Feb 9, 2022 • 7M

Russia Is Playing Geopolitical Chess

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To investors,

There have been a plethora of rumors about bitcoin and cryptocurrencies in Russia over the last few months. The country sits in a unique geopolitical position — they are frienemies of the United States and have a deepening relationship with China, another frienemy of the western superpower.

As a refresher, the mainstream media has been pushing the narrative of a pending Russian invasion of Ukraine. The response by the United States in an attempt to deter the invasion is financial sanctions, including potentially the exclusion of Russia from the SWIFT payment system.

It is important to caveat that no one actually knows what is going on between Russia and Ukraine. Americans have nearly zero appetite for another invasion or war. The average citizen couldn’t even point Ukraine out on a map, while they have little concern about their safety due to actions that Russia may or may not take halfway around the world. That doesn’t mean that the United States shouldn’t be paying attention, but there are major questions about the narrative being pushed by the mainstream media.

Additionally, the threats of financial sanctions on a large country like Russia are noteworthy. More than a decade ago, these sanctions carried significant weight. The United States could cut you off from the global financial system and essentially sentence you to financial system purgatory.

These sanctions are likely to be less effective in the current time period though. Let me give you two examples — China and bitcoin.

Chinese President Xi Jinping hadn’t met with a foreign leader in person since the start of the global pandemic in 2020 until he recently sat down face-to-face with Russian President Vladimir Putin a few days ago. The two countries issued a 5,000+ word joint statement following that meeting. Here is the opening paragraph:

“Today, the world is going through momentous changes, and humanity is entering a new era of rapid development and profound transformation. It sees the development of such processes and phenomena as multipolarity, economic globalization, the advent of information society, cultural diversity, transformation of the global governance architecture and world order; there is increasing interrelation and interdependence between the States; a trend has emerged towards redistribution of power in the world; and the international community is showing a growing demand for the leadership aiming at peaceful and gradual development. At the same time, as the pandemic of the new coronavirus infection continues, the international and regional security situation is complicating and the number of global challenges and threats is growing from day to day. Some actors representing but the minority on the international scale continue to advocate unilateral approaches to addressing international issues and resort to force; they interfere in the internal affairs of other states, infringing their legitimate rights and interests, and incite contradictions, differences and confrontation, thus hampering the development and progress of mankind, against the opposition from the international community.”

This new interest in collaboration between Russia and China creates the potential for bi-lateral trade to be settled outside the US dollar regime. Obviously, if these countries begin to conduct trade without using the global reserve currency, the sanctions from the issuer of that global reserve currency will be significantly less effective. It is unclear how much of this is tough talk compared to committed action, but it is an important development.

Second, the rise of bitcoin and cryptocurrencies provides an open, decentralized payment system that is not controlled by anyone. This may seem like a wild idea theoretically, but we are watching bitcoin gain adoption globally at an insane pace.

It is important to highlight that sanctions is just another name for censorship. The creator and distributor of the global reserve currency is attempting to censor who uses their currency and payment system. There may be good reason for the censorship. There may not be. Either way, sanctions are just a different terminology for censorship.

Bitcoin is censorship-resistent money. No one can shut down the system. No one controls it. Anyone in the world can send monetary value to anyone else in the world. There are no middlemen. There are no rent seekers. The peer-to-peer system is unique in design and powerful in application. So it is weird that the central bank of Russia started to question bitcoin’s relevance in the country at the same time that it may become incredibly important to the nation state.

To explain further, the Bank of Russia recently floated the idea of banning bitcoin and cryptocurrencies within the country. This led to a heated debate internally and externally of the country. Last night, it appears that the Russian government and the central bank reached an agreement on digital assets. They will not be banning them, but rather treating them like other foreign currencies.

There are other aspects to the agreement (read statement here), such as regulatory frameworks, proper licensing for crypto exchanges, increased taxation, submission of various information to a state-run surveillance tool, and more. Ultimately, the important takeaway is that Russia is not going to ban bitcoin or crypto assets, but rather they are going to increase the usage and adoption within the country by creating frameworks and rules that everyone understands.

Many people may not know this, but Russia is already one of the largest crypto countries. They are the third largest country in terms of bitcoin’s hash rate, there are more than 12 million crypto accounts held by Russian citizens, and it is estimated that those people hold more than $26 billion worth of cryptocurrencies. Not exactly something that is easy to ignore for the government or central bank.

So let’s take this one step further.

If Russia becomes sympathetic to the bitcoin and crypto industry, including putting the digital currency on their balance sheet or mining with state resources, it will force the hand of the United States. There is a global competition underway that has a decentralized, open system at the heart of it. Anyone can plug into the system. The game theory is that no one wants to start the cascade, but once your adversary does it, you are forced to adopt the technology or risk being left behind.

El Salvador was a great first step. The smaller country doesn’t have any enemies though. The largest superpowers could simply ignore the strategic move and carry on with normal operations. If Russia was to make a move on the chess board, it would be impossible for global superpowers to look the other way.

Eventually every country is going to adopt bitcoin and the open payment system. The question is not whether it will happen, but rather the sequence of events that will play out. As with most innovative technology, those who have courage and conviction to invest earliest are rewarded with the largest benefit. This situation is no different.

Russia’s decision to treat bitcoin and crypto as currencies is a step down this path. It will be interesting to see how far, and how quickly, they go. The United States can’t afford to fall behind. We must be the leader on the global stage. We must act. The stakes are too high.

Hope you have a great day. I’ll talk to everyone tomorrow.


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Dylan LeClair is the Senior Market Analyst at UTXO Management, a digital asset fund investing in the analog to digital transformation of money and the emergent financial system.

In this conversation, we discuss Bitcoin, on-chain metrics, market structure, and what to expect from the rest of the bitcoin bull market.


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