WEEKLY, August 3, 2024

Russia, crypto and sanctions; The possible crypto impact from Ethiopia’s devaluation

Aug 03, 2024

Hello, everyone, I hope you’re all taking care of yourselves! Things are getting ugly out there.

You’re reading the free weekly version of Crypto is Macro Now, where I reshare/update a couple of the articles from the week. I won’t be talking today about yesterday’s dire jobs numbers and the understandable market reaction, that will be in Monday’s newsletter. As a teaser, though, in my opinion markets have more to fall, but we’re not going to get an emergency rate cut from the Fed, and two in September is not that likely… yet. Much depends on the next employment report, which I expect to be bad, but perhaps not as bad as the newly adjusted forecasts (when we get them) will have us believe.

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Russia, crypto and sanctions
The possible crypto impact from Ethiopia’s devaluation

Some of the topics discussed this week:

A smashed Overton window: crypto on stage
Lummis’ Bitcoin Strategic Reserve bill
Now we’re talking: the Dems and crypto
More from the monthly crypto regulation overview
DEXs and SEC suits
Markets are understandably nervous
Shifting the economic balance
Conflict flash points: Venezuela and Lebanon
Middle East tensions ratchet up
Japan raises rates
US jobs

… and more!

Russia, crypto and sanctions

Russia has passed two new laws that both support and limit its crypto ecosystem.

The first legalizes Bitcoin mining as of November 1, with oversight spread between different institutions. Companies cannot advertise cryptocurrencies, nor offer them to the general public without some participation restrictions. And the government reserves the right to ban or restrict cryptocurrency transactions to maintain monetary stability.

The second law passed this week supports cryptocurrency settlement. As of September 1, Russia’s central bank will have power to authorize companies to settle cross-border trade and exchange transactions in digital currencies. This will start with an experimental regime, which includes the creation of an official crypto platform connected to the national payment system.

This is in line with recent comments from senior officials about the utility of digital assets when it comes to getting around sanctions. It does not necessarily mean sanctioned companies have freedom to trade with whoever – there will still be global penalties for any business caught transacting with these entities. But, with the list getting so long, even non-sanctioned businesses are struggling to complete trades.

(chart via @JStein_WaPo)

Will crypto make sanctions less effective? It’s early still, and it’s a lot more complicated than it sounds. It’s not just about “hey, here’s some BTC, we good?”. It’s about accounting rules (which don’t allow acceptance of non-money as settlement, and digital currencies are not yet officially defined as money – plus, do you value the asset at time of contract or time of transfer, and is it net of fees?). It’s also about banking (someone along the chain will be worried about getting debanked should their involvement in crypto trades be confirmed). And it requires the legal recognition of settlement in a non-money asset, to avoid the sender taking delivery of payment but then denying there was a sale contract. Plus, a lot of other moving parts that we never think about when transacting would also need to fall into line, when it comes to business-to-business cross border trade. All this would need to happen in the originating and the receiving jurisdictions.

But, longer term, yes, crypto will make sanctions less effective. This will enable some deeply awful criminal activity and financing. But it will also allow individuals and businesses unfairly caught up in the sanctions web to have access to basic goods and services. And it will weaken the ability of the US to weaponize the dollar.

Ironically, that might be what saves the dollar’s reserve currency status – holding dollars should be a choice, not an imposed obligation that can then be used against a country’s population, and against which governments are moving to protect themselves by diversifying reserves.

The possible crypto impact from Ethiopia’s devaluation

Yet another IMF-encouraged currency devaluation affects the livelihoods of millions, this time in Ethiopia. On Monday, the Ethiopian government announced the decision to abandon its controlled exchange rate policy, which had led to a widening gap (at times more than 100%) between the official rate and the street rate. From now on, the birr will trade freely at a market price which, no surprise, turns out to be roughly 30% lower on an official basis, with the black market rate lower still. This “forced” devaluation may put the country’s exchange rate on a more competitive footing, but it does significant damage to livelihoods, especially given the dependence on imports. It also massacres any attempt to control the inflation rate, already around 20%.

In exchange, the IMF has agreed to lend the nation $3.4 billion, of which $1 billion will be distributed immediately. And the World Bank has pledged a further $16.6 billion over three years.

This money will give the country a chance to rebuild after its debilitating civil war. But it comes at a steep price.

Devaluations may help competitiveness longer-term, but they do a lot of damage, hurting lower-income citizens the most. “Hard assets” have long been a sought-after savings refuge for Ethiopians, and with foreign currency so hard to come by, bitcoin has become an obvious alternative.

This is especially relevant given the government’s initiative to attract more bitcoin mining to the region. Both Chinese and Russian bitcoin miners are reportedly there in force. The IMF is probably not going to like this, and could pressure the government to cease its electricity subsidies and welcoming regulation.

So, on the one hand, Ethiopia’s devaluation could support demand for BTC as a hedge against inflation and further devaluations; it could also trigger some miner selling if local operations have to migrate.

HAVE A GREAT WEEKEND!

For me, the most spectacular output from the Olympics is always the photos, and the Reuters team has been capturing an overwhelming number of breathtaking images. I find them incredibly moving not just for the human strength, but also for the interaction of humans with their environment. Reuters has been publishing streams of amazing photos pretty much every day of the Games – here are just a handful of my favourites.

(photo by Marko Djurica for Reuters)

(photo by Athit Perawongmetha for Reuters)

(photo by Albert Gea for Reuters)

(photo by Paul Childs for Reuters)

(photo by Esa Alexander for Reuters)

DISCLAIMER: I never give trading ideas, and NOTHING I say is investment advice! I hold some BTC, ETH and a tiny amount of some smaller tokens, but they’re all long-term holdings – I don’t trade.