Cryptocurrencies received their biggest endorsement after the White House signed an executive order calling for a federal strategy to better oversee digital assets earlier this month. The announcement also calls on the Treasury Department and other agency partners to assess and develop policy recommendations for financial markets.
Major digital assets like Bitcoin have followed world markets lower for 2022, moving in lockstep along traditional investments such as equities. New custodian services and an expanding talent pool of crypto analysts has helped institutional investors to increase their exposure to the assets, albeit at nascent levels.
While cryptocurrency’s market cap quickly returned early gains following the White House’s announcement, the signal from Washington is positive according to Neil Mascarenhas, a Hong Kong based ESG fund manager and digital asset specialist, speaking to FinanceAsia.
“The executive order addresses long standing uncertainties for crypto investors, crucially Washington is not outright banning cryptocurrencies, but rather accommodating them into an evolving regulatory landscape.”
But the executive order comes at an awkward time. A week before the White House’s statement, four US Senators penned a letter to the Treasury Secretary Janet Yellen, regarding the department’s progress in monitoring and enforcing sanctions compliance by the cryptocurrency industry, even citing the Treasury Department’s own Sanctions Review.
The Ukraine conflict shines a light onto this matter as it unfolds in real time. According to Kaiko, since the end of February, ruble-Bitcoin pair trading has accelerated, as the Russian currency falls with US sanctions aiming to isolate the economy.
However, Mascarenhas adds, that while the liquidity of cryptocurrencies has improved over the years, that liquidity pool is still not large enough to serve a viable route to completely side-step sanctions.
Safe-haven reputation
For investors, the Ukraine crisis adds to the reputational challenge of holding and investing into digital assets, demonstrating the disconnect between crypto enthusiasts and naysayers which will likely polarise further: “We may be witnessing the world’s first major conflict in the age of cryptocurrency, and this is proving to be a great test case to see how bitcoin performs," according to a published note from Bitfinex, a crypto exchange.
Ukraine ranked fourth globally in terms of cryptocurrency adoption last year, according to Chainalysis’ Global Crypto Adoption Index 2021, after Vietnam, India and Pakistan.
Among noteworthy developments is crypto’s ability to quickly crowdsource relief aid.The flipside of by-passing financial institutions has helped individuals when other payments become unavailable, according to a press statement by Nigel Green, chief executive officer of deVere Group, a financial advisory firm. Although the amounts are small, block chain’s capabilities are on full display, as there is no central authority that can block payments.
But the new political reality is likely to continue to encounter age-old investor problems when it comes to cryptocurrency, particularly as the world economy promotes cleaner energy. As energy intensive crypto mining transitions to a reliance upon renewable energy, this is set to delay moves by other traditional services which are adapting to reduce their consumption of coal powered sources, warned Mascarenhas.
Crypto mining only increases the gargantuan energy demand that continues to witness oil prices jump precipitously amid Russian sanctions, with the price of Brent oil breaching $130 a barrel this month and further feeding higher inflation expectations.
In the meantime, investors have returned to an old playbook: gold. The non-yielding metal asset has risen around ten percent year to date, and is showing to be the preferred safe-haven asset in the current environment. Indirectly, this implies that in spite of better custodian arrangements and its offer of deeper liquidity, cryptocurrency still has some way to go before being fully backed by investors in times of uncertainty.
