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| Examining the intersection of cryptocurrency and government By Nikhilesh De Managing Editor, Global Policy & Regulation February 23, 2022 Was this newsletter forwarded to you? Sign up here. Supported by
Hey folks,
Welcome to State of Crypto, a CoinDesk newsletter looking at the intersection of cryptocurrency and government. I’m your host, Nikhilesh De.
Monday was a holiday, so you’re getting this week’s edition of the newsletter a day late. But it was a pretty eventful day. We may be on the cusp of seeing the effect that widely coordinated, government-imposed sanctions have on digital currencies (and currencies’ ability to bypass this type of financial censorship). —Nik
Sanctions Ukrainian Air Force MiG-29 (Artur Voznenko/Unsplash) The narrative Two real-world events over the past week have interesting implications for crypto: Canada’s “freedom convoy” and that government’s efforts to shut this border blockade down; and Russia’s invasion of Ukraine. Why it matters Financial sanctions could prove bitcoin (and the broader cryptocurrency industry)’s value proposition. Even putting the crypto-specific implications aside, we’re going to be discussing sanctions and governments’ ability to impact how people transact more broadly for some time to come. Breaking it down Governments are about to test the limits of sanctioning crypto wallets. Last week, Canada’s federal government put 34 wallet addresses on a list, warning crypto exchanges and financial firms not to facilitate any transactions with them. That hasn’t stopped the owners of these addresses from immediately moving their funds into other wallets or crypto exchanges like Coinbase and Crypto.com.
The crypto industry saw last week’s action as proof that bitcoin (and other cryptocurrencies) is necessary, even gaining agreement from traditionally skeptical voices.
The Canadian government’s action is separate and distinct from a Mareva injunction filed by a group of private locals affected by the protests. I think this distinction has been somewhat lost in the discourse but it’s an important one: The federal government froze bank accounts and crypto wallets outside of a judicial review process, while the Mareva injunction was granted by a court. The court in the private action is also giving wallet owners or operators a chance to respond.
The question now, to me at least, is whether this proves bitcoin’s value proposition. Regulators outside of Canada are undoubtedly looking at how the industry reacts and whether protestors receiving bitcoin are able to cash out or otherwise utilize their cryptocurrency.
Separately, I think we’re going to see a new test case in the international sanctions package that is about to be rolled out against Russia.
A quick primer: Russian President Vladimir Putin recognized two regions of Ukraine as being independent and deployed military forces inside these regions as “peacekeepers,” confirming U.S. and NATO fears that Russia would invade the European nation. U.S. President Joe Biden announced an initial slate of sanctions on Monday evening, with an additional tranche on Tuesday.
The European Union is similarly planning to impose sanctions, while Canada and Japan have already announced their own.
These sanctions so far are limited to certain entities, oligarchs, vessels and financial institutions, as well as businesses in Donetsk and Luhansk, the two Ukrainian regions at the heart of Russia's recent incursion.
To be clear: In no way do I want to minimize the potential harm and suffering I suspect we’re about to see in Ukraine. However, for the purposes of this newsletter, I’ll be focusing on the crypto-specific implications, mainly through these sanctions.
The U.S. sanctions regime is predicated on the idea that the dollar is the world’s reserve currency and/or the U.S. has the ability to influence the financial institutions that sanctioned entities with which might otherwise interact.
Among the most severe tools in the U.S. and NATO’s arsenal would be cutting Russia off from SWIFT, the financial communications network underpinning transactions worldwide. Over the past few years, we’ve been hearing more and more that some countries – namely, Russia and China – are looking to either create or work with a financial system independent of the U.S.
Central bank digital currencies like China’s digital yuan are one possibile tool to create this system. Former U.S. officials and academics even wargamed a scenario where China’s digital yuan was used to bypass U.S. influence.
An official at the Bank of Russia spoke to the possibility that the country could create a digital ruble as part of sanctions mitigation effort two years ago. It does not look like the country has put any serious thought or investment into a CBDC at this time, but this does go to show that, if nothing else, it’s on their minds.
The Bank of Russia announced a pilot stage for a digital ruble last week, though officials haven’t explicitly said whether they hope to bypass sanctions with it.
Of course, the idea that bitcoin or a CBDC or some other cryptocurrency can be used to bypass sanctions depends on that asset actually being picked up for widespread use. Canadian truckers have had difficulty using bitcoin to actually pay for anything, and digitizing the yuan or ruble as a sanctions-avoidance tool depends on the premise that the underlying yuan or ruble can secure a reserve currency-like status.
The technical fundamentals of these assets won’t be as big a factor here as the soft power efforts of encouraging adoption and making adoption feasible will be. And that’s a whole different kettle of fish.
PolyTrade is a DeFi stable coin lending protocol that helps small and medium size businesses in developing economies meet their working capital needs by tokenizing real-world invoices and bringing them on-chain into the DeFi space. Built on the Polygon ecosystem, PolyTrade is the first-ever bridge between DeFi and TradeFi, with an objective to accelerate the transition to a digital, modern and interconnected ecosystem. It leverages new models to achieve inclusivity while closing SMEs’ funding gaps and simplifying processes that inhibit the trade industry’s progression. “The trade industry is facing a $1.7+ trillion gap in trade finance availability exacerbated by the impact of the COVID-19 pandemic”, says Piyush Gupta, CEO PolyTrade. He further adds, “PolyTrade’s protocol would enable smart receivables financing connecting buyers, suppliers, insurance service providers and investors on a unique platform. While unleashing the locked-in liquidity within stagnant invoices, Polytrade is enabling SMEs to improve their working capital management.
The Biden Bunch Changing of the guard Key: (nom.) = nominee, (rum.) = rumored, (act.) = acting, (inc.) = incumbent (no replacement anticipated) Fed Chair Pro Tempore Jerome Powell will testify before the House Financial Services and Senate Banking committees next week. We’re still awaiting a vote on Powell and the other four Fed board nominees after Senate Banking Republicans walked out of a confirmation markup last week. Ranking member Sen. Patrick Toomey (R-Pa.) said he would like to ask nominee Sarah Bloom Raskin some further questions. Chairman Sherrod Brown (D-Ohio) called this a “political stunt.”
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Elsewhere Tether Slashes Commercial Paper Holdings by 21%: Tether published its latest attestation report, saying its commercial paper holdings fell by $6.2 billion over the last quarter of 2021. CoinDesk Tax Week: Did you trade crypto in the 2021 calendar year? Congrats you probably owe taxes. CoinDesk has a host of articles this week on how to best deal with them.
CoinDesk’s Tax Week, dropping Feb. 21-25, is all about the crypto community’s struggles and confusion with taxes. We feel your pain! And we do our best to help, calling upon the experts in the crypto tax business to explain everything as clearly as possible. Read more.
Beyond CoinDesk (The Washington Post) Alison Parker was a TV news reporter who was killed live on air. Her father, Andy Parker, has spent the last seven years trying to remove the footage from the internet with limited success. He has now minted an NFT of the video in an effort to use copyright law as a tool to require platforms to automatically take the video down. Minting an NFT doesn’t automatically confer copyright protections and the actual footage’s copyright appears to be owned by a television company, so I’m not sure whether Parker has a case here. But I can understand the desperation. This is really tragic. (TechCrunch) Zack Whittaker has an excellent, if disturbing, rundown of how stalkerware and malware are being used, as well as the security concerns around stalkerware. It’s worth a read.
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If you’ve got thoughts or questions on what I should discuss next week, or any other feedback you’d like to share, feel free to email me or find me on Twitter.
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See y’all next week!
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