The Breakdown - The Game Theory Behind Russia's New Crypto Policy

Starting point is 00:00:00 there is a recognition on the part of Russia that a digital ruble is unlikely to displace any sort of U.S. dollar hegemony or to compete with a Chinese digital currency in the years going forward. If you were stuck uncomfortably between an old monetary hegemon and a potential new monetary hegemon, maybe figuring out a regime that enabled the proliferation of a non-sovereign alternative wouldn't look so bad. 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. The breakdown is sponsored by nexo.io, Arculus, and FTX, and produced and distributed by CoinDesk.

Starting point is 00:00:42 What's going on, guys? It is Friday, February 11th. And today, we are talking about the game theory behind Russia's new crypto policy. First, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, it a review, or if you want to dig deeper into the conversation, come join us on the Breakers Discord. You can find that link in the show notes or go to bit.ly slash breakdown pod. As usual, a quick disclosure. In addition to them being a sponsor, I also work with FTX. Now, a final note before we get into today's show. This week, I'm incredibly pleased to have a special sponsor in Meld. If you've ever wondered how to do you've ever wondered how to be a special sponsor in Meld.

Starting point is 00:01:26 If you've ever wondered how the rich are able to spend their money and still stay rich, well, it's because they borrow against their assets. Meld is creating a protocol that can be used by anyone and which offers this exact service, but in a decentralized way. Users of Meld's protocol will be able to borrow dollars, euros, and other fiat currencies against their cryptocurrencies. If you want to learn more about the first defy non-custodial banking protocol today, go check Meld.com. That's M-E-L-D.com. So if you listen to yesterday's show, we talked about these strange two forces that are ripping crypto in two different directions. On the one hand, you have the pressure being put on risk assets in the context of a pretty significant 180 and monetary

Starting point is 00:02:13 policy. We're moving off zero when it comes to interest rates. We're seeing right now a rapid tapering of asset purchases, and we're heading potentially to a world of actual quantitative tightening or balance sheet reduction. On the other hand, there have been so many big-scale, macro, institutional, and geopolitical, bullish signals that it's hard for people in the Bitcoin space to wrap their head around how they're supposed to feel. Yesterday, I talked about one of the most significant of those, which is, of course, the entrance of BlackRock, the world's biggest asset manager into the space. But we didn't have time to get into what the community felt about that. So let's go to a few comments from around crypto Twitter.

Starting point is 00:02:55 C3 Nick writes BlackRock getting in, KPMG putting Bitcoin and Eath on their balance sheet. These entities are very well connected. I would like to venture a guess and say that they know that crypto regulation in the U.S. will be favorable. Of course, some were more skeptical. Justin Thomason writes, are you all really that excited about BlackRock getting into crypto? Like, really BlackRock? Do you pay any attention to what BlackRock does? Still others make the connection with other large geopolitical events. Macroscope writes, never been one of those I can't imagine selling my Bitcoin types, but Russia accepting it for oil and BlackRock taking it as collateral would help

Starting point is 00:03:33 push me in that direction. Pentoshi writes, Bitcoin insane 24 hours. Some random Canadian company bought wayless Bitcoin than I own. Russia adopted Bitcoin. BlackRock wants Bitcoin. El Salvador bonds approved. So why price struggle here? Joshua Jake tweets JPMorgan, we will never get into Bitcoin. Gets into Bitcoin. BlackRock, Bitcoin is a

Starting point is 00:03:57 terrible investment. Now looking to launch a Bitcoin spot ETF. Russia. We're going to ban crypto. Crypto's now considered a currency. Do you get the narrative yet? Hoddle. All right. So you heard a lot about Russia in there. So let's talk a little bit about what's been going on with Russia as it relates to cryptocurrency. The central bank in Russia has long been one of the loudest institutions that is out and against Bitcoin and crypto. It has numerous times called for an outright ban on crypto up to and including less than a month ago. On the other hand, that is not necessarily the shared political opinion in Russia. Dating back to last fall, there has been an effort in the legislature to bring it within the fold and actually regulated in a clearer way. And as of the last couple weeks, it seems like

Starting point is 00:04:45 Putin and a number of the other institutions of government have been on the side of regulation and legalization not banning. And now, Russia is moving to recognize crypto as a form of currency. The news first broke from the outlet Commerzant on Tuesday, and they reported that cryptos are to be classified as, quote, an analog of currencies instead of as financial digital assets. Legislation is apparently going to be drawn up no later than February 18th, just about a week away. The announcement included some choice little quotes, including the establishment of rules for the circulation of cryptocurrencies and control measures will minimize the threat to the stability of the financial system and reduce the use of

Starting point is 00:05:27 cryptocurrencies for illegal purposes, since a complete ban on the segment of operations related to their circulation is impossible. There's the whole idea of banning being impossible, but reified and reiterated by an actual government. In this new regime, people will be able to use crypto only following proper identity checks, it's a KYC-type system, and any operations that exceed 600,000 rubles, which is a little over 8,000 U.S. dollars, must be declared. There is, you can tell, a real recognition of what the government is facing with this industry. Quote, the complete absence of regulation of this industry, as well as the establishment of a ban, the document reads, will lead to an increase in the share of the shadow economy, an increase in fraud cases and

Starting point is 00:06:10 destabilization of the industry as a whole. The implementation of the concept will ensure the creation of the necessary regulatory framework, will bring the digital currency out of the shadows, and create the possibility of legal business activities. Lin Alden tweeted about this. A few weeks ago, Russia proposed banning the use of cryptos. Now Russia is instead moving to recognize cryptos as actual currencies. Apparently, the thought process was that if they ban it, then it'll still be used in the shadow economy anyway, so they might as well bring it to the surface and regulate it as part of the economy. Preston Pish writes, Russia is going to treat Bitcoin as a currency. When are policymakers going to realize this is the most urgent strategic importance?

Starting point is 00:06:50 This is like owning a piece of the internet itself, plus a global settlement layer. You don't get any do-overs for the size of your opening position. Alex Gladstein from the Human Rights Foundation writes, when Navalny, who's Putin's chief political opponent, started fundraising millions in Bitcoin, his team said that the Russian state was hesitant to close their bank accounts entirely, as it at least knew what was going on. Similar logic here. Allow, regulate, monitor. Don't ban and force everything into a shadow economy. Vitalina at Cantilian Effect on Twitter writes, OK, this new crypto regulation in Russia is all about total control. On ramps, off ramps, exchanges all will be Russia-based in KYC only. Given the transparency of the public ledger,

Starting point is 00:07:32 it simply means further totalitarian expansion. This is not. not good news. The government will know all about you, your whereabouts, and exactly how much crypto holdings you have. It won't be safe anymore to possess Bitcoin or crypto assets as any time it can be seized by anyone who has access to all that information. Nexo is a trusted and easy-to-use crypto platform, where you can buy cryptocurrencies at the touch of a button and start earning up to 18% annual interest that is paid out daily. They support all of the major assets on the market and even allow you to swap one asset for another or borrow cash against. your crypto without selling it. Nearly 3 million people in over 200 countries trust Nexo with their

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Starting point is 00:09:49 terms of Russia's relationship with two other actors. The first is China. And anyone who's been in the Bitcoin space over the course of the last year will know that China has taken a dramatic, clear, and pretty extensive position banning the use of crypto in any meaningful way. It's a Bitcoin mining ban. It's a Bitcoin trading ban. It's a working for offshore exchanges ban. It is gone for all intents and purposes. What's less discussed, however, is the larger context of this. Bitcoin and crypto weren't the first area of quote-unquote digital money that the CCP targeted. Indeed, the first target for China was the existing mobile money industry, an industry that saw tech companies take on bank-like powers as people used mobile apps

Starting point is 00:10:35 as a proxy for banking activity, for commercial activity. There are a number of seminal moments during which China made it clear that they would no longer tolerate those technology companies having the sort of financial relationship, with customers that they had previously enjoyed, and nowhere was that more clear than when China stepped in to shut down the Ant Financial IPO, an IPO that would have likely been the biggest of all time. After that, Jack Ma basically went quiet for months at a time, and when all was said and done, Ant Financial was forced to totally restructure and basically be regulated like a bank. In many ways, Bitcoin and Crypto were just the next step, and they were the next step on the path of clearing

Starting point is 00:11:14 the way for the Chinese digital yuan. Their central bank digital, currency, their digital fiat, that they believe is key to the next stages of economic expansion, both within China and beyond. One of the things that China and Russia share is an antipathy to the U.S.-led global monetary system. China has long been frustrated with the disparity between how much trade involves China, but how little global trade settlement involves the Chinese R&B. We're going to talk in just a minute about why Russia has particular antipathy towards the U.S.-led system, but for now, is that both China and Russia want to see a world in which the U.S. dollar is less powerful and less omnipresent as it is today. China and Russia have also been getting even closer recently.

Starting point is 00:12:00 On the first day of the Winter Olympics, they declared a no-limits partnership. President Xi Jinping and President Vladimir Putin together said that the relationship between the two countries was superior to any Cold War-era alliance, that they would work together on all sorts of issues from artificial intelligence to internet control to space to climate change. They also came together around territorial issues. Beijing is supporting Russia's demand that the Ukraine should not be admitted into NATO, in fact saying that there should be no more expansion of NATO. Moscow, for its part, said that they were opposed to any form of independence for Taiwan. And these are some of the key issues, as you can tell. We are all nervously watching

Starting point is 00:12:40 what's happening in Ukraine, and it's sort of a what's the next shoe to drop kind of situation. The point is that Russia and China are aligned, as I said, in this desire to see a post-US dollar world. So how does this whole Bitcoin side of things fit in? Jason Lowry, who's at the U.S. Space Force, writes, that moment when Russia flips to pro-Bitcoin strategy six weeks after China finishes kicking all their miners and exchanges out, I wish I could see the faces of CCP officers this morning. They had two executive orders, get the miners out of the country, but also closed the exchanges. The deadline for the latter was by end of the election.

Starting point is 00:13:15 year. So literally 40 days after China concludes a six-month-long banishment of exchanges, Russia 180s and legalizes Bitcoin. Now, I don't know what's going on. Obviously, this whole episode is in the realm of speculation. But to me, it sort of strikes me as real politic from Russia and a potential hedge. Real politic in the sense that there is a recognition on the part of Russia that a digital ruble is unlikely to displace any sort of U.S. dollar hegemony or to compete with a Chinese digital currency in the years going forward. If you were stuck uncomfortably between an old monetary hegemon and a potential new monetary hegemon, maybe figuring out a regime that enabled the proliferation of a non-sovereign alternative wouldn't look so bad.

Starting point is 00:13:58 As I said, that's just speculation, but I think it's worth considering. Now, what about Russia's relationship with the U.S.? Well, let's start with a couple tweets here. Sophia Zahler writes, 11922. President Biden, if Russia invades, they're going to pay. Their banks will not be able to deal in dollars. 2-922, Russia's government and central bank agreed to recognize Bitcoin and crypto assets as currencies.

Starting point is 00:14:21 James Lavish. So if Russia treats Bitcoin as a currency and the United States treats it as a threat, how do you think that's going to turn out? Pi Prime Pi posted a screenshot regarding Biden's forthcoming executive order on crypto and says, kudos to the NSA. Obviously, they picked up some Russian chatter. This was not a surprise to the White House. This makes a lot more sense now.

Starting point is 00:14:42 And what he's referring to is the idea, reported recently, that Biden's executive order put crypto in the realm of national security. So what's the deal with the U.S. and Russia? There is, of course, this whole Ukraine-NATO political dimension we discussed, but there's a more fundamental thing, which is Swift. Swift is the interbank network that the U.S.D. denominated world uses. It's got 11,000 financial institutions around the world. It started in 1973 when 239 banks from 15 countries came together to figure out cross.

Starting point is 00:15:12 border payments and settlement. Cutting Russia off from Swift is something that has been floated, but only as an extreme measure. The New York Times on January 31st wrote a piece called what a disconnect from Swift would mean for Russia. The piece says, in sanctioned circles, a move by the United States and its European allies to cut Russia off from Swift has been characterized as a nuclear option. This would have wide-ranging, systemic financial effects, but it's not without precedent. The weapon, of Swift has been something that's characterized the last decade or so. In 2012, Swift expelled about 30 Iranian financial institutions, including its central bank. This was in order to comply with

Starting point is 00:15:54 EU sanctions that were enacted in response to Iran's nuclear energy program. Services were reconnected after the 2015 nuclear deal and then cut again in 2018 after the Trump administration withdrew from that deal and resumed sanctions. This sort of weaponization of Swift has been brought up before with regard to Russia. In 2014, when Russia annexed Crimea, this sort of action with Swift was brought up, and then PM Medvedev said it would be a declaration of war. Russia predicted it would shrink GDP by at least 5%. Now, of course, Russia isn't just going to take this threat lightly. It's already biting back. It's pointing out that there would be consequences for European countries who couldn't receive imports of Russian oil, gas, or

Starting point is 00:16:34 metals. But at the same time, Europe is still gearing up. Roiders this week published a piece Europe's banks fear payment system could be casualty of Russia-Ukraine crisis. Quote, amid fears of a Russian invasion of Ukraine, Italy's unicredit has backed out of a potential acquisition in Russia and Austria's Reifocene Bank International has set aside risk provisions for possible sanctions on Russia. What the region's banks now fear most is that Russia gets banned from a widely used payment system, bankers, told Reuters, with one describing such a move as an atomic bomb for the industry because it would prevent the repayment of debts. So there is a lot of going on here. For Russia, there's the domestic dimension of this, being able to keep track of

Starting point is 00:17:15 dissidents. There's the China dimension of this, supporting the wider goal of getting away from the U.S.-led system, but also having a hedge against China just being the new hegemon. And then, of course, there's the whole U.S. dimension of this, where Bitcoin represents potentially a way around SWIFT for international transfers and settlement. Does this all mean the U.S. will go after Bitcoin? The money of my enemy is also my enemy. I don't necessarily think so. I think in many ways it creates as much, if not more incentive for the U.S. to have a handle on Bitcoin as well, especially if realists in government here come to the same conclusion that it is ultimately uncontrollable and unbannable. Whatever the case, there's a lot more going on than just

Starting point is 00:17:54 easy tweets about this being bullish or bearish for Bitcoin. And hopefully you have a better sense of all those pieces now. I want to say thanks again to my sponsors nexo.io, Arculus, FtX, and meld.com. And thanks to you guys for hanging out. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - The Game Theory Behind Russia's New Crypto Policy

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