Crypto fails where digital yuan can succeed

With Tornado down 95% from its all-time high and its source code removed from Microsoft Corp.’s GitHub, it’s the latest blow to the “no sanctions yay” theory of crypto — the three words used by former Ethereum Foundation researcher Virgil Griffith in 2019 when he told a blockchain conference in North Korea how he could avoid sanctions by converting cash to crypto, costly advice that resulted in a guilty plea and a 63-month federal prison sentence.

When it comes to technology, it shows that even the most decentralized service cannot avoid law enforcement. Exchanges are under pressure to monitor links to common currencies, as are other service providers, and pseudonymous blockchains can be scrutinized for suspicious transactions – such as the profits of North Korean cybercriminals who went through Tornado. As Bloomberg’s Emily Nicolle notes, the crypto industry hasn’t been able to build all of its infrastructure yet.

Geopolitically, crypto is also suffering – not increasing – in the midst of an economic cold war. After the Covid-19 pandemic and Russia’s invasion of Ukraine, Washington has been flexing its economic muscles, even amid fears of the kind of backlash that handovers or alternative currencies could cause. Keeping crypto in check fits with the history of US regulation of encrypted technology, like the email mixers of the 1990s, but is also key to US soft power in wartime.

Ironically, even opponents of a dollar-based global economy have been ambivalent—at best—about crypto. For the likes of Russia and Iran, global pariahs who are also major energy exporters, crypto’s threats undermine potential. While in theory they may be able to use crypto to facilitate trade and circumvent US surveillance, that is offset by the prospect of capital flight, instability and price volatility. Moscow has alternated between banning and encouraging digital assets, no doubt recognizing that they can help sanctioned elites on some level. But the ruble still has muscle – as the recent arm-wrestling with the EU over gas payments showed.

While Tehran this week announced its first official import order using an unnamed cryptocurrency, according to Reuters, this is just one of a long line of crypto tests that have failed. Regulation has also been erratic, as Iranian crypto miners have recently found.

Right now, therefore, it seems that even a world steeped in unprecedented sanctions, conflicts and inflation will not give crypto much of a boost. And as economist Eswar Prasad recently wrote, the hegemony of the US dollar may last much longer than expected.

But there is a potential twist in the story: central bank digital currencies, specifically China’s e-yuan. These forms of digital money can play a major 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 gets a first-mover advantage with a digital currency that is interoperable with others and imposes standards on other countries that want to avoid doing business in dollars.

One scenario being war-gamed by US officials, according to CoinDesk, is a “fully portable” digital yuan that sees other countries using banks and payment providers as nodes effectively connected to China’s infrastructure. It could lead to North Korea or Russia buying materials without retaliation. Iran is hunting for its own digital central bank currency.

This is just one future among 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 far away.

But it suggests that the Cold War payments have a long way to go before threats to the US dollar manifest. It opens up a new conflict zone that ensures that “no sanctions yay” will remain little more than a slogan.

More from Bloomberg Opinion:

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

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

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

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

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

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