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Are digital assets a safe haven for wealth in times of conflict?
- During times of conflict, fiat money could become a less viable form of storing wealth or making payments
- Digital assets could serve as a hedge against inflation, falling markets, and other financial disruptions during times of crisis
- For some people, digital assets could be the only viable form of making payments
- During the current Russia-Ukraine conflict, Bitcoin is challenging gold as a safe haven asset
Times of geopolitical conflict are fraught with many problems, not least of these being financial difficulties such as devaluation of currencies, market shocks and other economic disruptions. Amid such challenging market conditions, digital assets such as Bitcoin could look increasingly attractive as a safe haven for wealth due to their accessibility, stability, and resistance to censorship.
The current Russia-Ukraine crisis has highlighted the utility of digital assets during such turbulent times, so much so that for many they are the only accessible form of payment as fiat money becomes a less viable form of storing wealth. The Ukrainian currency, the hryvnia, is down to seven-year lows, while the ruble lost close to 50% against the greenback since the beginning of 2022. Coupled with ever-increasing sanctions on Russia, this is seeing many in the region turn to digital assets as a safe haven.
The effects of sanctions on Russians
As Western sanctions went into effect, news spread that Russian banks were being excluded from the SWIFT system, the predominant interbank payment system. Visa and Mastercard announced they were excluding Russian financial institutions from their networks, while Apple and Google restricted their payment services.
In a globalized world, being cut off from international payment networks has serious consequences for people's everyday lives. Freelancers outside Russia who receive payments from within the country, for example, have concerns about working for Russian clients, while those inside Russia who work for foreign companies worry about receiving their salaries. For many of them, the ability to send funds around the world has become an unattainable privilege, as has the use of domestic currency as a store of value.
The role of Bitcoin
When a political or financial system comes under such intense pressure, it reinforces the role of Bitcoin as a safe-haven asset. With sanctions on financial institutions like the world has never seen before, people are looking for an alternative way to make payments and store their wealth.
Over the last decade, the Bitcoin narrative has changed significantly, from a decentralized electronic payment solution to a store of value and an alternative to gold. The current crisis has created a situation where the digital currency is called upon to perform both these functions.
A highly secure network, it allows money to move around the financial system at lightning speed. In addition, its decentralized and permissionless nature allows ordinary people impeded by the sanctions against Russia to use Bitcoin to store their wealth. Over the last month, the value of Bitcoin in Russian ruble terms has soared by around 30%, even as the value of the ruble continued deteriorating.
Bitcoin vs gold
Meanwhile, Bitcoin is also challenging the traditional role of gold as a safe haven. In the late 1970s, gold showed its value as a hedge against inflation, which reached 14% in the 1980s. Today, gold and Bitcoin are competing for the inflation narrative.
However, gold has several shortcomings compared to digital assets. Unlike gold, assets on the blockchain have access to global liquidity and can be traded 24/7. In addition, gold typically requires a custodian and therefore is not easily accessible and cannot be used for peer-to-peer payments. Finally, during times of crisis, digital assets are accessible to a broader segment of society.
Self custody of digital assets
With the broad availability of digital assets, capital flight has taken on a new form in the current crisis. The barrier to accessing digital assets is extremely low – all users need is to download a digital wallet. Moreover, permissionless, open blockchain networks are apolitical and can be used by anyone, regardless of the user's nationality. As a result, both Russians and Ukrainians are turning to digital assets such as Bitcoin and Ethereum for everyday transactions.
Exchange order book data from Chainalysis and Kaiko Data reveals this growing trend. Between 19 and 24 February 2022, the transaction volume for cryptocurrency trading pairs involving the Russian ruble and the Ukrainian hryvnia has increased around eight-fold.
Source: Chainalysis and Kaiko Data
As the war in Ukraine unfolds, concerns have emerged about the potential for sanctioned Russian institutions to use Bitcoin to circumvent sanctions using cryptocurrency. However, crypto exchanges such as Binance and others have vowed to take steps to ensure that those that have had sanctions levied against them are unable to use their services.
In addition, laundering a large amount of assets through exchanges would be extremely conspicuous due to the transparency of the blockchain technology. As such, it would seem the benefits of blockchain technology for those in need outweigh the potential risks posed by their open, permissionless nature.
It is likely that the Russia-Ukraine crisis will have a profound impact on digital assets. Drastic sanctions, such as those imposed on Russian financial institutions, can be expected to affect how people think about the existing financial system. As the value of fiat currencies in the region drops, those affected are naturally looking for alternatives for storing their wealth. This could lead to more mainstream adoption of digital assets, which remain neutral and free from any government interference.