Op-ed

Are Rogue Countries Turning to Crypto for Sanctions Relief?

Sanction-evading crypto use on the rise

Today we live in a world mired in war on many fronts. While there are a number of armed conflicts going on, there are also economic wars being waged that have a huge significance in the fate of nations. After the collapse of the Soviet Union, a new economic order was formed with the US and the West generally holding the reins. The US and Europe are generally able to dictate the terms on which global trade is done due to the dollar’s de facto role as the global currency. The US dollar currently accounts for about 60% of all central bank foreign exchange reserves, while the next closest currency is the euro with 20%.

With that much of the world’s wealth concentrated in western currency, global business runs at a western pace. While this may have its upsides, it can come at a cost for countries that don’t want to play ball according to US rules. Instead of military force, the US and its allies use their economic power to cordon off countries that differ from them politically. This can be seen in the sanctions levied by the US against Russia, Iran, and others, and the economic tensions that bubble up periodically between the US and China.

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Cryptocurrency Technology to Eclipse U.S. Domination

While America’s power has, outside of certain situations with China, gone unchecked, the relatively recent emergence of cryptocurrencies has opened up new pathways of global commerce independent from Washington’s purview.

Owing to cryptocurrencies’ benefits in terms of transparency and freedom from any outside interference, U.S. rivals view blockchain technology as an effective weapon against U.S. economic restrictions. However, as it stands now, the strategy of sanctions resistance based on crypto fundamentals is a long shot, because currently none of the platforms operating on blockchains can compare to the conventional banking system when it comes to volume and speed of financial transactions. And what is far more important, with many blockchain ventures still dependent on fiat money, U.S. policymakers are capable of pulling the strings on businesses in the cryptocurrency field, too.

 

At the same time, countries at odds with American foreign policy have recently been exploring cryptocurrencies and blockchain projects as potential means of circumventing US economic dictates. The technology is rather fast-evolving and many believe it holds enough potential to carve out a pathway for a brand-new value transfer system that could function apart from that controlled by the United States. The target timeline is a few decades away, but some countries are establishing a framework right now, with Russia, China, Iran, and Venezuela at the forefront. It is noteworthy that, while exploring crypto as a state venture, the last three actors have banned their citizens from using crypto assets already active on the market, though the success of such restrictive measures is anything but evident. In the following section, we will take a look at how major U.S. adversaries are deploying blockchain technology to circumvent sanctions and reduce Washington’s influence.

Rogue Regimes Working Out Crypto Solutions to Evade Sanctions

The geographic spread of the idea to launch government-run cryptocurrencies has stretched from the Korean peninsula to South America. In late September 2019, it was reported that North Korean authorities had devoted significant technical resources to the development of Pyongyang’s own cryptocurrency which would give the DPRK access to online goods and services and integrate the most isolated regime in the world into global trade. Whether the national digital currency will be able to help North Korea cope with current economic problems is still a question, with its scarcity of electricity, computer equipment, and quality specialists. The matter is also more complex due to the country’s restricted internet network, recent cybercrime accusations and the significant role of the dollar in Korean partner economies. However, the DPRK initiative is likely to be supported by other nations that have been exploring state-backed cryptocurrencies in order to bypass U.S. sanctions, like Venezuela, Iran, and Russia.

Despite Nicolás Maduro’s failure to consolidate the strength of the Petro, the digital currency represents a milestone in monetary history as the first-ever functioning national cryptocurrency. Pegged to the country’s oil, gold and mineral reserves, the Petro served as a payment method for government benefits as well as one of the units of account, along with the local bolívar, for Venezuela’s national oil company, Petróleos de Venezuela. Later on, Maduro tried to introduce sanctions-busting crypto-barter transactions based on the use of Petro to sell Venezuelan oil and gold, but his plans failed to come to fruition amid reports that the currency was never really made available and had no actual oil backing at all.

Facing U.S. pressure for more than 40 years, Iranian authorities have become quite experienced in implementing extensive evasion measures, like their famous commodity-based, barter-style, “gas-for-gold” schemes. With its Instrument in Support of Trade Exchanges (INSTEX), which is a EU-based cryptocurrency international payment gateway, Iran has carved out a possible means of staying in touch with the world. In late July 2018, Tehran announced its intention to issue a sovereign token to both circumvent the U.S.-controlled international payment system SWIFT, which had disconnected the majority of Iranian banks, and to move international trade beyond the scope of traditional banking operations. The resulting currency, PayMon, was built on the Stellar blockchain protocol as a new core mechanism for cross-border payments and has already interested a number of European and other countries as a method of continuing trade with the isolated nation.

 

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Russia, which has acted as a facilitator for the aforementioned crypto-related projects to avoid different limitations in worldwide trade, is also laying the groundwork for blockchain transformation in the government’s financial sector. The potential integration of cryptocurrency into the Russian market became much more real once the USA threatened to disconnect the country from SWIFT. Initially, Vladimir Putin opposed the development of a state-owned digital currency, but later recognized the potential of a ‘crypto-ruble.’ Judging by its assistance in the development of Petro and Paymon, Russia is eager to build a system that will help U.S. rivals tackle sanction challenges.

Another adversary of Washington is Cuba. The Cuban government is searching for a way to get out of its financial crisis, and is looking at launching a national cryptocurrency to increase the income level of its citizens. These measures are in part a response to what president Miguel Diaz-Canel has called America’s “asphyxiating financial persecution.”

Crypto-Yuan As Main Competitor for U.S. Dollar

Despite the January agreement between the US and China to diminish the trade war between two technological, economic and military superpowers, it seems like a conclusive detente is far from being achieved. Of all U.S. opponents, the Middle Kingdom is the most technically advanced, and perhaps the most capable of successfully undermining the global hegemony of the dollar.  One way of doing this is by optimizing the country’s cryptocurrency infrastructure with the help of a national digital asset pegged to the People’s Bank of China (PBoC). The mass adoption of crypto-yuan in China, the second-largest economy in the world, now is the most promising potential backdoor to U.S. economic control and something that could catapult China to the top of the alternative trade ecosystem.

For China, the development of blockchain technology in general and the digitized renminbi in particular is a national long-term strategic priority through the year 2050. The borderless transactions capable with the crypto-yuan could significantly simplify trade activity between countries in Africa, Asia and Europe involved in maintaining the “One Belt, One Road ” multi-billion-dollar global economic project. While the PBoC has been exploring the launch of a national cryptocurrency since 2014, the coronavirus pandemic has provided a new impetus for the project’s development. The digital yuan is currently being tested in four major Chinese cities.

Crypto As a Driver of New Economic Activity

Although the above-mentioned U.S. adversaries are hostile to any operations with cryptocurrencies that are not government-backed, independent cryptocurrencies remain the most popular means of using blockchain technology in these countries. It stands to reason that, should some of these national projects succeed, the popularity of other cryptocurrencies will rise as well. And a large influx of cryptocurrency traders can be expected, too. While the majority of Chinese traders stick to exchanges of Chinese origin like OKEx, Huobi or KuCoin, western options, with proven security and high liquidity like HitBTC are quite popular there as well. Should crypto take on a new and enhanced role in the economy post-covid, these crypto exchanges will likely become even bigger hubs of activity.

The decentralized nature of cryptocurrencies is what makes them capable of weakening the impact of sanctions and the way they are imposed. Governments across the world looking to escape from western fetters have realized that crypto may be their golden ticket. With the global economic structure under more stress now than ever before, the chance for many of these countries to strike is at hand.

 

 

Amy Day is an independent researcher

 

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