Due to the diplomatic nature of 21st-century politics, many countries build alliances based on mutual economic relevance; therefore, the fastest way to ruin a country is to damage its economy, making money in citizens’ bank account to become worthless, killing their purchasing power, and making life hell for them via hunger, lack, and hyperinflation.
The U.S. economy is the largest in the world, and as a result, the U.S. dollar is used in most international trades; hence, if the U.S. Government and powerful E.U. countries place international sanctions on any country, other countries who want to remain in the good books of these powerful countries always try to keep up with the sanctions.
The United States has recently sanctioned Iran due to its alleged relationship with Islamic terrorist organizations. Similarly, Russia was sanctioned due to the invasion of Ukraine, making it extremely difficult for these two countries to access international trade, which is dreadful to their economies. According to research from the Atlantic Council, economists estimate that Russia would lose around $50 billion annually due to the sanctions.
However, amid these crises, it appears that Russia and Iran are turning towards cryptocurrency to save their economies from crippling. About two weeks ago, Iran’s Trade Development Organization approved its first crypto-funded import order worth $10 million of cryptocurrency; this enabled Iran to circumvent the sanctions and participate in international trades. Furthermore, Alireza Peyman-Pak, Iran’s Deputy Trade and Industry Minister, tweeted, “By the end of September, the use of cryptocurrencies and smart contracts will be widely used in foreign trade with target countries.”
Similarly, Russia, which previously banned the official use of cryptocurrency in 2020, is now turning towards the rejected stone as a haven. However, in light of the international sanctions and the need to remain active in the global market, Russia’s central bank and the Ministry of Finance have reportedly agreed to legalize cryptocurrency to facilitate international trade.
The whole starting point of cryptocurrency was borne out of a desire to decentralize power; in reality, he who controls your money controls you. Hence, following the 2008 economic meltdown that started from the U.S. Real Estate dilemma, Satoshi Nakamoto wanted to create a new cryptocurrency that won’t be subject to any government or issued by any central bank. Hence, the birth of Bitcoin.
Bitcoin was created with a public ledger (blockchain) where all transactions are stored and traced. Initially, Bitcoin transactions were anonymous; but with the emergence of Centralized Exchanges (CEX) for easy conversion of fiat money to crypto and vice-versa, crypto transactions became pseudonymous; meaning that the anonymity is only existent if there is no interaction with a CEX wallet, which is usually KYC-enabled. Hence, the core of cryptocurrency was to build a decentralized and secure network where power belongs to the people (miners).
Given that sourcing for the U.S. dollar and other currencies like the euro would become herculean for sanctioned countries like Russia and Iran, cryptocurrency seems like a new good option because it isn’t gatekept by central banks; instead, it is rolled out by miners, and everyone can buy crypto assets without needing a bank account.
Can It Effectively Work?
The bigger question now remains if these sanctioned states can weather the storm using cryptocurrency; some experts think it is possible, while others think cryptocurrency as a solution to the sanctions is simply bogus.
In reality, escaping the sanctions with cryptocurrency is possible if the sanctioned countries could find a way to access crypto assets without using Centralized Exchanges; these CEXs are more popular than Decentralized Exchanges (DEXs), with over 14x higher trading volume. But unfortunately, most CEXs require users to register accounts with KYC information, such that money laundering can be easily traced. Hence, it becomes increasingly difficult to conceal the identity of purchasers.
Furthermore, the use of crypto tumblers has been banned by the U.S. government, and many CEXs have followed suit; hence, it also becomes difficult for these sanctioned countries to mask their transactions with a tumbler; as a result, anonymity becomes a source of concern.
If the sanctioned country fails to make these transactions anonymous, then their ally countries may become exposed to the U.S. government. In other words, it is possible; but it may be difficult to carry out due to the lack of assurance of anonymity. Although countries like China and Turkey, which are public allies of Russia, may easily transact with them without using the U.S. dollar, other countries willing to enter trades may be skeptical in order to protect their standings with the U.S. and other E.U. countries.
Cryptocurrency has, over time, proven to be the future of global currency without restrictions or bureaucratic control. However, public records make it difficult to mask crypto transactions; hence, it may only work as a minimal stop-gap for sanctioned countries and not a comprehensive solution.
The existence of privacy coins like Zcash and Monero may also allow anonymous transactions between two parties, obscuring transaction details and protecting trade partners of sanctioned states from a global backlash. In the end, blockchain technology assures freedom; however, it cannot attain its full potential until more countries legally adopt it as a payment method.
Some principal decision-makers are against the legalization of cryptocurrency as they believe its security cons outweigh its pros; for example, they believe that it can be used to launder money from illicit dealings, making it more difficult for law enforcement to catch up with them. Hence, the legalization of cryptocurrency keeps dividing opinions.
As earlier mentioned, the use of cryptocurrency to circumvent sanctions can only work as a stop-gap, but not as a wholesome solution due to the transparent nature of blockchain technology; additionally, stringent KYC and AML regulations make it difficult for converting fiat to crypto via Centralized Exchanges, as the volume available on DEXs may not sufficiently satisfy the needs of sanctioned states.