Bitcoin was created in a time of global uncertainty, and it’s taking another crisis to really show its global relevance. 

Governments and their leaders come and go, but the decisions they make can have permanent consequences on their people, and the peoples of the countries they enter into conflict with. We’re getting a front-row seat to this unfolding in Ukraine, as Putin continues to demonstrate his resolve in leading an unnecessary war that will not only count its victims in lives lost but in the economic devastation that will be felt in both Ukraine and Russia for decades to come. 

This is a very tense political situation that has seemingly brought the West together against Putin’s Russia. In addition, freedom-loving citizens around the world have been inspired by the plight of the Ukrainian people, and particularly by their leader, President Zelensky. Support in many forms has been flooding towards Ukraine. 

Part of this outpouring of support has come from an unexpected corner of the internet: the global cryptocurrency community. Alex Bornyakov, Ukraine’s Deputy Prime Minister of Digital Transformation, credits the crypto community for almost $100 million in direct support since the beginning of the conflict. For context, this is roughly on par with what a country like Canada has been able to contribute to the cause.^{1“On February 25, 2022, Canada announced that it would match donations made by individual Canadians to the Canadian Red Cross’s Ukraine Humanitarian Crisis up to a maximum of $10 million. On March 10, 2022, Canada announced that this amount would be increased up to a maximum of $30 million. This brings Canada’s total funding allocated to Ukraine for humanitarian assistance to $145 million to date in 2022. This includes the initial $15 million announced in January and $100 million announced on March 1” https://www.canada.ca/en/global-affairs/news/2022/03/canadas-humanitarian-assistance-for-ukraine.html} 

It’s hard to find an argument against this kind of compassionate generosity at a time of extreme need. In essence, Bitcoin is proving itself uniquely suited to instantly launch a global crowdfunding campaign amid a war, where supporters are coming from practically every country on earth.

Even Elizabeth Warren (Bitcoin’s legislative nemesis in the U.S.) would have a hard time denying the benefits this has created for Ukraine.

On top of that, since the beginning of this crisis, millions of Ukrainians have fled the country as refugees; many with only the clothes on their backs, a small amount of cash, and maybe a debit card. Certain Ukrainian banks, protecting against bank runs, have had to limit withdrawals both inside and outside of the country. Some refugees have reportedly experienced their debit cards not working once in a neighbouring country. Although it’s impossible to know how many, Ukrainians who were fortunate enough to convert to Bitcoin before the crisis could cross the border with their life savings. This ability to safeguard assets outside of an unstable economy is incredibly powerful.

Meanwhile, further north in Russia, citizens of that country are facing unprecedented economic sanctions because of the actions of their leaders.^{2Tracking sanctions against Russia} The Western world has almost unanimously acted to completely isolate the Russian economy to deter any escalation in the military actions being taken by Putin. Of course, the collateral damage is being felt by everyday Russians who have seen their Visa cards stop working, their life savings plummet in value as the Ruble tumbles, and their overall connections with the world cut off.^{3“The Russian currency has lost more than half its value since President Vladimir Putin launched the invasion of Ukraine on Feb. 24. On an annual basis, inflation jumped to 9.2% in February, up from 8.7% a month earlier. Economists expect the pace of annual price rises will surpass 20% by the end of March.” https://www.themoscowtimes.com/2022/03/10/russian-prices-rising-fastest-in-24-years-on-ruble-collapse-a76858}

Some have reacted by turning to cryptocurrencies. The criticism, of course, is pointing to the fact that Bitcoin can be used to circumvent economic sanctions, but the reality is far less dystopian. Although Bitcoin is a meaningful market in terms of value, it has proven itself to not be a great tool for criminals, terrorists, or sanctioned individuals trying to hide the flow of their funds. Ultimately, to get in and out of cryptocurrencies, people are required to interact with regulated exchanges; many of whom are similarly applying the sanctions imposed by their governments. 

And even if an individual is avoiding exchanges and holding their assets directly in Bitcoin, these transactions are published to the world’s most transparent ledger and financial system. Governments and law enforcement agencies around the world are equipped with powerful analytical and forensic auditing tools that can quite easily pinpoint the likely transactions associated with a “black-listed” person. In fact, there’s a good argument to make that financial transactions occurring on the Bitcoin network are the least likely to be associated with wrongdoing of any kind. In essence, Bitcoin is a criminal’s worst option.^{4“Since Bitcoin transactions are public, it is a matter of identifying which exchanges the coins are being moved to be sold and the accounts can be frozen. Stolen coins are then gotten back from the exchanges. As expected, a currency and/or transaction that can be tracked with such efficiency is not a good tool for crime. Thus leading to the fact that Bitcoin is bad for crime.” https://www.newsbtc.com/analysis/btc/why-bitcoin-is-actually-bad-for-crime-contrary-to-belief/} You’d be better off loading suitcases of U.S. dollar bills into a private jet destined for a non-extradition country.

So ultimately, to the extent there are meaningful movements of Bitcoin happening in Russia, it primarily reflects the desire of everyday Russians to dissociate themselves from their national currency, and find some amount of freedom and independence while still being subjugated daily to the whims of the world’s leading villain. 

This too we should celebrate. The Russian people are not the enemy of the West, and while we seek to de-escalate a war with Russia, we should also seek to enable Russians to exercise their own form of protest against their leaders. For them, Bitcoin represents a tool for economic freedom.

Of course, these are complex issues that I don’t pretend to have the answers to. But times of crisis can lead to reactionary policies that cause more harm than good. So while we continue to watch this crisis unfold, let’s be thoughtful in our reactions. 

Bitcoin is designed to be an apolitical tool in a world of increasingly complex political conflicts. To view it through any other lens is to not understand its relevance in the 21st century. This will be difficult for politicians to contend with, but it’s the fundamental reason this technology matters.

The lessons about Bitcoin we learn from Ukraine and Russia can serve us to be better equipped when the next authoritarian leader looks to put troops on the ground of their small neighbour. An event we hope doesn’t happen soon, but one we should be prepared for.

I can say with absolute confidence that the world’s cryptocurrency community will be ready to step in and help again.

This past week the U.S. government indicatedBiden takes big step toward government-backed digital currency https://www.nbcnews.com/tech/crypto/us-government-digital-currency-rcna19248 it would investigate the issuance of digital forms of its currency. Many central banks have mused about this possibility, including in the UK,“We have not yet made a decision on whether to introduce CBDC. In March 2020 we published our Discussion Paper on CBDC, which outlines one possible approach to the design of CBDC and asks for feedback from the payments industry, academics, and other interested parties” https://www.bankofengland.co.uk/research/digital- but this is the most tangible evidence of their intentions to date. Central bank currencies offer many advantages that cryptocurrencies do not. But recent government actions that sow doubt in their trustworthiness put the trust that is essential to the adoption of central bank currencies at considerable risk.

The idea of a central bank digital currency“CBDC is generally defined as a digital liability of a central bank that is widely available to the general public. Today in the United States, Federal Reserve notes (i.e., physical currency) are the only type of central bank money available to the general public. Like existing forms of money, a CBDC would enable the general public to make digital payments. As a liability of the Federal Reserve, however, a CBDC would be the safest digital asset available to the general public, with no associated credit or liquidity risk.” https://www.federalreserve.gov/central-bank-digital-currency.htm is the virtual opposite of Bitcoin and other blockchain-based cryptocurrencies. The value proposition of Bitcoin is to completely do away with a trusted central issuer and create trust among end-users, effectively replacing trust with sophisticated cryptography. A central bank digital currency would be just another form of its existing currency, based on the full faith, credit, and trust of the central bank from whom it is issued. Its selling point, trust in a central authority, would be exactly the reliance that blockchain-based currencies are built to avoid.

The construction of a centrally managed currency would be far simpler, more efficient, and potentially more secure than those based on blockchain. The presence of a central ledger, as opposed to a distributed one, means that both sides of any particular transaction would be visible to the central counterparty and the processing of the transaction would not rely on any other user in the system. Furthermore, there would be no need for crypto mining, which can place an unacceptable environmentalThe average transaction consumes over 1,700 kWh of electricity, which is almost twice the monthly amount used by the average U.S. home https://www.forbes.com/sites/joshuarhodes/2021/10/08/is-bitcoin-inherently-bad-for-the-environment/?sh=4ed9ce973033 burden on blockchain use.

Depending on the protocol used, a centrally managed currency need not even rely on public key cryptography, which is likely essential to any distributed ledger system. Public key cryptography is the use of an algorithm based on different, but mathematically related, encryption and decryption keys, or more pertinently for blockchain, signing, and verifying keys. Eliminating public key and the other aspects of blockchain protocols could speed processing and reduce the long-term existential risk that quantum computing poses to virtually all public key systems, including the one used in Bitcoin.

The likely use of central bank currencies would also be the opposite of Bitcoin. Bitcoin use as a transaction medium still faces significant challenges. Most holders do so in order to enjoy capital gains or to facilitate large illicit transactions, not make day-to-day payments. Central bank currencies would tend to be used in the same places where physical cash is useful; smaller, essentially anonymous transactions. The lack of interest or prospect for capital gains would likely discourage large balances. The potential efficiency benefits would make it appropriate for small transactions.

Presumably, along with the digital currency, central banks would issue a wallet in which to hold it. This would mean that holders would have an app that they could use to make payments and transfers. Like physical cash, these transactions could be accomplished without the exchange of any personal information. Anonymity between participants in a transaction could be maintained. Of course, there would not be anonymity from the central authority, which could monitor all transactions. More on that later.

Since a central bank currency would be just another form of its existing currency, it would share whatever stability and exchange features that its underlying currency possesses. Modern central banks are focused on maintaining price stability subject to some small amount of inflation and the digital form would inherit the same features. This would remove the major reason why most people hold cryptocurrencies: the prospect of long-term price appreciation. A central bank currency would actually decline in value every year by whatever inflation target is achieved.

The introduction of a digital central bank currency would have systemic implications for the banking system. Currently, the physical form of Canadian currency amounts to about $112 Billion. Those physical notes have been issued over many decades and the funds used to pay for the notes are invested in securities held by the Bank of Canada. The interest on these funds generates seigneurage income for the Bank, last year amounting to over $4 billion, most of which gets paid into government coffers. For holders, that interest represents the income that they forgo in return for having funds that are liquid and spendable. The issuance of a digital currency would undoubtedly increase the amount of currency outstanding, possibly by many times, as many might use their central bank in the way they currently use their bank balances and Interac. The benefits of higher income for the central bank would come at the expense of bank balances and fees by commercial banks and would reduce, possibly materially, their deposit bases.

But lately, trucker protests in Ottawa and the war in Ukraine have placed the trust in governments and central banks in question. That has significant implications on the marketing of digital currencies. The common feature in both these seemingly disparate situations is the confiscation of assets of supporters of trucker protests by the government and the seizing of Russian central bank deposits by central banks worldwide. The obvious question surrounding central bank currencies, and one that will now be asked more seriously, is whether central bank currencies represent unacceptable risks to holders from governments based on their security, policy, or even political concerns. Whether purchases will then be visible to governments may become a serious issue as governments with easy access to spending information could use it in the way the Chinese government implements its social credit system.

If central banks cannot establish a governance and legal framework that will give assurance that the funds held will be above political interference then their rollout will be much more difficult. The central value proposition of central bank currencies is trust. If citizens cannot be assured of trust, then they will be reluctant to use them. The spectacle of the Canadian Minister of Justice warning that Trump supporters might be subject to bank account freezes could not be more toxic to the establishment of this kind of trust and plays into the perceived advantages of cryptocurrencies. The seizure of Russian central bank deposits, for whatever well-intentioned reasons, is a significant departure from the trust in central banks that has been regarded as absolute in the past. Many people don’t see a material separation between governments and central banks, and actions that put deposits at risk without due process will erect significant barriers to trust.