Cryptocurrency is failing to capitalise on the current crisis.

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Is cryptocurrency the dog that failed to bark?

War is a crucible of innovation, not all of it necessarily malign – think of penicillin. In Russia’s cowardly and horrific assault upon Ukraine, some cryptocurrency enthusiasts have declared that the war is a 9/11 moment, where crypto proves its worth and the scales fall from the eyes of sceptics and reluctant governments. But in circumstances which could have been tailor-made as a test bed for cryptocurrencies, like Arthur Conan Doyle’s hound, crypto has largely failed to bark. For each of the three crypto tribes – the true believers, speculators and pragmatists – this is disconcerting.

As the true believers remind us, bitcoin was designed to liberate users from the tyranny of fiat currencies and their accompanying state-controlled financial infrastructures. Holders could escape the alleged iniquities of the dollar. Protected by its artificially controlled scarcity and immune from the ravages of inflation, bitcoin would prosper not only as a borderless and politically neutral payments instrument, but also as an immutable, anonymous asset.

The speculators – not all of whom are entirely honest – view bitcoin and its peers as tradable and investible alternative assets which ought to prosper in times of adversity, particularly for fiat instruments.

The pragmatists expect that, in times of disruption, crypto provides a parallel and substitute set of instruments and rails which enable the economy to function. We have seen some pragmatic use cases, but it is the deficiencies of crypto which have drawn attention.

Not only is Ukraine one of the most cyber-literate countries in the world, it has also been one of the most open to exploring the use of cryptocurrency. Crowdfunding has raised close to $100m in cryptocurrency to support the resistance effort. This could arguably form the genesis of an alternative digital payments system operating as a replacement for fiat currency, although Ukrainians still seem to trust the hryvnia. Nor have there been any reports of much more significant dollar contributions being refused.

Conversely, there has been a massive loss of trust in the rouble. With access to foreign currencies blocked, Russian citizens have been scurrying to convert roubles into cryptocurrency to help preserve wealth. If financial sanctions continue to tighten, it is questionable whether these transactions can be reversed. It will be interesting to see whether Russian authorities turn a blind eye to the development of a domestic crypto-based transactions economy. One thing is clear: whoever controls and regulates the on/off ramps linking fiat and crypto wields significant power in determining its utility.

With both the public and private banking sector in Russia increasingly frozen out of international commerce, access to dollar assets denied and sanctions starting to bite the non-fossil fuel economy, conditions for widespread deployment of cryptocurrency might be considered ideal. But despite a lot of warnings to the contrary, there is little sign of Russian-based oligarchs moving large sums out of the currency and into cryptoassets. Nor, as yet, is there any indication of the state departing from its traditional policy of bartering commodities in exchange for foreign currency with counterparties who have scant respect for US displeasure.

The speculators, who have been loudly – and not necessarily disinterestedly – predicting a six figure value for bitcoin, must be roundly disappointed. In the wake of potentially the worst financial and political crisis in Europe since 1945, the price of bitcoin has barely budged. Meanwhile gold, which bitcoin was supposed to replace as a reserve asset in times of stress, has blossomed by 12% in the same period.

The fiat currency architecture, defined globally largely in relation to the dollar so far reigns supreme. The challenge from crypto is peripheral at best. It is becoming clear that in times of severe crisis, having a parallel financial infrastructure is useful. This will strengthen the arguments of central bank digital currency advocates. But all this is loose change in the face of the horrors currently besetting Ukraine

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