How crypto crash affects countries crypto dependent countries

The crash in cryptocurrency prices is well documented, especially when it comes to retail investors and traders who have lost huge sums.

But crypto isn’t just an economic story – and the crash isn’t just affecting individual investors. For countries ranging from El Salvador to North Korea, Venezuela to Iran, cryptocurrencies have also emerged in recent years as a tool to achieve geopolitical goals — goals that take a beating along with all the other damage done in the abyss in the crypto value. Dictators in particular have latched onto crypto for a variety of reasons; in many cases a relatively new economic and technological system collides with something as old as politics.

“What’s under the hood, I think, are opportunistic people, lawmakers or politicians looking for revenue,” Yaya J. Fanusie, an adjunct senior fellow at the Center for a New American Security and a former CIA analyst, told the Grid. “There is such an alliance right now between the private sector or the technology sector and the politician.”

Even the war in Ukraine – specifically a crypto-fueled effort to support the Ukrainian resistance – has been affected. In the midst of a cryptocurrency winter, the impact is being felt across the globe.

Last resort currency

Cryptocurrencies are often seen as a form of risky speculation, but in some countries they are attractive because they are seen as safer than the local currency. In Lebanon, Argentina and Venezuela, Bitcoin and other cryptocurrencies have exploded in popularity amid rampant hyperinflation. (Venezuelan suffered an inflation rate in 2021 that reached nearly 700 percent.) Residents of these countries have flocked to crypto as a better bet than the new currencies of their respective nations.

“You have a bunch of countries where the regular central bank, for one reason or another, doesn’t work anymore,” David Yermack, an economics professor at New York University who researches cryptocurrency, told Grid. “I think the availability of Bitcoin as an alternative to fiat currency has been somewhat helpful for these countries.”

One of the fundamental narratives of Bitcoin is that it can be a hedge against inflation. While a local currency may decline in value over time due to a central bank’s efforts or printing more money, Bitcoin will retain a fundamental value because only a limited amount will be created. Experts say this could be a legitimate way for an inflation-ravaged nation to think about cryptocurrency — indeed, while the national currency loses almost all of its value, crypto will at least have some chance of recovering.

Crypto has also been useful for governments under heavy international sanctions. In Iran, where access to the international financial system has been hampered by sanctions, the government has openly promoted cryptocurrency mining as a solution.

Here’s how it works: Iran is cash-strapped, but rich in oil and gas, which it now finds difficult to sell on global markets. Crypto mining requires a notoriously high amount of electricity, and in 2019 Iran became one of the world’s first countries to formally legalize crypto mining on an industrial scale. The government licensed mining, which relies on fleets of computers that perform intensive calculations, and gave them free electricity. The bitcoin these operations generate is then sold back to the country’s central bank. Instead of selling its oil and gas on the international market for dollars, Iran’s solution means that it essentially converts oil and gas into Bitcoins.

The solution works. According to a 2021 report by research firm Elliptic, around 4.5 percent of global Bitcoin mining takes place in Iran, generating annual revenues of around $1 billion a year. The practice may have become too popular: The Iranian government recently shut down more than 7,000 unlicensed crypto farms because they were putting a strain on the country’s power grid amid an energy crisis.

Crypto trading has also exploded among the Iranian public – again, because sanctions have made other investment and trading difficult. As many as 12 million Iranians own crypto, according to one of the country’s exchanges. These investors will also have taken a hit in the recent crash.

But crypto’s days of unregulated trading may be numbered. In recent months, the United States and other governments have signaled a renewed willingness to press charges against cryptocurrency exchanges – in Iran and elsewhere – that are exempt from international sanctions.

Tanvi Ratna, an India-based cryptocurrency analyst, told Grid that the recent global sanctions against Russia have included measures to monitor cryptocurrency transactions. “When the sanctions started coming out after the start of the war in Ukraine, there was a lot of focus on making sure crypto exchanges were in compliance with the sanctions,” Ratna said. “So you hear less about crypto being used in this space.”

El Salvador: A Bitcoin Nation Falters

No world leader has embraced the crypto world with the same missionary zeal as Salvadoran President Nayib Bukele. In September 2021, El Salvador became the first country in the world to accept Bitcoin as legal tender, requiring businesses to accept the currency alongside US dollars (the Salvadoran government has not issued its own currency since 2001) and giving citizens financial incentives to Download a Bitcoin trading app called “Chivo Wallet.”

Bukele seems to truly believe that Bitcoin is the future and that by making his country a crypto-friendly destination, he can attract investment from around the world. On a more practical level, the government has argued that Bitcoin could make it easier for Salvadorans to receive remittances from relatives widely.

“In the short term, this will generate jobs and help provide financial inclusion to thousands outside the formal economy,” Bukele told a Bitcoin conference in Miami in 2021. “And in the medium and long term, we hope this small decision can help we push humanity at least a little bit in the right direction.”

Adoption has been unstable. Only 1 in 5 businesses in El Salvador use Bitcoin regularly. And more than 60 percent of those who have downloaded Chivo Wallet have never used it. Technical errors with the app have not helped.

However, Bukele has been undeterred, regularly touting Bitcoin on a Twitter account filled with crypto-speak and unveiling plans for a proposed “Bitcoin City,” built on designs inspired by Alexander the Great, to be created at the foot of a volcano. More worryingly, Bukele has plowed more than $100 million of the nation’s reserves into Bitcoin. In May, Reuters estimated that the recent Bitcoin crash had wiped out nearly a third of the government’s holdings, but Bukele has continued to invest, boasting that El Salvador is “buying the dip.”

Yermack, a professor of economics at NYU, said what Bukele is doing is unprecedented.

“There are countries where the economy is very tied to mineral wealth or the price of oil, but it’s hard to think of a country that essentially speculated on a risky investment as a strategy for growth,” he told Grid.

Bukele’s Bitcoin gamble has put the country at odds with the International Monetary Fund, from which it is seeking $1.3 billion in funding. The IMF has said that in order to receive a new credit limit, El Salvador will have to address credit risks “related to the introduction of bitcoin as legal tender.” Bukele shows no signs of it.

An economic analyst from Salvador, who spoke on condition of anonymity because of the political climate in the country, told Grid that the real impact “lies in the opportunity costs of scarce resources. … There are social needs that the country must cover – for example, the 13.6 percent of children under 5 who are crippled due to malnutrition.”

While cryptocurrencies are often touted by proponents for their decentralization and lack of government control, El Salvador’s Bitcoin experiment has coincided with growing authoritarianism in the country. Bukele has sent in troops to intimidate the country’s legislature and has undermined the independence of the judiciary.

All this has made it harder for anyone to stand in the way of the plans of the president who has described himself on Twitter as “the coolest dictator in the world”. (It’s not clear if he was kidding.)

How crypto helps dictators

El Salvador is just one case of crypto-enthusiasm among authoritarian regimes and dictators who co-opt crypto for their own ends.

North Korea is a large-scale example and one that involves cryptocurrency-related crime. North Korea and associated hacker groups have stolen millions in crypto from around the world and used those funds to fund the country’s weapons programs.

As former CIA analyst Sue Mi Terry wrote for Grid earlier this year, “the regime obtained nearly $400 million in stolen cryptocurrency last year alone. North Korea has also legally purchased crypto-assets such as bitcoin, which are not controlled by governments or banks, difficult to trace, and thus a sanctions-proof investment.”

North Korea is now also feeling the pain of the cryptocurrency plunge. One example: Blockchain analytics firm Chainalysis looked at one set of North Korean crypto funds and found that their value had recently dropped from $170 million to $65 million.

For dictators, there seems to be a crypto paradox: On the one hand, according to Fanusie, dictators often hate crypto because it gives citizens opportunities to operate outside of a country’s official financial structure. One of the value propositions of crypto is that in some cases there is no bank or other institution that acts as an intermediary between transactions. A current example: the Kremlin may fear that Russian citizens will use crypto as a tool to withdraw cash from the country, further damaging the economy. In fact, Russia recently banned cryptocurrency payments in the country.

But authoritarian leaders have also learned to use crypto to their advantage – as a sanctions-busting mechanism (Iran), a source of income (North Korea) or a hedge against rampant inflation (Venezuela).

In Ukraine, crypto donations were washed away

In the case of the war in Ukraine, the crypto crash has shown both the possibilities and potential nightmares that cryptocurrencies present.

After Russia’s invasion, crypto-donations poured into Ukraine, worth more than $63 million in the first month of the war. An April report put the figure north of $100 million, and a recent Grid review showed that crypto-donations to Ukraine still have. These donations have been used to purchase bulletproof vests, helmets, walkie talkies and other supplies. Even Russian dissidents have turned to crypto to transfer funds to Ukrainian refugees.

As cryptocurrency values ​​have fallen, so has the value of all these crypto donations.

When Russia invaded, the price of Bitcoin was around $38,000, while Ethereum hovered around $2,600. Today, the top two cryptocurrencies are at around $23,000 and $1,500 respectively, and the price drop has driven down the value of all those donations. Put differently, that $100 million would now be worth about $60 million.

“In a time of crisis, it is beneficial to get money for crowdfunding funds from all over the world, crypto, volatile price or not,” Fanusie said. As he and Sale Lilly, senior policy analyst at the Rand Corporation, pointed out, the flip side of crypto’s volatility is that those donations could have also increased in value.

“The risk of donations is symmetrical,” Lilly said. “Had the Ukraine conflict started around the time covid emerged in April, March 2020, these donations would have been double or triple what they were.”

There is another problem in the case of Ukraine: cryptocrime. As Grid has reported, cybercriminals have targeted Ukrainian users’ crypto wallets through malware, conducted phishing attacks, and even spun off fake coins purporting to help Ukraine.

For individual investors, cryptocurrencies have been marketed as a way to exploit inefficiencies in the traditional financial system or bypass it altogether. In a global economy dominated by a few rich countries and driven mainly by the US dollar, several countries have seen them as a way to chart their own, more independent, economic course. In the wake of the crypto crash, some of these countries are getting burned – just as individual investors have been.

Thanks to Lillian Barkley for copy editing this article.