Putin could use some Bitcoins

Russia’s economy is deteriorating fast, and sanctions imposed by the US Treasury Department are causing increasing costs for the already weakening regime of Vladimir Putin.

Financial Warfare

The sanctions include visa bans, asset freezes and restrictions on trade. The purpose and effects of these sanctions are subject to some misunderstanding, but are explained by Juan Zarate in his book Treasury’s War:

“The point was not necessarily to freeze assets in US banks—though that was a benefit—but instead to use the designations to make it harder for individuals who were financing terrorists to access the formal financial system.  Our analyses therefore focused on the networks of actors and institutions providing the financial backbone to the terrorist enterprises.”

The sanctions apply not only to people, but also to any entities they control. Effectively, they cannot do business with any entity that also does business in the US, cutting them off from the international financial system.

How Putin could use Bitcoin

In this case, Putin could greatly benefit from the digital currency, which was ironically stated to be illegal according to the Central Bank of Russia earlier this year. The Central Bank issued a clarifition citing Article 27 of the Federal Law “On the Central Bank of the Russian Federation (Bank of Russia)” below:

“The official currency (currency) of the Russian Federation is the ruble. One ruble is divided into 100 cents. Introduction to the territory of the Russian Federation and other monetary units issue money substitutes prohibited.”

But despite the guidance, Russia cannot prevent Russians from using Bitcoin, as the currency does not rely on any physical institution but on a network of miners around the world. In the same way, Bitcoins could be used to bypass international financial sanctions against Russia.

In a normal situation, sanctioned Russian entities would need a bank to transfer funds internationally, but they will not be able to access the formal international financial system. Bitcoin does not require an intermediate party, and would therefore make a transaction less troublesome.

Implications

The previous provides an interesting perspective, as it reveals one of the few advantages of the classical financial system over Bitcoin. Fewer intermediate parties could result in some major cost benefits, but also mean a significant loss of control compared to the current system. Given the power of the financial measures that it allows, it is not very likely that politicians are going to be very willing to give up on this. In other words, it provides an incentive to keep Bitcoin from becoming mainstream in its current form.

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