The ongoing Russia-Ukraine war has put the spotlight on bitcoin and crypto in general as a means of carrying out transactions during a crisis. Crypto has also made it to the news for helping transactions amid sanctions and falling fiat currency prices in Russia and to help Ukrainians receive aid.
While bitcoin may appear to have acquired a new use case as a “war-time currency” for donations, transactions etc, there are at least two big questions that raise doubts over its usefulness during a war-like crisis:
- Can you rely on bitcoin as a store of value for use during crisis?
- Can bitcoin survive economic sanctions and bans?
Bitcoin has not become a means of transaction yet. It can’t be used to buy other goods everywhere. Even as a store of value, its reliability is uncertain due to volatility and is being tested amid the ongoing geopolitical crisis, experts say.
According to Rohas Nagpal, Chief Blockchain Architect at the HyFi Blockchain, crypto may be useful for receiving funds and exchanging into local currencies but there may be a problem if one is using it as a store of value.
“If you are relying upon crypto as a medium of exchange, then the current low rates do not matter because anyone receiving crypto would immediately convert it into the local currency. However, if you are using it as a store of value, then there is a problem,” Nagpal told FE Online.
Experts doubt whether bitcoin can be relied upon during crisis at present. More so, because it is still evolving and hasn’t achieved the “gold-standard” required for becoming reliable.
“I doubt bitcoin is a safe haven from an extreme-risk environment. In that sense, bitcoin isn’t gold. Well, you can use bitcoin for economic transactions in a way that gold was never designed to do because it’s a physical thing, but that is not yet so easy to do. Bitcoin has not reached the critical mass to be considered a viable currency to use for payments,” crypto and tokenomics expert Eloisa Marchesoni told FE Online.
She further said that bitcoin may be benefitting from demand as a currency or store of value in countries hit by war and sanctions, since it can bypass government controls. It might not be the technology you want to buy a loaf of bread, but if you need funds quickly and want to know they’re really yours, then it’s a technology that plays a useful role.
Not the best hedging option?
“While crypto is the best option for the Russian government to evade sanctions and for the Ukrainian government to receive aid, but not the best hedging option for all other people, compared to luxury goods and gold, considering the price instability of crypto and the fact that, even though futuristic technologies are quite appealing, these virtual assets cannot prove their value as easily and clearly as a physical good can,” Eloisa said.
Stablecoins may be more reliable than other cryptos during crisis, according to Sharat Chandra, VP, Research and Strategy at EarthID, a self-sovereign Identity Management Platform,
“In today’s uncertain times, when the fiat monetary system is under stress, crypto has widely emerged as an alternate channel to make payments, receive aid and fund humanitarian efforts bypassing existing financial rails. Despite showing signs of maturity, cryptos aren’t devoid of volatility. Stablecoins, since they are pegged against fiat currency, are more stable than the rest of the digital assets are being used to settle payments and facilitate remittances. Stablecoins would fuel the further growth of the DeFi ecosystem in the coming days,” Chandra told FE Online.
Not immune to sanctions
Wars are generally accompanied by economic sanctions. Like in the present case, US and its allies in Europe have imposed several economic sanctions on Russia. The impact of the sanctions was seen in crypto markets where prices moved up initially as demand increased.
Even as crypto is marketed as decentralised assets, that no authority can have full control over them, experts say that the real test of this claim is happening now.
“Economic sanctions are like a litmust test for cryptocurrencies. They are supposed to be decentralised and this is the time that that can be proven. Their level of decentralisation ensures that they can survive economic sanctions also,” said Nagpal.
Crypto isn’t sanction-resistant as its gateways have to follow the law of the land. To become truly censorship-resistant, neutral protocols would be required, which is not the case at present.
“Crypto entities which provide on-ramp/off -ramp services and exchanges act as gateways to the crypto and Web3.0 ecosystem. These entities have to follow the law of the land, and they can’t be immune to economic sanctions imposed by sovereign nations. To stay true to the core philosophy of decentralization and censorship-resistance, crypto needs neutral protocols,” said Chandra.
Crypto, not truly decentralised?
Chandra further said that the geopolitical upheaval in the European region has shattered the myth of decentralization.
“Nations have taken sides, and ideological divisions are leading to economic sanctions depriving millions of access to financial services. This might be an inflexion point for the rise of decentralized finance where gatekeepers of tradfi world can’t dictate terms to truly decentralized online communities willing to engage with people of their choice,” Chandra said.
There have been reports of blocking and deleting of accounts based in countries sanctioned by the US by Metamask and OpenSea, further raising questions on the “truly decentralized” claim argued in favor of crypto. Experts say that while deleting and blocking accounts may be isolated incidents, crypto investors should take note of the decentralised nature of such apps.
“Deleting and blocking of accounts should be seen as isolated incidents which do not have any impact on the larger crypto ecosystem. The crypto revolution is driven by the people and any particular country banning crypto is completely irrelevant to the industry. This event although was by mistake but it shows centralisation element of these apps which a true crypto investor have to take a note of,” Shivam Thakral, CEO of BuyUcoin, said.
“The concept of decentralisation revolves largely around eliminating the power to control or follow the decisions of a centralised entity. By imposing restrictions for some regions is a development towards a centralized ecosystem rather than a decentralized ecosystem,” Crypto and Blockchain expert Vikram Mahar said.
(Crypto tokens are unregularised assets in India. Investing in them could lead to losses. Please consult your financial advisor before investing in crypto or any other virtual digital asset.)