The following analysis is based on the OODA Loop 2021 Year-End Cybersecurity Review, the OODA Almanac 2022 – Exponential Disruption, and OODA CEO Matt Devost’s recent post Is Bitcoin a National Security Risk?.

To achieve stability and legitimacy, the crypto and digital currency markets are dependent on:

1. Enhanced Security Measures – which are now a clear precursor to regulation for the legitimacy of this marketplace.  The scale and severity of cryptocurrency heists [over the course of 2021] made the need for enhanced security abundantly clear.  Many of the crypto and digital currency initiatives will encounter consequential cybersecurity issues in 2022 that will impact public adoption and invite increased regulatory pressure. There is a middleware ecosystem emerging in the form of marketplaces and exchanges that are based on Web2 technologies that are being deployed without proper consideration for cybersecurity best practices.
2. Regulation or Overregulation?:  It has been the conventional wisdom that “traditional” regulation would be the inevitable fate of cryptocurrency.  The U.S. Government does not have a great track record of understanding its role (if any?) in disruptive innovation and technology. The Catch-22 here is that any efforts to thwart innovation in this space could create durable national security risks in the future if the U.S. loses innovation advantage by driving key projects to external domiciles or ceding control of critical infrastructure to foreign governments.
3. Global Crypto and Digital Currency Adoption Rates:  The economic benefits of the U.S. dollar serving as a global reserve currency could be diminished with the widespread adoption of Bitcoin as a store and exchange of value.  Several nation-states have or are looking to recognize Bitcoin as a currency or as legal tender and several U.S. state initiatives are also underway.  The secondary challenge here for the U.S. government is ensuring that any inevitable movement to a new reserve currency model is tied directly to the U.S. innovation ecosystem.

Following is a brief survey of crypto and digital currency initiatives from around the globe, all of which are officially sanctioned to enhance national competitive advantage (in the event crypto overtakes the US dollar as the global reserve currency).  It is the cumulative adoption rate of state-sanctioned crypto and digital currency legalization and regulation that will propel this innovative system for value exchange to the top as the official global currency standard.

El Salvador

“…this is not something the World Bank can support given the environmental and transparency shortcomings…”

El Salvador became the first country to allow bitcoin to be used alongside the U.S. dollar.  The proposal by the President of the country was made law in June of 2021, stipulating:

• All economic agents shall accept bitcoin as a form of payment when it is offered by the purchaser of a good or service.
• Tax payments can now be made in bitcoin.
• The country would partner with digital finance company Strike to establish the infrastructure required to support the use of bitcoin as an official currency.
• Using bitcoin as legal tender would promote financial inclusion, tourism, innovation and economic development.
• Cryptocurrency digital wallets would help the ‘unbanked’ in the Central American region gain increased access to their finances. (1)  Only 30% of the Central American country’s population even has a bank account.
• The government promoted the cryptocurrency’s use by giving US$30 in free bitcoins to citizens who sign up for its national digital wallet, known as “Chivo,” or “cool” in English.
• Foreigners who invest three bitcoins in the country – currently about $106,000 – will be granted residency.
• President Bukele believes this will encourage investors with cryptocurrency to spend more of it in his country.
• El Salvador’s state-run geothermal utility plans to use energy from the country’s volcanoes to mine bitcoin.
• 200 bitcoin ATMs have been installed to allow people to convert cryptocurrency into dollars. (2)

Soon after the approval of bitcoin as a legal tender by El Salvadoran lawmakers, the country reached out to the World Bank for assistance with the implementation of Bitcoin nationwide.  “While the government did approach us for assistance on Bitcoin, this is not something the World Bank can support given the environmental and transparency shortcomings,” a World Bank spokesperson told the Reuters news agency via email (3)

Updates provided by the WSJ since bitcoin’s adoption as a legal tender in El Salvador include:

• Its use in day-to-day transactions has been rare, and a recent poll found that about 70% of respondents didn’t trust the government’s move.
• El Salvador is planning to issue in 2022 $1 billion in bonds backed by bitcoin, the latest effort by the economically stressed Central American nation to attract crypto capital.
• The bonds will be U.S. dollar-denominated 10-year bonds with a coupon of 6.5%.
• Half of that money would be used to buy bitcoin to hold for five years and the rest would fund construction projects related to bitcoin.
• El Salvador will issue the bond in partnership with Blockstream, a digital assets infrastructure company based in Canada. The bonds would be issued on blockchain, the digital ledger that allows for trading without traditional intermediaries such as banks.

Panama

• Panama has followed El Salvador’s lead in Central America: In September, a Panamanian lawmaker introduced a  proposed crypto regulation law that would adopt cryptocurrencies as a legal tender and create tax incentives for crypto-related businesses.
• A couple of days ago,  crypto legislation in Panama advanced in a legislative committee meeting:  “…two bills from different representatives both address crypto…”
• The 696 bill, introduced by Cenobia Vargas in August, would regulate cryptocurrencies, tokens, NFTs and blockchain technology used in Panama. That bill recommended regulating five crypto assets: Bitcoin, Ethereum, Tether, a cryptocurrency called Elrond, and a controversial token called Token 7UT.  The second, 697, is a wide-ranging crypto law introduced by independent congressman Gabriel Silva that specifically mentions Bitcoin and Ethereum as types of crypto assets. It focuses on bringing the country up to speed with the digital economy, crypto assets, and the internet. (4)

Ukraine

Last October in Ukraine, the Virtual Assets Bill was vetoed by President Volodymyr Zelenskyy.  Last week, the Ukrainian parliament voted in favor of the bill that legalizes all cryptocurrencies and virtual assets, including:

• Establishment of a regulatory framework for all virtual assets in Ukraine.
• Cryptocurrencies such as Bitcoin and Ethereum are classified under the term virtual asset.
• Virtual assets are defined as “any asset that cannot already be legally used as a payment instrument or traded for other assets, products, or services.”
• The legal groundwork for incorporating crypto assets into Ukraine’s financial and regulatory systems, the bill also confirms citizens’ rights to hold and use cryptocurrencies and defines the rights and duties of all cryptocurrency market participants.
• A stipulation that Ukraine’s National Securities Commission will act as the main regulator for virtual assets and any future virtual asset market.  (5)
• According to The Record, there is an ongoing heated debate over cryptocurrency mining in Ukraine.
• While the El Salvadoran President has plans to crypto mine via volcanic energy,  a group of Ukrainians in 2019 connected a nuclear plant to the internet to mine cryptocurrency.

Of course, we have to consider an update on the Ukrainian crypto market in the shadow of the Russian invasion.   Decrypt.co reports that “Russia provides an estimated 11% of the blockchain network’s hashpower” and that “bitcoin mining in Russia is largely unaffected amid Ukraine Invasion.” (6)    There are reports that Russia may use cryptocurrency to avoid US sanctions over the invasion of Ukraine.  We have not heard any reports on the impact of crypto mining operations in Ukraine as a result of the invasion.  Watch this space.

Overall, however, the Russian Invasion of Ukraine has sent cryptocurrency into a market tumble.  According to ZDNet:  “As of the mid-morning eastern time, Bitcoin was down nearly 8% over 24 hours, which actually represented a slight rebound from where it spent most of the overnight hours. Alongside it, Ethereum dropped as much as 10% in early morning trading, with many other coins following suit.  In fact, every cryptocurrency with an individual price above $3.00 was trending sharply downward by 10 am ET.”

Fortune Magazine recently provided coverage of the potential impacts of the Russian Invasion on the nascent Virtual Assets Law:  Ukraine is going all-in on becoming the world’s premiere crypto superpower. Now the Russia crisis is scaring investors:  “Ukraine has been positioning itself to be the main decentralized finance hub of not just Eastern Europe but the world as a whole. But now, just five months after the government legalized virtual financial assets and began the process of regulating them, conflict at the border has flared up, icing out the country’s ambitious crypto plans.”

Further Resources:

Global Crypto and Digital Currency Initiatives: India, Argentina, and Russia

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