How governments turn to crypto to reduce economic impact of sanctions

For a long time economic sanctions have been used in order to establish geopolitical dominance. The US dollar currently accounts for about 60% of all central bank foreign exchange reserves. For countries such as Russia, the oil and gas industries are integral for the country’s economy and because the US dollar is so intertwined with global trade, the United States and European Union are able to dictate the terms on which trade is done. 

Instead of using military force and traditional warfare, the US and their allies use their economic weight to get other countries to adhere to their policies. This can be very harmful to economies of the countries that have political differences with the western ideologies and do not want to compromise. This can be seen in the sanctions imposed by the US against Russia and Iran, and the economic tensions and struggle for dominance between the US and China. 

Crypto Rivals the US Dollar

While the US dollar is still the most dominant economic force in the world and, therefore, awards great power to the US, with the emergence of blockchain technology and cryptocurrencies, new potential paths for global commerce have emerged. 

Because cryptocurrencies like Bitcoin are decentralized and its blockchain is transparent, it can be effectively used to combat the sanctions imposed on certain countries by the US However, at the same time, blockchain technology is not yet operational on the level of traditional banking and, therefore, it’s effectiveness against economic sanctions has not been tested in full. The adoption rate has also slowed down because of the fiat-to-crypto relationship. The tie between crypto and fiat currencies has made it possible for US policy makers to impose their regulations on the development of the crypto industry. 

Crypto technology has only become an option relatively recently as the Bitcoin network only came into existence in 2009. In such a short time, the technology has evolved rapidly and created a large community of believers in its potential. By now, some countries that are at odds with American foreign policy are exploring crypto and blockchain projects to try and outmanoeuvre the US’s economic impositions. Russia, China, Iran and Venezuela are already in the process of establishing a digital commerce framework for the next few decades. While it is not a linear or fast process, these nations see a lot of promise in this line of development. 

North Korea

A government-controlled cryptocurrency is an idea that has spread like a wildfire from East Asia to South America. It was reported that North Korea is in the initial stages of developing their own cryptocurrency which could potentially give the country access to online markets and integrate it into global trade. This token is expected to function the same way as traditional cryptocurrencies such as Bitcoin, which means it will not be a digital version of the national North Korean won. However, due to the country’s isolated regime, there is a lack of resources necessary for development, such as advanced equipment and quality specialists. Matters were made even more complex with the recent accusations directed at the North Korean state of hacking attacks on foreign banks and crypto exchanges. Allegedly, the equivalent of $2 billion has been stolen by DPRK hackers to fund its weapons of mass destruction program. All allegations were denied by the government officials. However, while the dollar plays an important role in North Korean partner economies, this crypto initiative will likely be supported by other nations that have a need to bypass certain US sanctions.

Venezuela

Closely tied in with the country’s oil, gold and mineral reserves, Petro (PTR) was actively promoted by Venezuelan President, Nicolás Maduro. In March of this year, there was news that Petro was being promoted in the gambling sectors and that the government was even opening some crypto casinos in Caracas.

Due to the recent pandemic, cryptocurrency adoption rates have surged across South America. This, however, has not sped up the adoption of Petro. In June, news broke out that Joselit Ramírez, the head of Petro, is being pursued by the US Immigration and Customs Enforcement’s (ICE) for involvment with drug operations and money laundering. This development is bound to halter the adoption of the national currency unless more details come out. Either way, PTR marked an important milestone as the first-ever functioning national cryptocurrency.

Iran

For more than 40 years, Iranian authorities have been met with pressure from the US for their evasion measures such as barter-style, “gas-for-gold” schemes. In 2019, Instrument in Support of Trade Exchanges (INSTEX), a European special-purpose vehicle, was established to facilitate non-USD and non-SWIFT transactions with Iran to avoid breaking US sanctions. Recently, before INSTEX was established, an announcement was made regarding the development of a sovereign token. These measures were taken in response to the US-controlled international payment system SWIFT which walled off Iranian banks from the global banking system. PayMon, the proposed currency, was built on the Stellar blockchain protocol as a core mechanism for cross-border payments. A number of countries already showed their interest in PayMon as a way to establish trading connections with the nation. 

Russia

Russia has also faced potential losses in its trade capabilities due to the SWIFT system, which the US has threatened to disconnect Russia from. Now Russia is laying the groundwork for a blockchain transformation in the government's financial sector. Considering the Russian authorities’ assistance in the aforementioned Petro and Paymon, it is clear that a system that circumvents these limitations in worldwide trade is in the nation’s interests. Some reports on a potential CryptoRuble indicate that, unlike the currently prevalent cryptocurrencies, it will not be mined but issued and maintained only by the authorities.

Cuba

The Cuban government is also considering a government-backed cryptocurrency as a means to combat the current financial crisis and lower the impact of the US sanctions. A surprising development happened when John McAfee, the controversial cybersecurity expert, stated that he supports the project as it is a large scale, real-world application of cryptocurrencies and that he offered the Cuban authorities assistance with the project pro bono. 

China

Of all the adversaries of the United States, China is the most technologically advanced and populous, which gives it enough power to stand up to Western influences on global trade. Efforts to do just that have resulted in the early stages of development of a national digital asset pegged to the People’s Bank of China (PBoC). The Digital Yuan (DCEP) is a project focused on replacing physical cash and creating a new medium for cross-border payments. For a country whose citizens are already welcoming cashless mobile payments, the transition to crypto payments should be a logical next step.

Because China is such a superpower and a major international exporter, implementation of DCEP will encourage its use for trading with Belt and Road Initiative partners and move financial markets aways from a dollar-centric system, affecting the economies of every country involved. Currently, the Digital Yuan is in the process of being tested in four urban areas with a combined population of more than 38 million people. 

Crypto as a Tool for Economic Development

It’s important to mention that the countries mentioned above are hostile to their citizens performing operations with other independent cryptocurrencies. However, major decentralized currencies such as Bitcoin and Ethereum remain the most popular products of blockchain technology used across the globe. If government-backed cryptocurrencies become widely adopted, this could result in a surge in popularity for other existing cryptocurrencies. It is not clear whether DCEP or the other currencies will be traded on crypto exchanges the same way as Bitcoin and altcoins are. If this is the route taken, look to international crypto-based exchanges with high liquidity and a wide range of trading pairs like HitBTC and Coinbase to see a huge influx of new users and transactions. If any of the aforementioned currencies become successful, this type of crypto exchange might become the center of a lot of financial activity. 

Blockchain technology can be used not only as a payment system but also to help in other sectors such as healthcare, education and law enforcements. At this moment, governments that have been sanctioned by the US are looking at blockchain and crypto to weaken the impact of the sanctions and nurture their economies. With the health and economic crisis affecting the entire world, these measures have a chance of being pursued more seriously and with a higher sense of urgency.