Crypto at war?

The crypto scene has had an eventful few weeks. Analogous to the global stock markets, but in an even more drastic form, the prices of almost all crypto stocks have crashed. Some cryptocurrencies have disappeared completely from the market (and with them a lot of investor capital) and some crypto start-ups have not survived the crash either. Consider, for example, the insolvency of Nuri “crypto revenue account” partner Celsius Network, where customers transferred their assets to Celsius Network in exchange for interest payments. It remains highly questionable whether the affected investors will see any of their capital again. In the meantime, Nuri itself has also declared insolvency, but repeatedly asserts that customer funds are safe.

According to unanimous press opinion, the harsh economic and financial sanctions have taken Russia by surprise and hit it hard after its war of aggression, which violated international law. At best, North Korea, Iran and, many years ago, Cuba can roughly imagine how Russia and its citizens are currently faring. Largely cut off from air traffic, the purchase of popular Apple products virtually impossible, the use of Visa and Mastercard strictly limited, the booking of holidays in Ibiza impossible… and so many other things that no longer function in the usual way. The expected and understandable reflex? The way out via crypto-currencies. After all, they promise anonymity and independence from the global financial system. Here, people think they are safe from the wrath of Western sanctions.

Cryptocurrencies are virtually made for a situation like this, but due to rising interest rates and economic uncertainty worldwide, they are currently under extreme pressure, just like the stock markets, and thus, while in theory suitable for circumventing classic (regulated and sanctioned) financial instruments and markets, in practice they are also correspondingly dangerous and unsafe, as they are extremely volatile.

ECB President Christine Lagarde is already observing increased evasion of carefully prepared, strict sanctions by turning to cryptocurrencies. In the first days after the start of the war, insiders observed conspicuous activity by suspected Russian “crypto whales”, i.e. investors with very high investment volumes who moved crypto assets worth millions of dollars. The suspicion is that investors are seeking to shift their assets into crypto assets in order to escape sanctions from the West. Bank balances, especially in Western banks, can be frozen, blocked and, most importantly, watched. Crypto assets and transactions are much more difficult to control and, above all, to sanction, as there is often no access or even legal basis or regulation for them. The Russian Sberbank even tried to directly launch its own cryptocurrency, the Sbercoin, on the market in order to make itself more independent of the Western-style financial system and to prepare for exclusion from SWIFT. The enormous market movements of recent months and the associated financial consequences for investors, especially private investors, are also increasingly calling regulators to the scene to protect investors. In addition to the pure movement of financial assets via blockchains, the focus is also on the mining of crypto assets. Among other things, it is suspected that Russian energy companies are switching from exporting energy sources to using this energy for crypto-mining in order to compensate for export losses with corresponding crypto-profits. North Korea, for example, is also suspected of using crypto-mining and cyber-attacks and ransomware to circumvent international sanctions and obtain foreign currency in the form of crypto-assets.

A while ago I predicted that the more important the crypto market becomes, the more politicians and financial regulators will want to regulate it. As soon as the crypto market starts to develop “systemic relevance”, the pressure to regulate or, in extreme cases, even ban this market will increase. The idea behind cryptocurrencies is precisely to be able to escape this influence of the “system” and to be independent of states and financial supervisors. At the same time, this is precisely what puts pressure on those same states and financial regulators not to lose control over a considerable part of international financial activity.

The sanctions, and in particular the circumvention of sanctions via crypto-currencies, now hold a burning glass onto precisely this situation. Recently, a ban on proof-of-work crypto-currencies in the EU was already on the table, as they are particularly energy-hungry and thus harmful to the environment. A corresponding vote was averted at short notice. The MiCa regulation will further increase regulatory pressure. It is foreseeable that the MiCa regulation will follow a similar course as the Payment Services Directive (PSD), namely it will be further refined and tightened in various iterations. The regulatory regime will have to adapt and adjust to the changing market. The circumvention of sanctions and money laundering laws by crypto markets will therefore inevitably have consequences in the form of tightening regulation. The responsible politicians will certainly take the opportunity to demonstrate the moral reprehensibility of circumventing sanctions on the basis of this war of aggression that violates international law.

For crypto enthusiasts, the current situation is both a curse and a blessing. A blessing, because the major cryptocurrencies are currently receiving increased attention again – which is normally a positive thing, because the spread typically increases through greater attention. At the moment, however, the attention is being drawn mainly by the sharp drop in prices and the destruction of capital, as well as the accusations of money laundering by politicians. But it is also a curse, because the dream of money away from any state and regulation will be increasingly destroyed.

Europe is making progress and, with the Markets in Crypto Assets (MiCA) regulation, it is primarily the platform operators who will be held liable through a licensing obligation and thus wants to bring about traceability of money flows and, in particular, combat money laundering. But climate protection requirements, the right to reclaim stable coins and the first regulatory approaches for NFTs are also part of the new regulation.

We can be very curious to see how the further evolution of cryptocurrencies will look in line with the growing regulation. The crypto pioneers will certainly not become tired of looking innovatively into the future and coming up with new ways and means to make themselves a little more independent of the “classical financial world”.