Many governments, central banks and commercial banks around the world have traditionally been wary of cryptocurrencies and concerned at their potential to simultaneously overturn the existing financial system and undermine their role in it.
This is typically because cryptocurrencies present some challenges to government authority: they are not easily regulated and can facilitate citizens circumventing capital controls.
Ukraine: an accidental case study in side-stepping banking liquidity constraints
It is exactly this ability to circumvent the more established and traditional financial systems that has allowed Ukraine to leverage crypto as a lifeline as it’s country and its people are ravaged by war.
The creation of Ukraine’s central bank digital currency – the e-hryvnia – was due to be introduced via The National Bank of Ukraine at the end of 2022, following the introduction of legislation 18 months ago that legalised digital assets in the country.
However, when Russia invaded Ukraine on 24 February 2022, the Ukranian Government quickly began to hatch a plan that would effectively enable it to circumvent its own banking system which was already feeling the very real and present liquidity pressures of wartime. The Ukranian Government set up digital wallets to solicit donations and in just a few short weeks was able to raise over USD56 million in crypto donations to assist humanitarian agencies distributing aide and to procure the necessary supplies for its defence force.
It has also recently announced plans to sell NFTs to continue to support its army.
There are very real concerns across the globe that Russia will also seek to leverage crypto to help it evade the impact of sanctions from the West that aim to cut its economy off from the rest of the world.
From fringe to mainstream: governments embracing crypto around the globe
With the debasing of fiat currencies through money-printing and quantitative easing, plus the excessive credit creation enabled by fractional banking eroding public trust in established financial systems, it’s easy to make the argument that many governments, central banks and commercial banks have made their own beds.
With the rapid adoption of cryptocurrency, its rise in public awareness, and the burgeoning evolution of digital assets in general, governments are realising that they must get a handle on it. What was a fringe phenomenon is now well and truly mainstream.
The journey to acceptance is nowhere near uniform worldwide: it ranges from El Salvador, which has become the first country in the world to adopt Bitcoin as official currency, to the likes of China, Egypt, Morocco, Algeria and Tunisia, which have all banned cryptocurrency.
Somewhere in between are most of the developed nations.
In Australia, cryptocurrency is legal – it is considered “property” – although Australian law currently does not treat cryptocurrency as “money.” However, businesses can accept payment in cryptocurrency; and the Reserve Bank of Australia (RBA) has referred to crypto and decentralised finance (DeFi) as the “future of payments.”
In Japan, cryptocurrency is also considered property. In Switzerland, it is legal, and accepted as payment in some contexts. In the EU cryptocurrencies are legal, however, member-states may not introduce their own cryptocurrencies. Cryptocurrency is not yet legal tender in the US, UK, Canada, Singapore, South Korea and India.
In the US, the Biden administration is reportedly poised to direct all government agencies to study cryptocurrency and central bank digital currency (CBDC) and suggest regulating crypto assets.
But where cryptocurrency is not banned outright, governments, central banks and regulators are having to grapple with its dual nature – it is also a tradeable asset, and if you allow trade in cryptocurrency, you essentially allow your citizens to speculate in it, to use it as an investment, and as a store of value.
What does the future hold?
Not many countries are expected to go as far as Bitcoin poster child El Salvador. It has allowed Bitcoin to be used as legal currency because it relies heavily on remittances from citizens working abroad, which represents about one-fifth of its GDP, or about US$6 billion annually. Bitcoin theoretically suits this situation, in a country where a minority have a bank account, but the jury is still out on how this will play out in practical terms.
Where many governments might signal acceptance of cryptocurrency – at least indirectly – is through CBDCs, which are digital versions of their own currencies, replacing cash.
China is arguably a leader in this field, with its e-yuan, China’s version of a digital currency that is entirely controlled by its central bank (known as the “digital currency electronic payment,” or DCEP). Russia has proposed a state-backed “cryptoruble” – which might have lost a lot of its purported value in the wake of Russia’s invasion of Ukraine – and Sweden has its “e-krona,” while the European Central Bank (ECB) is reportedly looking at something similar for the euro.
All these proposals are far short of a real cryptocurrency being issued by the government with no “mining” involved. But they do represent tentative steps toward acceptance of digital assets; whether that evolves into full acceptance of the digital-asset ecosystem remains to be seen.
In terms of the role that crypto will continue to play in the war in Ukraine, only time will tell. But the evidence is clear that crypto holds a valuable and valued place in the financial ecosystem. In fact, we’ve only scratched the surface of what it can offer as an alternative to the current global financial system.
Just as we were finalising this note, the US released President Joe Biden’s executive order on regulation for the cryptocurrency asset class. This moment paves the way for the support the crypto-nation has been waiting for—regulation, with clear guidelines to protect investors and consumers. It’s a watershed moment that we hope will trickle across nations and foster growth.