Monday, February 6

Cryptocurrencies and sanctions in the spotlight

The role of cryptocurrencies like bitcoin has been a key talking point during Russia’s invasion of Ukraine and the enacting of sanctions and subsequent financial market turmoil.

And it has thrown up three big questions about how it is being used and what its future looks like.

Can cryptos be used to avoid sanctions?

But there are a number of challenges.

First, blockchain, the technology that underpins bitcoin, is a public ledger of activity. It’s therefore possible to track the movements of funds from one account to another quite easily. This doesn’t make it a good tool for avoiding sanctions.

“The biggest misconception about crypto remains that it is untraceable and is primarily used for nefarious purposes, which couldn’t be further from the truth,” Vijay Ayyar, vice president of corporate development and international at crypto exchange Luno, told CNBC.

Meanwhile, there isn’t enough liquidity for Russian oligarchs and companies to move their money around.

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“Liquidity in crypto is still a fraction of the global currency market, and hence moving large amounts of money using crypto is difficult,” Ayyar said.

Cryptocurrency exchanges will also be on high alert.

Read more about cryptocurrencies from CNBC Pro

“Exchanges that operate with strong processes and codes of conduct will no doubt be doubly watchful at this moment for funds that have nefarious origins,” Charles Hayter, CEO of data firm CryptoCompare, told CNBC.

On Thursday, Brian Armstrong, CEO of cryptocurrency exchange and wallet Coinbase, backed up many of these points in a thread. He said that every US business has to follow the law.

“It doesn’t matter if your company handles dollars, crypto, gold, real estate or even non financial assets. Sanctions laws apply to all US people and businesses,” Armstrong said.

“So it would be a mistake to think crypto businesses like Coinbase won’t follow the law. Of course we will. This is why we screen people who sign up for our services against global watchlists, and block transactions from IP addresses that might belong to sanctioned individuals or entities, just like any other regulated financial services business.”

However, there has been a spike in the volume of transactions from ruble into bitcoin and to tether, a so-called stablecoin tied to the US dollar, since Russia’s attack on Ukraine, according to CryptoCompare. Hayter said this is a “flight to the dollar by any means possible where crypto is but another route to preserve wealth,” as the ruble has plunged.

Coinbase’s Armstrong said “some ordinary Russians are using crypto as a lifeline now that their currency has collapsed.”

Earlier this week, lawmakers including Senator Elizabeth Warren urged the Treasury Department to ensure that they could make sure crypto companies are compliant with sanctions on Russia. One US government official said it’s unlikely that Russia could evade sanctions using cryptocurrencies.

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“The scale that the Russian state would need to successfully circumvent all US and partners’ financial sanctions would almost certainly render cryptocurrency as an ineffective primary tool for the state,” said Carol House, the director of cybersecurity for the National Security Council, during a webinar on Wednesday, Reutersreported.

Is bitcoin finally becoming ‘digital gold’?

For years, proponents of bitcoin have been calling the digital currency “digital gold.” The idea is that bitcoin is a store of value and could be a safe haven asset in times of turmoil, just like the yellow metal.

However, that theory has unraveled in recent years, as bitcoin trading has been correlated to risk assets, in particular stocks.

But as the war in Ukraine intensified this week, bitcoin saw a huge one day jump taking it above $44,000 off the lows for the year, prompting speculation that its time as a safe haven asset has come.

Several experts disagreed.

“We have read across a few different publications that BTC is regaining its status as a safe-haven. We completely disagree with this notion,” Lux Thiagarajah, head of trading and account management at crypto financial services company BCB Group, said in a note on Thursday.

“A safe haven is an asset that retains its value during times of market turbulence. Crypto has aggressively sold off since it was clear the Fed (US Federal Reserve) were going to hike rates faster than anticipated which in turn saw stocks sell off. This is not the definition of a safe haven.”

Luno’s Ayyar said in the past week that bitcoin has “de-correlated quite a bit from equities and gold, which is one positive indication around its use case as a safe haven.” He added that bitcoin will continue to mature, taking away market share from gold, but that narrative “may still take more time to play out.”

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Has blockchain tech proven its utility?

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