Fence-sitting
From the start of the Russian invasion, Ukrainian Deputy Prime Minister Mykhailo Fedorov walked on both sides of the new global divide over digital currency that the war exposed.
On February 26, he spear its far more publicized campaign for donations of Bitcoin, Tether, and Ethereum to funnel money to the resistance cause faster than a conventional appeal for international donor money could have. It would have strikingly grossed around US$100 million. But two days later, the politician tasked with digitizing his country call for an extension of the then still modest economic sanctions to the new world of cryptocurrency by requiring that on all major crypto exchanges Russian user addresses be blocked.
The war in Ukraine was a tipping point in shaping good and bad DeFi.
“It is crucial not only to freeze addresses linked to Russian and Belarusian politicians, but also to sabotage ordinary users,” Fedorov insisted in a tweet that didn’t quite get the love his appeal for donations did. aroused. “If the goal is to pressure citizens to revolt against their government, revoking access to their capital will weaken their ability to do so,” said typical responses from the crypto libertarian crowd.
The debate over regulating ‘freedom money’ is certainly not over this the representative Twitter user demonstrates:
Natsec and Neocon types won’t like the fact that sanctions are brutal and approaching obsolescence as a tool, but if the choice is between state-level and individual-level monetary sovereignty and that ” everyone uses a monetary database controlled by one government”, I know where I stand.
But just a month after Fedorov revealed a new divide over the purpose of decentralized finance (DeFi) in a changing geopolitical world, it looks like one of the biggest developments in global currency markets in decades is regularly drawn into the new world security order.
The new greenback
Earlier this year, we noted here that cryptocurrencies were going through a tough time after last year’s price spike, with both international financial agencies trying to catch up and investors under pressure from the rise in interest rates.
However, the war in Ukraine has seen the more institutional end of the DeFi revolution – if not the libertarians on Twitter – broadly align with the spirit of the Russian crackdown, at the very least in recognition of the long arm of directed sanctions. by the United States. .
This was probably unavoidable, as crypto exchanges such as Binance developed “know your customer” procedures as they sought to become part of mainstream finance as listed and regulated companies rather than anarchic troublemakers operating on corners. internet inferiors.
Nonetheless, as signs emerged that the Russians are still using crypto to try to get money out of the country, the US was quick to warn of the consequences for the more established end of the DeFi system. . For example, an official from the new Department of Justice (DoJ) “KleptoCapture Taskforce” said:
Financial institutions, banks, money transfer services, cryptocurrency exchanges that willfully fail to maintain adequate anti-money laundering policies and procedures and allow these oligarchs to move money . . . will be in the crosshairs of this investigation.
While the Group of Seven supported the DoJ’s new thinking as sanctions were expanded, the relatively positive reaction in the DeFi world to US President Joe Biden’s March 9 executive order on a US digital currency seemed to reflect a post zeitgeist. -invasion. change.
Government-issued digital fiat currency can be seen as an attempt to strangle the libertarian threat of DeFi, which is arguably the case with China’s well-advanced digital yuan. Or it can be seen as an attempt to put in place traffic rules that strongly favor certain types of crypto innovations such as stablecoins.
While Biden’s order called for more work on the national security aspects of crypto, the DeFi establishment seems to think it can thrive better under that order than it might have been under. a new era where G7 governments wield control over other countries’ supply chains, strategic commodities, foreign exchange reserves and even the yachts of rogue tycoons under the growing mandate of national security.
So, unlike the more innocuous US Federal Reserve Board working paper on digital currency in January, Biden’s relatively quick response can be seen as the US reasserting its status as a financial superpower on the back of the well-coordinated sanctions campaign against Ukraine.
Go digital
Comments this week by Australia’s top parliamentary opinion leader on digital assets, Senator Andrew Bragg, tend to lend weight to the idea that the war in Ukraine was a tipping point in crafting the right and bad DeFi.
Bragg reportedly told the Blockchain Week Australia conference, “we don’t live in a libertarian nirvana”, but that Australia has an opportunity to become a crypto hub from the interim regulatory guidelines the Morrison government has outlined. Monday.
And he said the government was concerned about crypto being used as a “loophole” from Russian sanctions and he had asked financial news agency AUSTRAC to report on digital currency exchanges to make sure ensure that they do not provide a “back door” to support Russian interests.
While, like Biden’s order, these national regulatory proposals were in the works before the Ukraine war, they seem to have given new impetus to ensure that DeFi is not allowed to undermine Russian economic sanctions. Indeed, Singapore acted quickly after Biden’s order to impose new rules on digital assets quite at odds with the libertarian vision, while promising to remain open to new financial technology. Nonetheless, the ability of the newly reinvigorated Western alliance to meet the challenge posed by DeFi to the Bretton Woods geoeconomic order will always depend on how well these proposed new national regimes keep up with digital fintech innovation.
Despite Bragg’s confidence, everything is under control, this Australian Financial Review The comment argues that national regulators are still struggling to control an alternative financial system that threatens the International Monetary Fund, Western governments and the status of the US dollar as the world’s reserve currency.
Bitcoin Bond Bombs
In January, as we wondered here whether disenchanted investors or newly assertive global regulators posed the biggest new challenge for crypto, El Salvador snubbed the IMF with a planned $1 billion Bitcoin government bond.
The success or failure of this first attempt at a new form of fundraising via cryptocurrency could have been a big deal given that developing countries like El Salvador are often frustrated with agency restrictions. of Bretton Woods. With El Salvador postponing the bond issue on Wednesday, it’s a little hard to tell if it’s taken the IMF’s threats to heart or is just stung by Bitcoin’s fall and volatility since its all-time high last November. .
Nevertheless, an interim report also released Wednesday by four central banks on the use of digital currencies to make cross-border transactions cheaper only underscored how the current payments system is hurting developing countries that depend on remittances. foreign worker fund.
The report, backed by the Reserve Bank of Australia, details how cooperation between government digital currencies is expected to make cross-border payments faster, cheaper and more secure through reduced reliance on intermediaries and simplified settlement processes. This is probably more about pushing back the appeal of crypto alternatives for some guest workers from developing countries than making the global job market fairer. But it could help offset how growing security concerns about supply chains are expected to dampen the growth of global trade and thus undermine overall global growth.
The old greenback
That says a lot about the nervousness about where the intersection of economic sanctions and DeFi is leaving the global financial system that Credit Suisse strategist Zoltan Pozsar garnered so much media attention for his prediction that we we are witnessing the birth of Bretton Woods 3. He argues that the war in Ukraine will force the monetary system designed at Bretton Woods in the United States in 1944 to change from “domestic currency” created by governments and central banks to an “external currency” built around commodities and gold.
“If you believe the West can craft sanctions that maximize pain for Russia while minimizing financial stability risks and price stability risks in the West, you might also believe in unicorns… Once this war over, “money” will never be the same. “says the former chief financial officer of the United States.
While the West has just reasserted its institutional power, countries that have been more equivocal about sanctioning Russia, including India, Indonesia and Vietnam, are still called upon to take an increasing part in the Mondial economy.
He says that after Russia’s foreign exchange reserves are frozen, more countries, such as China, will diversify their reserve holdings away from Western currencies and into assets such as commodities that are beyond government control. And it will be a question, in a significant way, of diversifying as much the financial risks as the security risks. And Bitcoin will likely benefit from this.
This is a new spin on the old debate about the US dollar’s waning primacy as the world’s reserve currency, which seems counterintuitive when we’ve just seen the most significant US institutional economic power in a long time. For example, almost half of international SWIFT payments are settled in dollars, while the United States accounts for only around 10% of global trade.
But while the West has just reasserted its institutional power, countries that have been more equivocal about sanctions against Russia, including India, Indonesia and Vietnam, are still called upon to take a growing part in the Mondial economy. They are likely to be interested in at least exploring alternative reserves and trade settlement currencies.
It’s a mixed picture for Australia. More raw materials in reserve assets would benefit the mining industry. But a more regional trade settlement in Chinese yuan might be a bit more uncomfortable.