March 29, 2022
Cryptocurrencies are not the threat to U.S. financial power the elites want to present.
Sen. Elizabeth Warren, that crusader against big banks, is no fan of bitcoin. Whether because of the environment, the economy, or most recently: international sanctions against Russia, the self-styled protector of the little guy does not want us to have uncontrolled access to independent finance.
She’s not alone. Politicians who don’t like bitcoin rarely have one reason. They have all of the reasons, and will seize on whichever one is most convenient or newsworthy at the time.
Right now, it’s war. Hillary Clinton was trotted out to wag her finger at crypto exchanges that did not extralegally ban all Russians from their services. Treasury Secretary Janet Yellen is on the case, “monitoring” cryptocurrency for its capacity to give aid and comfort to the Ruskies, with the begrudging caveat that “that sector is [not] completely one where things can be evaded.” Federal Reserve Chairman Jerome Powell did admit that he had no knowledge of bitcoin being used to evade sanctions, but struck while the iron was hot, stating that it nevertheless “underscores the need” for a “regulatory framework” on cryptocurrencies, which … already exists (and is already way too onerous).
But Sen. Warren stole the show with fearmongering about bitcoin and sanctions at this month’s Senate Banking Committee hearing on “Understanding the Role of Digital Assets in Illicit Finance.” In her witness questions, she first darkly intoned that “crypto provides a new payment option for criminals and cheats” before laying out a hypothetical where a Russian billionaire would do just that.
The problem is that her hypothetical did not make sense. She directed her questions at a representative from Chainalysis, a blockchain forensics company. If anyone might want to exaggerate the cloak-and-dagger stereotype of blockchain transactions, it would probably be a blockchain forensics company, which get paid handsomely to develop new tools to trace digital money. But these companies know the most about what can and cannot be traced on a blockchain. They know how difficult it would be for a country like Russia to evade billions in sanctions without detection using bitcoin.
Sen. Warren was under the impression that a tool called a mixing service could magically remove any trace of a transaction from the blockchain. The Chainalysis representative corrected her, pointing out that the daily liquidity value of mixing services is only around $30 million, and that blockchain forensics companies are routinely able to unmask transactions that have been sent through mixers. Warren, surprised but undeterred, continued with her confused line of questioning, so proud of herself that she put a transcript of the objectively embarrassing exchange on her government webpage.
Technology is not magic. People hear that bitcoin allows people to send money anywhere and don’t realize there are constraints.
Bitcoin is not an option for Russia to evade sanctions because the market is not deep enough to facilitate the needed financial volume. Buying that large of an amount of bitcoin at once would eat away at the value Russia would be trying to preserve. Critics, like Elizabeth Warren, reply that Russia could separate the transactions into smaller amounts. This still requires a counterparty to sell and structure those transactions appropriately, most if not all of whom are complying with existing sanctions on regulated financial intermediaries. Russia is not about to buy a bunch of $500 Walmart gift cards to move money around.
Serious people in Washington know that cryptocurrency is not a real option for Russia or any country to evade financial sanctions. Look through any news article with a headline suggesting that cryptocurrency is a handmaiden of sanctions evasion. You will inevitably find several high-ranking government authorities explaining that, no, Russia cannot realistically evade sanctions with cryptocurrencies. But although people don’t read the articles, they do remember the headlines. And demagogues are too happy to further the misunderstanding that cryptocurrency is fueling the enemy. This is how misinformation is spread.
Politicians will seize on confusion to promote new controls on all of us. Warren unveiled her new hobby horse at the Senate hearing, a mess of a bill called the Digital Asset Sanctions Compliance Enhancement Act. That’s a lot of stodgy words to say “we’re unconstitutionally going after people who publish or run code.”
The bill would impose punishments on actors who “significantly and materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of any [sanctioned] person.” In the case of a peer-to-peer network, that means anyone who writes or runs code that facilitates a transaction, even if they have no ability to know or prevent who is sending or receiving the money.
Trying to punish innocent actors in a decentralized network for the criminal behavior of a few is nothing new. It motivates basically every bad policy idea in the cryptocurrency space. This attempt, like all the others, should be resisted.
But anti-bitcoin politicians’ gripes exceed the mere question of sanctions evasion. They don’t like the idea that the Russian government, or any Russian really, can use cryptocurrency at all.
The new paranoia is that Russia will accept bitcoin for oil trades. The source of this panic was a throwaway comment by Russian legislator Pavel Zavalny that Russia was open to letting “friendly countries”—like China and Turkey—pay for gas in whatever currency they’d like, including bitcoin, but more likely yuan and liras. The rest of the “unfriendly” world must, by Thursday, pay in rubles.
The story is a big deal not because a random Russian politician said the word “bitcoin,” as our press would have you believe, but that Russia is moving away from the dollar as the currency of international oil exchanges (the “petrodollar.”)
Of course Russia is going to move away from the dollar. The U.S. is sanctioning Russia and limiting how they can access dollars. The ruble had been in free fall for a while. Mandating a demand for the Russian currency will prop up its value.
That isn’t bitcoin’s fault. The real problem is that governments around the world are losing trust in the dollar because of U.S. authorities’ actions. They’ve clearly weaponized our levers of global finance, and other countries are watching closely.
It is not surprising that the U.S. would exercise its powers over the global reserve currency to try to bloodlessly curtail Russia’s actions. Perhaps most drastic was the West’s move to freeze Russia’s $630 billion in overseas foreign reserves of dollars and gold. Leaving open that vulnerability was a bit of a boneheaded move on Russia’s part, but perhaps it demonstrates just how beyond the pale they believed the move to be. One financial analyst described the move to freeze Russian assets as a “nuclear bomb in the world of global finance.”
But that’s not all the U.S. is doing. Our authorities have also made clear their displeasure with marginal countries—the “friendly countries” in Russia’s terms—for not following the leader. The goodwill with these formidable countries was already rather thin. Add in the fact that sanctions on Russia will also impose hardships on these major economies and you have a recipe for resentment and a search for an escape.
President Joe Biden himself has publicly admitted that U.S. sanctions on Russia will lead to food shortages in the U.S. and abroad. Hungry populations are not happy populations, and governments around the world are not as wedded to the dollar and NATO as the United States.
Russia is no global economic slouch, with the considerable portion of oil, fertilizer, and metals—key productive inputs—that they contribute to global markets. If they say pay in anything but the dollar, some countries will likely do so. Maybe they will get some ideas about other areas where the dollar is not actually critical.
Saudi Arabia is already publicly considering accepting yuan for Chinese oil sales instead of dollars. (Nota bene: yuan, not bitcoin.) These two countries have nothing to do with the invasion of Ukraine, yet policy decisions emanating from that conflict have hastened their move away from the dollar.
It’s a big problem for the establishment, and it’s not one that will be solved by shaking their fists at bitcoin. Really, bitcoin doesn’t have much of anything to do with the economic geopolitical trends that have been marinating for a good few decades now. Cryptocurrency is a tool that can be wielded in different ways—most importantly as a way for innocent people to protect their finances and privacy—but it’s far from a causal factor in this latest chapter of the Great Game.
Unfortunately, I doubt we will see much soul searching on the part of the leaders that have the power to make effective decisions and improve the geopolitical situation somewhat. Instead, expect a lot more anti-bitcoin fearmongering.