What do El Salvador, Iran, and North Korea have in common? They’re all feeling the heat in the great crypto crash. Crypto is punishing retail traders. What about the countries that bought in?
The crash of cryptocurrency prices has been well documented, particularly when it comes to retail investors and traders who have lost huge sums of money.
But crypto isn’t only an economic story — and the crash isn’t only hitting individual investors. For countries ranging from El Salvador to North Korea, Venezuela to Iran, cryptocurrencies have also emerged in recent years as a tool for achieving geopolitical goals — goals that are taking a hit along with all the other damage done in the plunge in crypto’s value. Dictators, in particular, have latched onto crypto for a variety of reasons; in many cases, a relatively new economic and technological system is colliding with something as old as politics.
“What is underneath the hood, I think, is opportunistic people, legislators or politicians looking for revenue,” Yaya J. Fanusie, an adjunct senior fellow at the Center for a New American Security and a former CIA analyst, told Grid. “There’s this sort of alliance right now between the private sector or the tech sector and the politician.”
Even the war in Ukraine — specifically, a crypto-fueled effort to support the Ukrainian resistance — has been affected. In the midst of a cryptocurrency winter, the impact is being felt across the globe.
Currency of last resort
Cryptocurrencies are often viewed as a form of risky speculation, but in some countries, they’re attractive because they are seen as safer than the local currency. In Lebanon, Argentina, and Venezuela, Bitcoin and other cryptocurrencies have exploded in popularity amid rampant hyperinflation. (Venezuelans suffered a 2021 inflation rate that reached nearly 700 percent.) Citizens of these countries have flocked to crypto as a better bet than the fledgling currencies of their respective nations.
“You have a bunch of countries where the regular central bank, for one reason or another, doesn’t really work anymore,” David Yermack, an economics professor at New York University who researches cryptocurrency, told Grid. “I think that the availability of Bitcoin as an alternative to the fiat currency has been somewhat helpful to these countries.”
One of the foundational narratives of Bitcoin is that it can be a hedge against inflation. While a local currency might decrease in value over time due to the machinations of a central bank or the printing of more money, Bitcoin will retain a fundamental value because only a finite amount will ever be created. Experts say this may be a legitimate way for an inflation-ravaged nation to think of cryptocurrency — in effect, while the national currency loses nearly all its value, crypto will hold at least some chance of rebounding.
Crypto has also been useful for governments under heavy international sanctions. In Iran, where access to the international financial system has been hampered by sanctions, the government has openly promoted cryptocurrency mining as a workaround.
Here’s how it works: Iran is short on cash but rich in oil and gas that it now has a hard time selling on global markets. Crypto mining requires a notoriously high amount of electricity, and in 2019, Iran became one of the world’s first countries to formally legalize industrial-scale crypto mining. The government licensed mining operations, which rely on fleets of computers performing intensive calculations, and provided them with free electricity. The Bitcoin these operations generate is then sold back to the country’s central bank. Rather than selling its oil and gas on the international market for dollars, Iran’s workaround means it is essentially converting oil and gas into Bitcoins.