This paper provides an overview on the cryptocurrency industry and how it started its journey from back then till now or what is the position of this new phenomenon in the international financial and monetary system. Undoubtedly every new phenomenon has Pros and Cons, and cryptocurrency is not an exceptional to it, so we analyze the advantages and disadvantages which a cryptocurrency can brings up. Through this paper we examine Pros and Cons of these currencies in more details by using specific case studies data and comparative cases.

In the age of modern globalization, cryptocurrency is becoming prevalent. Cryptocurrencies are a subset of digital currency that encompasses a revolutionary technology. It has the potential to shift economic and political realms. Most of countries have reacted positively to this new form of currency, which are not monitored by any authority. Of course, some governments have also responded negatively to the cryptocurrency because it facilitates financial system for the illegal activities through its anonymity. Certain countries are more encouraged to the adoption of cryptocurrency. Through three different case studies, Russia, Iran and Venezuela, it shows evidently the relation between cryptocurrencies and international economic sanctions, or in another word cryptocurrencies are clearly helping the sanctioned countries to evade the economic sanctions.

Excerpt

Abstract

In the age of modern globalization, cryptocurrency is becoming prevalent. Cryptocurrencies are a subset of digital currency that encompasses a revolutionary technology. It has the potential to shift economic and political realms. Most of countries have reacted positively to this new form of currency, which are not monitored by any authority. Of course, some governments have also responded negatively to the cryptocurrency because it facilitates financial system for the illegal activities through its anonymity. Certain countries are more encouraged to the adoption of cryptocurrency. Through three different case studies, Russia, Iran and Venezuela, it shows evidently the relation between cryptocurrencies and international economic sanctions, or in another word cryptocurrencies are clearly helping the sanctioned countries to evade the economic sanctions.

Keywords: Cryptocurrency, Economic sanction, International financial and monetary system, Russia, Iran & Venezuela

1- Introduction

Since we move hastily towards the digital era, undoubtedly it is more evident to encounter the digital form of money, that is so called “Cryptocurrency”. Most of us at least once heard or interacted with the word of cryptocurrency, even though it was introduced in 2009, but it caught the interest of the media only in 2012. Cryptocurrency is a new phenomenon which is growing in financial markets and by passing time its applications are increasing (Taheri, 2019), or it is considered as a virtual or digital currency, that is digital means of exchange or trade which uses cryptography for security (Gardner, 2019). Cryptocurrencies are often compared to cash, but unlike the cash, these currencies are purely digital and they have online usages. They are considered potential enough to compete other currencies and other online payment methods. They have a large long-term effect on both currency and payment system, but currently they are in their infancy.

2- What is cryptocurrency?

Crypto is an ancient Greek word (Kryptos) which it means private or hidden, so we can say it is a digital type of currency that is created by private individuals or groups and it is used also by them. Digital type of currency it means no prints money or coins, and it indicates that everything is happen through online way, which is far different from conventional forms of currency that is issued and generated by the governments or central bankand then circulated to the economy system via banks (Gardner,2019). Oneof the main and important character of cryptocurrencies which is they are decentralized, meaning there is no government, organization or entity can control or manipulate the market, and the possession of transactions are authorized by other nodes in the network system, creating the Distributed Ledger Technology (DLT), which is defined as the Blockchain (Mahdavieh, 2019). According to (Viriyasitavat and Hoonsopon,2018) we can define Blockchain as a technology that enables inalterability, and entirety of data in which a record of transactions made in a system are kept over many spreaded nodes which are connected in a peer-to-peer network. One of the character of Blockchain is that it can just be updated by consensus between contributors in the system, and it is not erasable once the data has been entered (Mearian,2019).

(Liu and Tsyvinski, 2018) mentioned three main and most successful cryptocurrencies: BITCOIN, RIPLLE, and ETHEREUM. Bitcoin proposed by Satoshi Nakamoto in 2009, as a system of electronic payment that is relied on the network of peer-to-peer instead of depending on the trust of third party system. For preventing double spending problems, the transactions of Bitcoin are registered on a public ledger under Blockchain (Gardner,2019), Bitcoin has been introduced as a first decentralized cryptocurrency, but today cryptocurrencies are estimated to be more than hundreds and they are trading with the market value, the most common element or character of all these cryptocurrencies is public ledger or Blockchain (Hileman and Rauchs, 2017). This new currency helps some hated organizations by governments such as WIKILEAKS to conduct their business anonymously or also receive donations. Beside the undeniable positive effects of Bitcoins or other cryptocurrencies, there are also some negative effects. Due to the anonymity of digital currency, it facilitates laundering of money, illegal drugs trades, tax evasion or child pornography (Grinberg, 2011). The recent innovation and fast increase in the usage of cryptocurrencies like Bitcoin, shows a reliable solution for states, corporation and individuals to undermine or evade sanctions which are imposed mainly by united nations or united states (Konowicz,2018). We can mention Bitcoin as a biggest cryptocurrency with the value over 40% of total cryptocurrencies value. Through the following two sections (2.1 and 2.2) we will see some pros and cons of this new phenomenon

2.1- Cryptocurrency Advantages:

- Little or no transaction costs: Cryptocurrency has no processing and transactional fees as we have many different fees for transactions in the traditional forms of payments, and this is because all the transactions occurred through Blockchain, the users of Blockchain can easily create or verify transactions in the absence of any intermediary or central authority (Martin,2019).
- Fast transaction: In the normal way, the payments of credit or debit card last for two or three days to process, while with digital currencies, it takes 10 minutes or less for transactions to be done (blockchain-council.org).
- Increased payment options: It would be much better if you can provide more options for payment as a business, therefore digital currency attracts more customer base for its potential.
- 24-Hour accessibility: Another advantages of cryptocurrencies is the instant access, in the sense that whenever or wherever you are, you have possibility to spend or buy, and is not necessary high-tech for it, nor computer. You can do it with your mobile device, (wallstreet, 2018).
- Protection from inflation: Generally, inflation makes many currencies to lose their value over time, hence, most of the cryptocurrencies issued in a fixed amount at the time of their launch, and is the sourcecode clarify how many number of each coin (Nguyen & Hun Oh, 2018).

2.2- Cryptocurrency Disadvantages:

- Volatility of price: The permanent fluctuation of price is the most significant Cons of cryptocurrencies. You never can have a 100% certainty of how much is the value of cryptocurrencies tomorrow (Grossberg,2018). In January 2018 each Bitcoin value was almost $17,000 but less than a month later it decreased to $7,000 (Martin,2019).
- Anonymity: Cryptocurrencies are anonymous, and this can increase the number of activities that are illegal (Fry and E. T. Cheah, 2016). Cryptocurrencies also can be used on dark web or deep net. This part of the web which is not available to all the users, is a place where most of the illegal trafficking websites exist like: human trafficking, weapons trafficking, drugs and so on. Digital currencies can facilitate the sale from these websites, so by this way money goes to the pockets of criminals from the pockets of public (Garnier,2017).
- Cyber security: Digital currencies are one of the prime targets for the hackers globally, especially there are many businesses are using cryptocurrencies but they are not aware enough how to secure and protect this new form of money (Martin,2019).
- Energy pollution for planet: The process of mining generates cryptocurrencies, and mining required a lot of power, but, how? It is simple: miners utilize computers to calculate power, but a single computer has a very small portion in this calculation, thereby cryptocurrency farms have been created, which is the high concentration of computers for calculating motions of currencies in all the time, but the energy power that is used for it is absolutely massive (Goodkind, Jones, Berrens, 2019).
- Irreversibility of transactions: Most of the Bitcoin or cryptocurrency's users consider irreversibility of transactions as an advantage, but some see it as a major drawback. Once a cryptocurrency's transaction is approved and completed, there will be no possibility of refund (Martin, 2019).

3- Data and case studies

Cryptocurrencies show a trustful and useful means for states, individuals, and corporations to skirt US economic sanctions. The more US increase and tighten its sanctions, the more it would increase the use of digital currencies. Russian, Iranian government and Venezuela have chosen to utilize all the available strategies, knowing that one of them would be successful in circumventing sanctions (Konowicz,2018). Generally, crypto currencies have a significant effect on countries, in particular, for those sanctioned states have some great impacts, however, most of these impacts and benefits rely on the crypto currency's adoption. By creating more political support and stronger regulations for crypto currencies, we can have a more stable price level, but this is possible when central banks and government have a control over it, and this change the cryptocurrency from decentralized to centralized which would reduce many advantages of crypto currencies (Holtmeier and Sandner,2019). In the section 3.1 and 3.2 we analyze data from case studies of Russia, Iran and Venezuela and it provides what is the relation of cryptocurrencies with these countries

3.1- Russia and cryptocurrency

Cryptocurrencies are important tools for some countries, because they help them to evade some certain economic sanctions through the untraceable operations of banking. After increasing sanctions against some countries, their governments found themselves in an unstable and fragile state which push them to the adoption of cryptocurrencies and use them to stabilize economic condition by tokenizing their currency, or using cryptocurrencies for the international transactions, and sanction evasion as a general (Mahdavieh, 2019).

A widespread western economic sanctions limited Russia's capabilities of dominating the Eastern Europe. The sanctions started to be imposed from July 2014 as a response to the Crimea annexation by Russia and continued imposing after interjecting in the U.S. elections of 2016 (Smith, 2018). Thus, Russian currency (Ruble) lost its value by 50%, and has cut the foreign direct investment (FDI) by 5%. The sanctions also decreased the Russia's oil exportation, that caused a huge collapse in oil prices by 50% (Nelson, 2015). The Central Bank of the Russian Federation hurriedly increased money supply by printing more to fight back the devaluation of the Ruble, but this act of central bank increased inflation and has lowered the public spending, and consequently a drop in government revenues (Mahdavieh, 2019).

According to the International Monetary Fund (IMF), in 2014, Russia's GDP growth was estimated at 0.2%, while scholars have mentioned a loss of 4-5 Billion dollars per year as a result of the economic sanctions (Wang, 2015). Russia for overcoming the severity of economic sanctions that placed limitation to many sectors in the country, entered into alliance with other states such as China and Venezuela who also have been sanctioned by the west countries (Mahdavieh, 2019). Another way for achieving financial salvation from the economic sanctions, Russia has developed its own cryptocurrency under the name of ‘CryptoRuble'.

CryptoRuble is a native government-backed cryptocurrency that uses Masterchain rather than Blockchain, through this way any funds will be in the reach of Russian government but in the meantime hidden from the federal reserves, US government, United Nations and EU. Russian authority can launder money by crypto Ruble, and kleptocracy just has the access, which ensure full governmental control over the crypto Ruble (Kakushadze, 2018). The main and first goal of crypto Ruble is sanction evasion and gaining the independence from West countries. Circumventing sanctions through cryptocurrencies is eminent in Russia, particularly by cyber hacking Russia is able to access cryptocurrencies and is becoming main interest for Russian government. Russia mainly backed cryptocurrency by commodities like oil and gold (Mahdavieh,2019).

Stages of development of the Russia national crypto network are:

- The Issuer: The central bank is the holder of CryptoRuble registry. A single level system where the central bank is the issuer and all the others are considered as its clients.
- A two-tier system: While the central bank is the issuer, the crypto banks and crypto exchange or the crypto companies are the market participants, thus the creation of cryptoeconomy is the result of this stage
- Crypto shares are dominance in the cryptocurrency: During this stage, the digital stock market is created. The technology of cryptoshare provides any company to issue its own shares as a form of crypto shares (Loginov. M, Tatyannikov. V, Sobina. N, 2018)

Digital currency in Russia established for a wider domestic and international avail. Another successful strategy is coupling multiple states, especially those whom facing western sanction, to a common cryptocurrency to use for trading between them. One of the well-known union for this strategy is BRICS, which is the aggregation of five emerging national economies (Brazil, Russia, China, India, and South Africa). Recently, it came up the idea of BRICSCoin, that is backed by their own commodities. The purpose of this cryptocurrency is to increase the trade between these states due to the fact that the exchange rates between them is more equitable. BRICSCoin could potentially undermine the power and use of dollar in the international transactions (Konowicz, 2018).

3.2- Iran & Venezuela

In another cases, Venezuela and Iranian citizens have combated the hyperinflation by mining cryptocurrencies and then trade them for US dollars, maybe it is a stable method for securing a living, but it is not lack of risk for citizens (Dychdala and Conroy,2020). The adoption of cryptocurrency occurs more fast in those countries where the banking systems are not working properly or they have failed, for instance the Iranian and Venezuelan banks after many International sanctions, they have lost their efficiency in the banking system, and this was the start for them to adopt digital currencies for evading sanctions. In the Iran case the usage of cryptocurrency has been increased rapidly among the population.

The international sanctions have limited financial freedom and also access to the International fiat currencies for the Iranians, therefore, by investing in the digital currency market they can reach the International fiat currencies (Konowicz, 2018). Iranian cryptocurrency researcher, Hadi Nemati stated: “Mainly in the world, people use Bitcoin as a store of value, while in Iran it is a utility because it gives Iranian the possibility to have access to the global economy” (Mahdavieh,2019). In November 2018 at a conference in Armenia, Iran signed a trilateral agreement with Armenia and Russia for the Blockchain cooperation (Motamedia, 2019). Iranian government along with four national banks announced to work on a cryptocurrency backed by gold, which called the PayMon (Financial Tribune, 2019). In July 2019, the central bank of Iran (IRBC) announced that central bank has the only exclusive right for issuing any forms of cryptocurrencies backed by Rial or gold, and it is illegal for individuals to operate a Blockchain technology, otherwise the central bank has the right to prosecute anyone who ignore the rules (Rahimi, Sharifian, 2020).

For long decades, Venezuela has struggled with the high rate of corruption in the country, particularly in the governmental institutions. This level of corruption resulted in political and economic mismanagement and also lack of transparency which pushed country to be dependent strongly on the natural resources production and revenues (Karl,1999). The country's GDP is significantly related to the natural resources revenues. Economic mismanagement and US sanctions made GDP to decrease in Venezuela over the past years. The response of the Venezuela government to the sanctions and financial limitations was to raise the money supply that ended in the “Hyperinflation” and consequently the mass abuses of human rights and the people starving (Mahdavieh, 2019). In 2017, Maduro's administration proposed a new cryptocurrency, Petro, which it was backed by natural resources such as oil, gas, gold and diamonds. The reason for creating this cryptocurrency was to evade new sanction that imposed by the Trump administration. According to the (Reuters staff,2017) in January 2018, president Maduro announced Venezuelan government would issue almost $6 billion of Petros in means to increase hard currency for evading financial sanctions which are imposed by Washington. Petro Coin introduced in February of 2018 and launched through an Initial Coin Offering (ICO)(Berman,2018). Venezuela government also authorized exchange and sell of another six cryptocurrencies (Afx trade, Bancar, Cryptia, Criptolago, Amberes Coin, Cave Blockchain) with the Petro Coin (Pepi, 2018). It seems a cryptocurrency that is only related to petroleum is nothing more than a Blockchain encrypted oil future contract. According to (Vavra,2018) cryptocurrencies can hide or mask illegal activities, as they can be transferred more quickly and they are functional across the borders, or they are anonymous, it means transactions are not hidden but always is not obvious who is part of them and they don't have any connection with government backed like other currencies, also they can be changed to cash, and the regulatory landscape is full of holes and bugs right now, and the question is that: can US and West countries find an effective way to combat these adversarial strategies for circumventing economic sanctions?

The answer is: as long as United states reliant on the economic sanctions, preserving the global value and position of dollar becomes more important, so an approach that is multi-lateral can be fundamental to a US anti-strategy, it means having international partners, include UK, EU, Canada, Australia, South Korea, Japan and China, must be useful solution for the future effectiveness of economic sanctions, thereby united states should focus more on international approaches like partnership approach with the G7 and G20, rather only working and focusing on United Nations (Blackwill and Harris,2016). There is a new interest from regulizers in Singapore, Japan, China and united states to have a control over digital currency space and try to limit the potential of crime and laundering the money (Choudhury,2017). The United States no longer enjoy monopoly on how capital intermediates, and digital currency show a dynamic alteration in how capital intermediates. Due to this reason US financial sanctions are more reliant on multilateral diplomacy. Undoubtedly, US should have strategy for overcoming the use of cryptocurrency to avoid sanction and try to focus on the Blockchain technology, this means investing in the cracking of Blockchain cryptography for tracing transactions. In the other hand more pressures politically can force sovereign states to regulate digital currencies if fiat currencies seem to be threatened; or another strategy of united states is developing its own digital currency which is backed by dollar. This method can take a significant crypto market share in a short period of time (Blackwill and Harris,2016).

Conclusion

In conclusion, cryptocurrency has a significant potential to be a game changing technology that can affect industries. Digital currencies offer the opportunity of creating a new currency which is decentralized and is not controlled by any authority. The main purpose of this paper was to introduce “cryptocurrency” and why within a very short period of time, it has caught the attention of many countries and governments around the globe. Cryptocurrency like many other new phenomenon is along with advantages and disadvantages. One of the disadvantages - which is an advantage for the sanctioned countries - is the way it facilitates circumventing the economic sanctions. The emerging market of crypto currencies and the intensifying of US sanctions against some countries like Russia, Iran and Venezuela created a perfect timing of events for many countries to seek a different sources of financing through digital currencies. The core findings of this paper from different case studies (Russia, Iran and Venezuela), shared groups of attributes common in each kleptocratic country: unstable economic conditions, inflation, western sanction and high rates of corruption. All of these factors are interrelated and can have an impact on one another. Due to the limited accessibility of data because of the newness of this phenomenon, it is still difficult to acquire enough data regarding cryptocurrencies and these limitations restrict comparative methodology. Every day many national and international companies are accepting multiple kinds of cryptocurrency as a method of payment for their products and services, so future researches will need to analyze the subsequent effects of digital currencies on the financial markets and institutions.

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Details

Title: Cryptocurrency and its role in Economic Sanctions
College: University of Siena
Grade: 28/30
Author: Hatam Ansari (Author)
Publication Year: 2021
Pages: 10
Catalog Number: V1154587
ISBN (eBook): 9783346550507
Language: English
Tags: cryptocurrency economic sanctions

Quote paper: Hatam Ansari (Author), 2021, Cryptocurrency and its role in Economic Sanctions, Munich, GRIN Verlag, https://www.grin.com/document/1154587

Cryptocurrency and its role in Economic Sanctions