Crypto fails where the digital yuan can succeed

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Does an industrial-sized dog whistle sound when proponents brag about the cryptocurrency’s ability to evade US government sanctions?

Last March, a founder of Tornado Cash — a so-called “blender” service that masks cryptocurrency transactions by mixing them with others — told Bloomberg that it would be “technically impossible” for sanctions be enforced against decentralized protocols. Surprise: Tornado has now been sanctioned by the US Treasury’s Office of Foreign Assets Control, in part because of its use by hackers allegedly linked to North Korean money laundering.

With Tornado down 95% from its all-time high and its source code removed from Microsoft Corp.’s GitHub, this is the latest blow to crypto’s “no penalties yay” theory – the three words used by former Ethereum Foundation scientist Virgil Griffith in 2019, when he told a blockchain conference in North Korea how to dodge sanctions by converting money to crypto, expensive advice that resulted in a plea guilty and sentenced to 63 months in federal prison.

In terms of technology, this shows that even the most decentralized service cannot avoid law enforcement. Exchanges are under pressure to monitor links to regular currencies, as are other service providers, and pseudonymous blockchains may be scrutinized for suspicious transactions, such as the earnings of North Korean cybercriminals who transited through Tornado. As Bloomberg’s Emily Nicolle notes, the crypto industry has yet to be able to build all of its infrastructure.

Geopolitically, crypto is also suffering — not booming — amid an economic cold war. After the Covid-19 pandemic and Russia’s invasion of Ukraine, Washington flexed its financial muscles, even amid angst over what kind of backlash might result from overreach or currencies. alternatives. Keeping crypto in check fits the history of US regulation of crypto technology, like the email mixers of the 1990s, but is also essential for US wartime soft power.

Ironically, even opponents of a dollar-based global economy have been ambivalent – ​​at best – about crypto. For countries like Russia and Iran, global pariahs that are also big energy exporters, crypto’s threats undermine its potential. While in theory they might be able to use crypto to facilitate trade and circumvent US surveillance, this is offset by the prospect of capital flight, instability and price volatility. Moscow has wavered between banning and encouraging digital assets, no doubt acknowledging that they can help sanctioned elites on some level. But the ruble still has muscle, as demonstrated by the recent tussle with the European Union over gas payments.

As Tehran this week announced its first official import order using an unnamed cryptocurrency, according to Reuters it is just one in a long string of crypto tests that have failed to gain traction. . Regulation has also been erratic, as Iranian crypto miners recently discovered.

Right now, therefore, it seems that even a world steeped in sanctions, conflict, and unprecedented inflation will fail to give crypto a big boost. And as economist Eswar Prasad recently wrote, US dollar hegemony could last much longer than expected.

But there is a potential twist in the story: central bank digital currencies, notably the Chinese e-yuan. These forms of digital currency could play an important geopolitical role depending on how they are implemented and who gets there first.

A new book by sanctions experts Astrid Viaud and Paul-Arthur Luzu imagines a world in which China gains a first-mover advantage with a digital currency interoperable with others and imposes standards on other countries seeking to avoid doing business in dollars.

According to CoinDesk, one scenario dreamed up by US officials is that of a “fully portable” digital yuan that sees other countries using banks and payment providers as nodes effectively connected to Chinese infrastructure. This could see North Korea or Russia buy hardware without retaliation. Iran is pursuing its own digital central bank currency.

This is just one future of many – it could be that US and Eurozone digital currencies take off first, or that such projects end up fragmenting existing systems rather than strengthening them. . And anyway, everything is distant.

But it suggests that the payments cold war still has a long way to go before threats to the US dollar materialize. This opens up a new zone of conflict which ensures that “no sanctions yay” will remain little more than a slogan.

More from Bloomberg Opinion:

• The dollar system is China’s California hotel: Matthew Brooker

• It’s lights out for Crypto’s laser-eyed crooks: Lionel Laurent

• It takes sanctions and endurance to defeat Putin: Clara F. Marques

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. Previously, he was a reporter for Reuters and Forbes.

More stories like this are available at bloomberg.com/opinion

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