The Breakdown - Is Bitcoin Freedom Money or a Tool for Sanctions Evaders?

Starting point is 00:00:00 We need to be tempered in how strongly we draw any conclusions right now. Things are moving fast. There's lots of potential explanations for almost everything that we're seeing. And to assert that it is one thing or another is generally going to be an act of narrative making more than real clarity. But whatever the case, it's not nothing. And it's important. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world.

Starting point is 00:00:30 The breakdown is sponsored by nexus.io, Arculus, and FTX, and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, March 1st. Welcome to a new month. And today we are talking about whether crypto is freedom money or a tool for sanctions evasion. Now, before we get into that, if you are enjoying the breakdown, please go subscribe to it. Give it five stars. Give it a review. Or if you want to dig deeper into the conversation, come join us on the Breakers. You can find a link in the show notes or go to bit.le slash breakdown pod. Also, a disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX. Finally, I'm excited to welcome a sponsor for this week, and guys, it is that time of year,

Starting point is 00:01:17 tax time. Coinelli is here to make crypto tax reporting stress-free for both individuals and accountants. Designed by CPAs, CoinTellie supports hundreds of crypto platforms and provides accurate calculations so you don't pay any extra on your taxes. Cointelli also charges no added fees for up to 100,000 transactions and offers 24-7 customer support from tax advisors. Check them out at cointeli.com. That's coin t-E-L-I.com.

Starting point is 00:01:45 And I want to say thanks again to CoinTeli for sponsoring the show and for helping people in what can be an extremely stressful moment. All right, now to today's show, and we're picking up kind of where we left off yesterday. Obviously, we have been discussing the huge economic implications of everything happening right now with regard to Russia and Ukraine, but in today's show, I want to bring the crypto side of that story in. Over the weekend, Brett Harrison, the president of FTXUS tweeted, there are two competing media narratives about crypto right now. One, crypto has enabled significant direct contributions to Ukraine's resistance efforts, and two, crypto has the potential to be used by Russia to evade sanctions. Number one is a provable fact.

Starting point is 00:02:26 Crypto wallets from around the globe have contributed millions in Bitcoin, ETH, stablecoins, and other crypto assets to Ukraine's publicly verified crypto wallets. Number two is speculation that regulated crypto exchanges rightly find dubious. We have always complied with official sanctions and have sophisticated tools on both the Fiat and crypto transaction sides to uphold such sanctions. So today we're going to parse through those two different narratives and see where we come out. We're going to start with Crypto Narrative 1, the idea, of this as freedom money. On Saturday, February 26th, the official Ukraine account on Twitter posted

Starting point is 00:03:02 Stand with the people of Ukraine, now accepting cryptocurrency donations in Bitcoin, Ethereum, and USDT. They gave their public addresses, and according to the founder of Kuna, which is a Ukrainian exchange that is reportedly helping facilitate those donations, the money is going to be used to support evacuees as well as military with drones, heat vision goggles, and gas. Elliptic has been tracking the donations and put it at $30.8 million for more than 26,000 individual crypto donations. One NGO got a Bitcoin donation worth more than $3 million alone. Of the total donated, stablecoins represent 16.9%, ETH is 38.3% and Bitcoin is 42.2%, with about 2.5% coming from other cryptos. On top of those direct donations, the Ukraine Dow is raising

Starting point is 00:03:47 ether to be donated to Come Back Alive, which is the organization we discussed last week that was kicked off Patreon for raising money for war, specifically financing and training military personnel. That has raised about 3.5 million in Eth so far, and on top of that, new organizations and groups keep popping up. Relief is a new organization from some notable members of the NFT community that put together an NFT collection that raised $1 million for Come Back Alive, plus local news and medical organizations. And this is just scratching the surface of all the different organizations that are popping up right now to support Ukraine directly via crypto donations. Now, this is something both new and something not new, and I want to do a quick historical

Starting point is 00:04:26 aside that I think is relevant in this context. American citizens have not always been directly involved with the world. In fact, Americans being involved in humanitarian fundraising and activism has a specific origin, and that origin came in the Nigeria-Bia-Biafra War. Biafra was a region of Nigeria that seceded from the country. country in the late 60s. Without getting into the politics of the war, secession is not a thing that most countries abide, and the Biafran conflict started fierce and bloody in 1967. By the middle of 1968, it looked pretty clear that Nigeria was going to win. They had cut Biafra off from supplies

Starting point is 00:05:05 from Cameroon and other parts of Western Africa, and by locking down all these supply chains, they had basically created a siege of an entire region. As a byproduct of that, many civilians started to experience extreme issues with food security. It was then that those famous images of starving African children with their distended bellies started to make their way to American TVs and magazines. It was, in fact, that starvation that caught our attention and created a huge new impetus for regular Americans to start fundraising and doing food drives and trying to hire their own private planes to get into Biafra to drop supplies on this starving region. This was where that classic old trope of eat what's on your plate

Starting point is 00:05:51 there are children starving in Africa came from. Now, when I was in college, I was really interested in this conflict. And what I knew going into studying it is that this was the conflict that had started Doctors Without Borders and so many other humanitarian organizations. I knew that it was the first time that Americans raised money en masse for a humanitarian crisis outside of the U.S. What I wasn't sure of was the reason why. In fact, I thought going into it that it might have been the rhetoric of genocide. The Biafran government was extremely adept at propaganda

Starting point is 00:06:23 and was one of the first organizations globally to talk about the Holocaust, which was, again, only 25, 30 years removed at that point as a genocide. They compared their plight to that, but it really didn't resonate. I looked at all the published rebel propaganda between the beginning of the war in 1967 and the beginning of starvation in 1968, compared to the daily New York Times headlines, and there was absolutely no correlation. Western media simply was not repeating the lines of the Biafran leadership. However, when the images of starvation happened, it took on a whole new life. Now, on the one hand, this is an inspiring story of people coming face to face with horror

Starting point is 00:07:04 and wanting to do something about that. On the other hand, it was a cautionary tale. It is widely believed that the donations of well-intentioned Americans and Westerners allowed that conflict to prolong for about a year and a half, for at least a year longer than it otherwise might have done. It is possible, in other words, that the sum result of those efforts, however good the intentions were, were to actually add more suffering net net by extending the war. Why I believe this is resonant in this Ukraine situation is that the part of these donations that break new ground is that this isn't humanitarian aid. This is direct military financing,

Starting point is 00:07:45 and not just in the way where humanitarian aid is often diverted for those purposes. Citizens are now finding themselves in the same moral quandary as was once only the province of governments. What happens if the fierceness of Ukrainian resistance leads the Russian government to become increasingly violent, and the sum total of our efforts to support Ukraine are simply to lead to a more violent end than might otherwise. have been. Now, for some, the answer will be clear if that is what happens, that the blame will remain

Starting point is 00:08:15 squarely on the shoulders of the aggressor, and that the unlikelyhood of the invaded country winning does not mean that that country should not be given a chance to fight to their last to remain free. For others, the answer will be more complicated. What matters here is that the ability to move resources free and unfettered from a citizenry to a military is something new. The questions of right and wrong and ethics and efficacy are the right ones to be asking. In general, I favor more possibilities of human experience and more possibilities of political engagement to be open, even if they bring up challenging new questions. And whatever freedom leads to, you cannot say that this is less rather than more free. Nexo is the go-to platform for all things crypto.

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Starting point is 00:10:30 FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCS, you pay no gas fees. Download the FTCX app today and use referral code breakdown to support the show. Now, let's get to Crypto Narrative 2, Crypto as a tool for sanctions evaders. This was always going to be a narrative in this type of situation. It was always going to be an issue. There's no way with both the state of mainstream media discourse around Bitcoin and crypto, as well as the fundamental realities of Bitcoin and Crypto,

Starting point is 00:11:06 that we weren't going to have exactly this conversation. And sure enough, we are. On Friday of last week, Bloomberg published a piece called ECB urges haste on crypto regulation in wake of Russian sanctions. Christine Lagarde, the head of the ECB, said there are always criminal ways to try to circumvent a prohibition, which is why it's so critically important that Micah is pushed through as quickly as possible so that we have a regulatory framework. Micah is the European Parliament's in-progress legislation known as Markets in Crypto Access.

Starting point is 00:11:35 Sam Bankman-Fried, again, of FTX responded to this, saying we would welcome a strong regulatory framework for digital assets in Europe, but in the meantime, we are already complying with international sanctions to prevent evasion, and will do so whether or not it's mandated. Yesterday, Elizabeth Warren tweeted similar themes saying cryptocurrencies risk undermining sanctions against Russia, allowing Putin and his cronies to evade economic pain. U.S. financial regulators need to take this threat seriously and increase their scrutiny of digital assets. Now, she attached this to a New York Times piece about crypto's potential to help evade sanctions,

Starting point is 00:12:07 but the piece that she referenced didn't actually talk much about using crypto to evade sanctions. Instead, it discussed one, Russia developing a central bank digital currency, and E-Rubel so as not to need Swift, but has many pointed out who's going to buy an E-ruble right now? Two, it discussed the Russian government using ransomware to make up revenue through theft, which is sure, perhaps supported by cryptocurrency but is just a criminal enterprise in its own right. Finally, it discussed Russia's development of, quote, new tools to mask the origins of crypto transaction origination without discussing what those tools were or anything more about them. Now, when it comes to people who are actually focused on sanctions,

Starting point is 00:12:46 crypto does not seem to be a huge concern. Here's a section of a piece from Politico about exactly this. Treasury officials say they aren't overly worried about crypto undermining the effort to choke off the Kremlin's access to capital, laundering large amounts of money through a dizzying array of digital wallets and exchanges is expensive, time-consuming, and would likely be visible in the broader crypto market, given the massive investment portfolios of individuals and institutions named in the sanctions. Quote, the scale of what they have to move and where they have to move things from, crypto's not necessarily going to be that concerning, said Todd Conklin, counselor to the deputy treasury secretary. Any attempt to move that much money through exchanges would contribute to,

Starting point is 00:13:24 quote, a bit more of a spike in the crypto market in my view than has been observed lately. Neeraj from Coin Center says Treasury Department knows there isn't a realistic risk that Russia could use cryptocurrency to evade sanctions at a meaningful scale. We're talking about multiple orders of magnitude larger flows of money than would be possible to conceal on a public ledger. NBC News reiterated this in a piece writing, could Bitcoin be Putin's economic savior? That's unlikely, experts say. Virtual currencies such as Bitcoin are sometimes associated with lawlessness, but the reality is they become a regulated business with safeguards against money laundering.

Starting point is 00:13:57 David Weisberger responded to Niroz's tweet and these pieces saying, The nation state of Russia, as you say, can't make meaningful use of Bitcoin to evade sanctions, but individuals displaced in the Ukraine and dissenters in Russia, however, can use it to preserve wealth. or receive donations? Pretty much ideal. Still, the media narrative around sanctions is extremely fraught right now. First, it's a really easy set of headlines to get attention for. Second, it got more confused when a representative of the Ukraine government asked all exchanges to block all Russian users. A number of exchanges jumped into the conversation, which the media picked up on is seeming to suggest that exchanges weren't complying with sanctions, which just isn't true. As reported by Bloomberg,

Starting point is 00:14:39 the U.S. government has actually urged crypto exchanges not to target all Russian citizens, but to focus on only those who have been sanctioned. Still, I think that we can expect a really interesting tightrope moment, as these freedom narratives and sanctions evader kind of narratives go head to head and frankly coexist. But if you are just a market participant, you may be wondering after all of this, then why is crypto up? Bitcoin is up above 43,000 from where it was at 37 to 38 over the weekend. And remember, it got low as 34,000 at one point on February 24th.

Starting point is 00:15:12 So one possible explanation for this is that the market decided all this stuff wasn't as big a deal as it initially thought. So upon the first attack, markets go down as they try to price the larger systemic risk that come with sanctions, but then the market decides that it's gone too far and that there is less risk of a spillover and economic contagion that they thought, and they just went down too much. In that case, Bitcoin could be a leading indicator because it trades 24-7, but that's not exactly what we've seen with stocks. The S&P 500 is down 1.2% today, the Dow Jones Industrial

Starting point is 00:15:42 average, 1.7%, and NASDAQ is down 1.1%. Stocks, of course, aren't down just because of war generally. They're down because this particular shock also feeds into the fear of sustained high inflation. Commodity prices are rising. Gas is expensive. Oil is its highest since 2014. European natural gas is up over 16%. Wheat prices are at their highest level since 2008. So what then are other explanations for why Bitcoin and crypto are up. One could be it's the result of buyers in Ukraine and Russia, and there are a lot of people trying to make this case. One prominent analyst showed a chart yesterday with a major spike in Bitcoin whale addresses before being calmed down by cooler heads who said that it could just as likely, and in fact was more likely to be,

Starting point is 00:16:26 exchanges shuffling Bitcoin around and that in any case it wasn't enough information to draw clear assertions from. Now, that said, there is clear evidence that there is uptake in adoption in Ukraine and Russia specifically. Coin Metrics shared a chart that the daily volume on Binance and local Bitcoins in Ukraine had significantly gone up. The Ukrainian crypto exchange Kuna, which we mentioned before, saw its volume triple from Thursday to Friday, and Bitcoin was trading at over a 7% premium in the country. And Kiko, a crypto research provider, showed that ruble denominated Bitcoin volume also increased

Starting point is 00:16:57 to a nine-month high at the end of last week. So whether or not this can explain the bid that's driving the price up in total, it shows that there is interest in this asset in the region. And I think that gets to the second more likely cause of a bid returning to Bitcoin, which is the recognition of the value of a censorship-resistant asset. Many have made the point that no matter what you think of Bitcoin right now, you can't treat it anymore as just some stupid, irrelevant Ponzi. For those who are watching and imagining themselves either in the shoes of Ukrainians

Starting point is 00:17:28 or Russians just caught up in this, and imagining the power of a sovereign money that they can access transact with, send anywhere, receive from anywhere, it's a seminal moment. I think that there are a lot more people out there than we think in the middle of just not having spent enough time to really make up their mind. Who might be watching this and saying, okay, I get why this thing is important now. Or alternatively, former skeptics who have been on a slow, lindy-powered journey that makes it harder and harder for them to ignore the longer Bitcoin survives.

Starting point is 00:17:59 For that type of person, this could be an inflection moment, and so it should be. should be. We need to be tempered in how strongly we draw any conclusions right now. Things are moving fast. There's lots of potential explanations for almost everything that we're seeing, and to assert that it is one thing or another is generally going to be an act of narrative-making more than real clarity. But whatever the case, it's not nothing, and it's important. I want to say thanks again to my sponsors for supporting this show, nexo.io, Arculus, FTX, and Cointelli. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Is Bitcoin Freedom Money or a Tool for Sanctions Evaders?

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