CRYPTOCURRENCY AS FINANCIAL SOVEREIGNTY: ADOPTION PATTERNS IN ECONOMIES UNDER SANCTIONS

Authors: Sadia Jamil, Kausar Raza

Abstract

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This paper introduces econometric data on the process of cryptocurrency adoption in 25 approved economies in 2015-2024, combining blockchain analytics data with Chain-analysis with the central bank survey data and bilateral trade statistics. We record a 340% growth rate of aggregate crypto adoption after events of tightening sanctions, and 68 percent of the volume of transactions is allocated to import-substitution trade finance, and not remittance flows. The panel fixed-effects regression analysis indicates that both one standard deviation growth in the severity index of sanctions is associated with a 2.4 percentage point growth in the crypto adoption, with the macroeconomic fundamentals held constant. The heterogeneity analysis across countries reveals that economies which have existing energy subsidies (Iran, Russia) have rates of adoption that are 3.7x higher when it comes to a mining program that is approved by the state, and fragile states (Afghanistan, Syria) see the lowest adoption rates due to the infrastructural limitations. Cryptocurrency counterfactuals show that access of cryptocurrency decreased effective remittance expenses by an average of 6.8 to 1.2 in high-adoption jurisdictions, which saved 1.3 billion dollars in recipient households. Nevertheless, the gains of inflation hedging are concentrated mostly in the urban elites with a rise in Gini coefficients of 4-6 points in both Venezuela and Iran. The responses to the questionnaires on central banks (n=30 policymakers) indicate that there was a policy dilemma: 73% consider crypto to be the way to survive financially and 87% are worried about losing monetary sovereignty. The analysis shows that the most important channels of sanctions leaks are those in which Russia received 49 billion in crypto payments in Q4 2023-Q1 2024 which is 12 percent of the pre-sanctions merchandise exports. Our solution offers a Targeted Crypto Sanctions Framework to differentiate between licit and illicit finance with the help of risk-based wallet screening, jurisdictional stablecoin regulation, and balanced mining policies. Results are used to support current arguments on the effectiveness of sanctions policy, as well as the design of Central Bank Digital Currency (CBDC) in geopolitically restricted settings.