized countries to look for alternatives in order to further their own economic interests. Yet, as the competition for the newest hegemonic currency begins, it would be prudent for countries to question if an attachment to a traditional financial market is even viable for international trade.
The weaponization of international payment system is a risk that all players face when dealing with a hegemonic power. As shown by Iran’s and Russia’s ejection from the SWIFT system, participation in the international trade system is bound by specific rules that are often dictated by the powers that dominate the financial system. More often than not, it 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 to engage in debates of whether joining a fully decentralized system to safeguard their own ambitions or create their own payment system to compete with others. While payment centralization is an attractive model to even control citizens domestically, such as the case in Canada with the Trucker’s Convoy, the case of the Russo-Ukraine war should demonstrate that a decentralized finance gives a flexible economic backbone to defend against digitally empowered economic attacks.
[Photo by Max Pixel]
The views and opinions expressed in this article are those of the author.
Maria Claudia Nunes serves as a volunteer researcher at the Nucleus of Conjunctural Assessment (NAC), as technology specialist at the Naval War School (EGN) in Brazil, and a Political Science Professor’s Assistant in University of São Paulo. She graduated with a Bachelor’s degree from IBMEC and is currently pursuing an International Relations Master’s degree at University of São Paulo.