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The rhetoric meets the road

Thumbnail image for Bitcoin_Digital_Currency_Logo.pngOn February 28, at the same time as he called for blocking Russia's Internet connections, Ukrainian minister of digital transformation Mykhailo Fedorov called for cryptocurrency exchanges to block the addresses of Russian users as well as addresses officially tied to Russia and Belarus. Fedorov was not the only one: European Central Bank president Christine Lagarde called for regulations to stop cryptocurrencies from being used to bypass the economic sanctions being jointly applied against Russia by numerous countries, as has Estonian prime minister Kaja Kallas.

Their concern echoes the rhetoric that formed cryptocurrencies' origin story. Bitcoin's founding paper begins by saying that the system's main benefit is eliminating the need for financial institutions or trusted third parties because the blockchain replaces trust with cryptography and transparency. Eliminating governments' ability to interfere in financial transactions was definitely part of the plan. I can't help thinking that Satoshi's threat model was governments taken singly, not dozens of them acting in concert. Also, this was before Sarah Meiklejohn showed that bitcoin addresses are not anonymous.

The notion that cryptoccurrencies can build an independent global financial system outside of government regulation is even more overblown than 1999s claims that governments would not be able to control the Internet. Information can achieve an effect simply by transmitting from one individual to another. Money can't, at least not at current levels of non-adoption; if you want your bitcoin stash to be of use to buy stuff you have to connect it to state-backed currencies. Even stablecoins won't buy me groceries at the local shop. And that's the point where government regulation steps in - as, for example, this week, when the UK's Financial Conduct Authority ordered the shutdown of all 81 of the UK's bitcoin ATMs because they need to be registered and comply with anti-money-laundering regulations.

The responses to the above developments have exposed the extent to which the original bitcoin/blockchain design has been thwarted by centralization. As we've said before, any time something is complicated there's a business model for a third-party intermediary to make it simple. And so we have cryptocurrency exchanges like Coinbase, which make buying and transferring cryptocurrencies easy but far more controllable for governments. And indeed: a few days after sanctions were imposed, Coinbase had blocked 25,000 cryptocurrency addresses linked to Russian people or entities.

With the Moscow stock exchange closed for two weeks and counting, shares in Russian companies plummeting to zero on international exchanges, and the ruble collapsing, the motivations for individuals to use cryptocurrencies are inarguable. But an entire trillion-dollar economy?

Says Dave Birch, author of The Currency Cold War, "Cryptocurrency people think cryptocurrencies are more important than they actually are."

Changpeng Zhao, the founder of Binance, which in 2021 was investigated for money laundering by the US and ordered to cease operations in the UK, quickly refused to sanction Russians, arguing that cryptocurrencies are too small for Russian needs. Zhao estimated the value of all cryptocurrencies at less than 0.3% of global net worth - plus, it's too traceable to be useful for illicit activities. Coin Telegraph reports that Russians are estimated to hold more than $200 billion in cryptocurrencies as of February 2022; the country is Binance's second-biggest market after Turkey.

Many experts agree with Zhao. At last week's State of the Net conference, Bill Rockwood, the executive director of the Future Forum caucus in the US House of Representatives, argued that the unalterability of the blockchain creates truth an authoritarian state can't hide, making it unsuitable for a country trying to stealthily evade international sanctions. At the Atlantic Council, senior fellow JP Schnapper-Casteras agrees, pointing out that Russian authorities have considered either banning or regulating cryptocurrencies for the precise reason that they cannot be easily centrally controlled. In any case, Schnapper-Casteras adds, US-based cryptocurrency exchanges must legally comply with all US law, including sanctions, and law enforcement skills at tracing transactions on public blockchains have improved greatly, as the recent Bitfinex arrests showed. Plus, only two cryptocurrencies are big enough to help, and purchases of the necessary size would lead to unaffordable price spikes. Like many other countries, Russia intends to develop its own central bank digital currency - but that will take years.

In a Twitter thread, the Bitcoin Association's head of policy, Jake Chervinsky, explains all that in more detail, and also points out that in the years Russian president Vladimir Putin has spent building up his war chest, cryptocurrencies formed no part of the plan, as the New York Times has reported..

The more obvious use is for individual Russians to buy cryptocurrencies (using their own systems and hardware wallets, avoiding the exchanges) as a way of hedging against further collapse in the ruble. Bloomberg, however, finds that this isn't really happening much either. As of March 3, blockchain data was showing that Russian purchases have actually halved since February and is less than a fifth of what it was at its peak in May 2021. Also, we're talking millions, not the billions the war is costing Russia every day.

The more important cryptocurrency threat we should be considering, Reuters reports, is cyber attacks on cryptocurrency exchanges. If you have a bunch of cryptocurrency reposing in an online software wallet...buyer beware.

Illustrations: Bitcoin logo.

Wendy M. Grossman is the 2013 winner of the Enigma Award. Her Web site has an extensive archive of her books, articles, and music, and an archive of earlier columns in this series. Stories about the border wars between cyberspace and real life are posted occasionally during the week at the net.wars Pinboard - or follow on Twitter.


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