The specific nature of cryptocurrency ensures complete anonymity for users, and their decentralized structure of operation are unique features, which are in stark contrast to traditional state-controlled coin-operated systems.
Since cryptocurrencies were introduced, their use has grown in terms of speed, value, scale, and application. It is estimated that currently, only the "bitcoin" has a market capitalization of approximately 330 billion dollars – which is approximately the total value of the company Meta (Facebook). However, Bitcoin is not the only cryptocurrency on the market. It is the most valuable, but currently, this sector is considered to comprise about 10,000 alternative cryptocurrencies, otherwise known as "altcoins.”
While the use of cryptocurrencies offers numerous benefits, researchers have identified negative elements that have arisen due to the increase in their use by various state and non-state actors.
A lot more than the opportunity for tax-evasion
Compared to traditional currencies, cryptocurrencies have proven to be particularly useful. They are largely used by various terrorist organizations, which use them as a way to collect donations to finance their operations. Or even from criminal groups and drug dealers who sell prohibited narcotic substances online, and especially in what is known as the "dark web". Furthermore, users of these cryptocurrencies are also certain countries, such as Russia and Iran, which use cryptocurrency-based strategies to mitigate or avoid possible damages caused by economic sanctions imposed by Western countries.
As a result of its support for terrorist organizations and the development of its nuclear program, Iran is currently facing severe economic sanctions from Western countries - with the United States at the forefront. Thus, their banks lost access to the SWIFT international payment system; foreign state or private assets have been frozen or seized; the export of oil - their main product - is under sanctions, and the import and export of weapons is heavily restrained. In order to maintain the vitality of its economy, Iran has had to explore alternative ways to avoid sanctions or at least assuage the damage they inflict.
A key element of Iran's strategy to somewhat mitigate the effect of international economic sanctions relies on the nation's multimillion-dollar crypto mining effort. Iran has licensed special entities (firms) to "mine" cryptocurrencies, using favourable electricity prices. It is common knowledge that "crypto mining" implies a huge consumption of electricity. Offering favourable conditions in this regard, Iran has also become attractive to many domestic and international entities engaged in cryptocurrency mining.
Thus, Chinese companies from this sector have increased their presence in Iran, especially after China banned the mining of cryptocurrencies. With this action, Iran manages to convert its frozen oil reserves into foreign currency. In 2020 alone, Iran managed to convert about 10 million barrels of crude oil - which accounted for about 4% of their total exports for that year, worth over $1 billion - into "bitcoins".
Yet, Iran cannot completely avoid the negative effect of the sanctions it is facing. However, Iran’s limited success is encouraging to other countries facing similar challenges.
The annexation of Crimea in 2014, followed by a full-scale invasion of Ukraine in early 2022, left Russia facing a number of international sanctions. Russian banks are not allowed to use the SWIFT international payment system, about $600 billion in assets held abroad are frozen, and oil exports are banned by the United States and restricted by most European countries. Although these economic sanctions have not changed the Russian policy stance in regard to the war in Ukraine, they have caused significant economic damage.
Stealing the “thunder” of economic sanctions
However, similar to Iran, Russia is also employing a cryptocurrency -based strategy to somewhat assuage the potential damage caused by international economic sanctions. At first, Russia was reserved and very cautious about the use of cryptocurrencies, considering them primarily as an instrument for money laundering and terrorist financing. However, in the meantime, the attitude of the Russian authorities has changed drastically. Russia now perceives cryptocurrencies as a very convenient tool to mitigate the effects of sanctions.
To that end, several Russian oil companies are already building crypto-mining centres , and the Russian central bank is working on the development of a national cryptocurrency protected from sanctions that could serve as an alternative cryptocurrency due to the lack of access to the SWIFT international payment system.
Like Iran, Russia is a country rich in gas and oil. Hence, one of the main objectives of the sanctions was precisely the export of these products. One of the largest oil companies supported by the state, "Gazpromneft", announced at an international forum held in St. Petersburg in 2022 that it will closely cooperate with the company "Bitriver", which deals with bitcoin mining, in order to strengthen cryptocurrency mining centres in Russia.
However, as was the case with Iran, in Russia, too, cryptocurrencies seem to be an insufficient tool for Russia to circumvent or sufficiently dampen the damage caused by severe economic sanctions imposed by Western countries.
For a more significant easing of sanctions, Russia would need a higher volume of trading in the cryptocurrency market, which is practically impossible when considering the insufficient scale of cryptocurrency trading because, unlike conventional money, cryptocurrencies have a certain limitation as far as trading is concerned.
However, the data reveals a continued trend of cryptocurrency use by countries facing international sanctions. Moreover, the fact that Russia is copying Iran's strategy of turning frozen assets of oil into currency through the process of mining shows that countries facing a strict regime of economic sanctions are learning from each other as they continue to look for new alternative ways to circumvent or at least mitigate the possible effects of sanctions.
This will increase their confidence to pursue destructive policies internationally and at the same time reduce the ability of states and other international institutions to influence the change of states' behaviour through economic sanctions.
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