Cryptocurrency: The Variable in Modern Warfare

Throughout the last couple of months, the Russia-Ukraine war has dominated the headlines of most, if not all, major news outlets. At Coin Clarity, we have also published a number of articles on the topic, such as how the war affects your portfolio, the top crypto exchanges that refused to suspend Russian users, and a piece about Ukraine’s crypto donations. We even created a crypto timeline of the Russia-Ukraine war for you to track the latest related news.

This article will be a little different. Rather than focusing solely on the conflict between Russia and Ukraine, we will expand on it to analyze cryptocurrency’s role in security and modern warfare.

We’ll be answering the following questions:

• Can Bitcoin finance traditional warfare?
• Can cryptocurrency be used to evade sanctions?
• How will CBDCs shape future conflicts?

Can Cryptocurrency Finance Traditional Warfare?

Crypto Can Help War Efforts, but Can’t Solve Them Entirely

Simply put, Bitcoin and other types of digital currency cannot by themselves finance an entire military conflict, but they can definitely contribute to it. We need to look no further than the hundreds of millions of dollars that Ukraine has raised with cryptocurrency.

As we discussed in our last piece, the country has been accepting and requesting cryptocurrency donations in Ethereum, Bitcoin, and other coins. In fact, the government, NGOs, and artists have even begun to sell digital artwork as NFTs in hopes of further funding their efforts.

Low Liquidity

Compared to the global market, the digital currency market has very low liquidity, sitting at a market cap of $2.1 trillion. As such, it makes it very difficult to move money around. In addition, while digital currency adoption is on the rise, a large majority of people still do not use digital currencies in their daily lives. There are many reasons for this, such as ignorance, a high barrier to entry, and at times the fear of the unknown.

Lack of Widespread Institutional Adoption

Furthermore, not many institutions accept crypto yet. This means that in order to use crypto capital to buy critical supplies, such as helmets and weapons, it would have to be converted to fiat through a centralized exchange, like Binance, Gate.io, and Gemini. Although to seasoned crypto users this may not seem like much of an issue, it does add an additional layer of complexity for a government that has to make time-sensitive decisions that could prove costly for human lives.

Despite the ongoing digital transformation of our global financial system, these reasons and many more make it very difficult for cryptocurrency to help fund an entire country’s national security efforts. Therefore, the donations the Ukrainian government has received in crypto from individuals and institutions around the world are beneficial to their defence, but they alone would be insufficient.

Can Cryptocurrency be Used to Evade Sanctions?

Sanctions have been used for a long time as a means of punishing a country for undesirable policy. If you’re American or Cuban, you need look no further than the embargo the United States has against its Caribbean neighbour.

Russia Banned from SWIFT

Presently, we are witnessing sanctions imposed on Russia, as the country has been banned from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), which has effectively cut Russian banks from the global banking system.

In a previous article, we discussed whether Russian President Vladimir Putin and his oligarchs can use blockchain technology to avoid sanctions. We’d like to expand on it further here.

Virtual Currency can be Publicly Viewed on the Blockchain

By nature, digital assets are trustless and can be publicly viewed on the blockchain. Simply put, unless you’re using a privacy-based blockchain like Monero or Zcash, it is very easy to track every single transaction on a particular network, like Ethereum or Bitcoin. The only caveat is that you cannot identify individuals unless you know their wallet addresses. This can provide some privacy with regards to obscuring how the funds are being used.

KYC Reduces Privacy on Centralized Exchanges

That said, many people, Russian oligarchs included, hold large sums of wealth on centralized exchanges, which require Know Your Customer (KYC) standards. On these platforms, the exchange manages all wallet addresses, similar to how banks manage bank accounts. This means that if they are required by law to comply with sanctions, they could immediately freeze an individual’s assets. In sum, thanks to KYC checks, it has been fairly easy to block tens of thousands of sanctioned individuals during this conflict.

However, if an investor were to use a private wallet to invest in decentralized finance (DeFi), this would become more challenging. DeFi depends on smart contracts, which are bits of code that execute functions, without the need for a human intermediary. There are no KYC checks, which make it much simpler to hide your identity from the public.

Moving Large Sums of Money is a Challenge

Secondly, as was mentioned previously, the low liquidity of the crypto market compared to the global currency market is significant. Therefore, moving around insanely large amounts of money using crypto is challenging.

According to Ari Redbord, the Head of Legal and Government Affairs Director at TRM Labs, and a former Treasury advisor, “Crypto is not very useful for sanctions evasion at scale by Putin, the Russians, or the Russian Central Bank.”

In sum, it is possible to use cryptocurrency to avoid sanctions and it likely happens. However, the process to do so is complex and far from mainstream, which makes it unlikely that it occurs on an economically significant scale. As cryptocurrency continues to grow its adoption, evading sanctions will become even harder as the space becomes further regulated by governments.

The Traditional Financial System Remains The Main Way of Committing Crimes

As it stands, illicit activities, including evading sanctions, may still be more suitable for the traditional banking system, even during military clashes. According to Lawrence Wintermeyer from Forbes, “While a war might not be fundable with cryptocurrency, banks are on the front line as the money launderer vehicle of choice. Bad actors and terrorists are very experienced at exploiting the weaknesses and using all of the global financial systems for their purposes.”

How CBDCs Will Shape Future Conflicts

What is a CBDC?

Before diving into this section, it’s worth getting a general definition. A central bank digital currency (CBDC) is a country’s fiat currency, but in a digital format. A CBDC is issued, regulated, and fully backed by a country’s central bank or monetary authority, like the United States Federal Reserve. CBDCs run on centralized blockchains where governments maintain complete control of the network. If you’d like to learn more about CBDCs, check out our recent article for a more in-depth analysis.

As we discussed in our first article about CBDCs, many countries, including the United States’ Biden administration, Russia, and China, are exploring the possibility of creating one. This will have several implications for future wars.

Benefits for Warfare

In terms of benefits, CDBCs offer the same advantages as traditional digital currencies. Increased efficiency, speed, and lower fees on transactions would represent an enormous advantage for countries trying to fund their war efforts. For example, consider if one country has to purchase equipment from another. CBDCs, similar to some cryptocurrencies, could greatly improve the efficiency of this process by eliminating the slow, costly transfers that are usually paid.

Disadvantages for War

According to the Modern War Institute at West Point, state-backed digital currencies are not without their downsides when it comes to military conflicts. What appears to be their biggest concern is a CBDC crashing, be it because of reduced access to it or through a shutdown of the entire system. This could have a profoundly negative impact on a particular country’s standing worldwide. For example, imagine if the United States created a digital dollar just to have its network crash, leaving millions of people without access to their funds. The global reaction would be disastrous and would leave the country exposed to several threats because of its now weakened position.

Vox EU also explains that CBDCs could open a country’s governments to more cyberattacks. If they are to follow the same public ledger format of cryptocurrency blockchains, then perhaps displaying a central bank’s balance sheet for the general public could bring about unintended privacy concerns, such as the possibility of a data breach. With the number of cyberattacks happening around the clock, such as those in the United States by Russia, this exposes yet another entry for digital warfare.

Coin Clarity’s Thoughts

Although cryptocurrency has come a long way, it requires governments to develop the appropriate infrastructure and regulations to reach true mass adoption. This goes hand in hand with its impact on modern warfare. While it is a powerful tool that can, to a limited extent, help finance military conflicts and provide a minimal ability to evade sanctions, Bitcoin and its peers are far less effective at this than the traditional banking system at scale.

That said, cryptocurrency is an excellent investment asset class that can provide a plethora of excellent opportunities for retail investors who have a higher appetite for risk than in the stock market. If you’re interested in a safe, legal way to build your portfolio, open up an account with one of our partners, Coinbase, Binance (or Binance US if you’re in the United States), Gate.io, or Kraken today.