Key Takeaways
- In our view, cryptocurrencies are increasingly perceived in Russia as a store of value that can protect wealth against ruble devaluation and related asset deflation.
- The scale of crypto use is not broad enough to allow Russian entities to effectively evade financial isolation due to sanctions.
- We expect a pick-up in the pace of regulation on crypto.
Demand for cryptocurrencies by Russian residents has surged as sanctions threaten to severely restrict the country from access to the global financial system. This will likely further accelerate the pace of regulatory scrutiny. However, S&P Global Ratings doesn't believe cryptocurrency use has reached a scale that could blunt the likely severe consequences of sanctions on the Russian economy.
Traded volume for Bitcoin in ruble jumped on the day of Russia's invasion of Ukraine, signifying a scramble for the cryptocurrency.
We estimate that the seven-day average of Bitcoin traded using rubles doubled on March 2, from the week before the invasion. While trading of Bitcoin in ruble likely represents only a small part of Russian-based Bitcoin trading, our view is overall local trading has followed a similar trend.
We also see similar patterns on Ethereum (ETH), the second largest cryptocurrency by market cap (see chart).
A "Store Of Value" In Volatile Times
In our view, the surge of interest in Bitcoin is primarily attributable to customers trying to protect savings against a weaker domestic currency along with other local asset depreciation. Under extreme circumstances such as war and severe sanctions, Bitcoin may be viewed as a way to safeguard wealth and bridge access to reserve currencies.
We don't believe that cryptocurrencies are broadly used to evade sanctions on corporates or certain Russian nationals. While standards vary across jurisdictions, popular crypto exchanges that swap fiat currencies against cryptocurrencies typically follow some form of regulation and client identification; transactions may be traced particularly on the fiat end. As such, it's unlikely that cryptocurrencies would be used at scale to evade restrictions on jurisdictions, allow transactions with counterparties under sanction, or move frozen assets. On the other hand, identification on decentralized exchanges and wallets is more difficult to track.
Cryptocurrencies Are Not Yet A Scalable Alternative Payment Means
On March 2, 2022, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) confirmed it will disconnect seven Russian banking groups from its financial messaging system on March 12, at the request of the EU and international partners. This system underpins the majority of international interbank payments (see "Credit FAQ: The Significance Of Some Russian Banks Being Excluded From The SWIFT System," published March 4, 2022, on RatingsDirect). Once again, we don't think crypto will offer a very meaningful alternative to international payments.
Blockchain technology has promising prospects for corporate payments, including potentially faster and cheaper transactions via crypto (including Stablecoins) compared with traditional international transfers. However, its use currently remains marginal. There are risks that come with the decentralization and anonymity features of cryptocurrencies; risks that are adequately addressed under the traditional banking framework due to proper identification of those transferring or receiving funds.
Crypto Was Already Popular In Russia (And Ukraine)
Russian and Ukrainian citizens are already among the top users of cryptocurrencies globally. About 13% of the Ukrainian population use crypto. That is the highest percentage in the world followed by Russia--at about 12%--according to cryptocurrency specialist TripleA.
Regulatory Scrutiny Will Likely Intensify
The potential for crypto as a tool for evading sanctions could lead to regulatory actions. These could be enacted globally to enforce the sanctions on Russia, and also within the country to put controls on capital flows. Before the conflict, Russian authorities were yet to finalize how crypto is regulated and how know-your-client rules should be implemented.
Across regions, we expect crypto regulation to pick up pace in 2022. That said, a myriad of approaches remains on the table ranging from full adoption to outright bans (see "Regulation Of Digital Assets: How Far, How Fast?" and "Digitalization Of Markets: Framing The Emerging Ecosystem," both published on Sept. 16, 2021).
Cryptocurrencies As An Avenue For Donations In Times Of Crisis
Cryptocurrencies are also being used for donations during this crisis, highlighting their convenience for making transfers and the benefits of anonymity, given the political sensitivities around the situation. The Ukrainian government appealed on social media to receive donations in cryptocurrencies. It reportedly raised close to US$50 million as of March 2, 2022.
These fundraisings have elevated the profile of cryptocurrencies as an institutional way to attract funds.
Related Research
- Credit FAQ: The Significance Of Some Russian Banks Being Excluded From The SWIFT System, March 4, 2022
- Russia Ratings Lowered To 'CCC-' And Kept On CreditWatch Negative On Increasing Risk Of Default, March 3, 2022
- Regulation Of Digital Assets: How Far, How Fast?, Sept. 16, 2021
- Digitalization Of Markets: Framing The Emerging Ecosystem, Sept. 16, 2021
This report does not constitute a rating action.
| Primary Credit Analyst: | Harry Hu, CFA, Hong Kong + 852 2533 3571; harry.hu@spglobal.com |
| Secondary Contacts: | Mohamed Damak, Dubai + 97143727153; mohamed.damak@spglobal.com |
| Alexandre Birry, London + 44 20 7176 7108; alexandre.birry@spglobal.com |
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