For investors, these are unprecedented times.
The world has been rocked by a deadly pandemic. Europe is at war; Russia in an economic stranglehold. The United States is experiencing its highest inflation in 40 years and it is likely to get worse. The currency and equity markets are gripped by a scale of volatility not seen in years. The status quo of the traditional geopolitical order faces a crisis. And commodities trade like meme stocks.
Enter cryptocurrency: a $3 trillion market that promises to free people from control of the global financial system.
Cryptocurrencies have become more and more mainstream. Five years ago, the market was valued at just $14 billion, a fraction of what it is today.
The US government, among others, is trying to get in on the digital asset boom, seeking to regulate and reinvent a sector that operates largely outside its reach.
US President Joe Biden on Wednesday signed an executive order requiring the government to assess the risks and benefits of creating its own central bank digital currency (CBDC).
While they are inspired by cryptocurrencies and follow some of the same principles, CBDCs are not considered cryptocurrencies as they are regulated by a central authority. The White House will also seek to mitigate crypto risks for consumers and lead economic and technological competitiveness and innovation in the sector.
China introduced its version of a CBDC, the digital yuan, during the Beijing Winter Olympics last month.
According to the Pew Research Center, 16 percent of Americans have dabbled in trading, using, and investing in cryptocurrencies. That figure is likely to rise considerably, crypto industry figures told Al Jazeera.
"I think we can refer to 2022 as the year of the great catalyst for crypto because what governments did was actually force adoption," Ran Neuner, host of CNBC's Crypto Trader, told Al Jazeera. "They put people in a position where they had no choice but to flee to the other system."
'What the governments did'
The United States and its allies have imposed sanctions on Russia over Russian President Vladimir Putin's decision to invade Ukraine.
The world's largest credit card networks, Visa and Mastercard, and Internet payment giant PayPal announced over the weekend that they will suspend services in Russia. That means credit and debit cards issued by Russian banks will no longer work outside of Russia. Russian companies will also not be able to accept cards issued from outside the country.
"It's the most ridiculous thing," Neuner said. โRussians who live in the US but have bank accounts in Russia have had their credit cards cut off. Essentially, people are forced into the alternative financial system.โ
The Russians were also banned from using SWIFT, an international banking messaging system vital for transactions. The assets of Russia's central bank were seized and hundreds of companies in the technology, oil, media and consumer goods sectors withdrew their operations from the country. Last week, the ruble hit a record low.
If your participation in the global financial system depends on the appeasement of the US and its allies and if you are not on good terms with those people, you are kicked out of that system, maybe you will find another global financial system to participate in.
Why Bitcoin is the most decentralized cryptocurrency
Bitcoin is the most well-known fully decentralized cryptocurrency in the world. Most digital currency trading is done peer-to-peer. There are no middlemen, unlike banks, and transactions are recorded on a blockchain, a digital ledger maintained by a network of computers.
Bitcoin was created by Satoshi Nakamoto, the pseudonym of the person or anonymous entity that basically wrote the code. Nobody financed it, nobody invested in it: it is open source software. There was a financial incentive for people to join the network to mine Bitcoin, and over time, that incentive led to the creation of what Bitcoin enthusiasts consider to be the most robust computer network in the world.
To change something in the Bitcoin infrastructure, a proposal must first be submitted and then approved by many different players in the Bitcoin universe, including the people who mine Bitcoin and the nodes, those who run the software.
This infrastructure is what makes Bitcoin resistant to attacks and nation-state meddling.
"The analogy here is Gmail versus email"
In addition to the decentralized Bitcoin network, there are centralized and decentralized trading platforms where you can buy, sell, and trade Bitcoin and thousands of other digital currencies and assets.
Centralized exchanges, which include platforms like Coinbase, Binance, and Kraken that embrace government oversight, have recently come under pressure to ban all Russian users, not just sanctioned individuals, from their platforms.
Coinbase announced earlier this week that it had blocked 25,000 cryptocurrency addresses linked to Russia. The platform said the addresses were linked to Russian individuals or entities it believed had engaged in illicit activity. Last week, the world's largest NFT marketplace OpenSea reportedly removed Iranian users from its platform.
A truly decentralized network like Bitcoin protects users from this.
โThe analogy here is Gmail versus email. Google could block certain addresses at the application level. But the smtp email protocol still works,โ Ryan Selkis, founder of crypto research firm Messari, told Al Jazeera.
A Kraken spokesperson told Al Jazeera that freezing the digital assets of citizens of an entire country does not necessarily punish those responsible for illicit activities.
"We hope that a solution can be found that does not cause serious and unnecessary harm to individuals, families and businesses that were ultimately not involved in the decision to invade Ukraine," the spokesman said.
'A potential future state'
Penalties only work if people are using your currency. But if Russia and China decide they are going to use Beijing's digital central bank digital currency or Moscow decides to create its own, sanctions will no longer have an impact.
In January, the US Federal Reserve said that its own CBDC could be instrumental in maintaining the US dollar's dominant global role. The central bank warned of "a possible future state" in which countries' CBDCs could reduce the global use and dominance of the dollar.
China may have an opening to meet the needs of Russia's new economic reality.
In response to the blocking of Visa and Mastercard, Sberbank and other Russian banks are considering using China's credit card company, UnionPay, to issue cards.
China's digital yuan could also become more mainstream.
โA digital yuan could allow the Chinese Communist Party to maintain control and surveillance of all domestic transactions, but include privacy protections that make the yuan more exportable as a reserve,โ Selkis said.
