Cryptocurrency Geopolitics
Cryptocurrency Geopolitics
I. Introduction
Cryptocurrencies, built on technologies like distributed ledgers (DLT) such as blockchain, have emerged as a notable development within the global financial system. They were initially thought of as alternatives to the traditional fiat currencies controlled by states, but these digital assets quickly grew beyond just niche uses. Now, they're topics of significant geopolitical focus and examination. Essentially, cryptocurrencies are digital or virtual tokens that use cryptography for security, and they operate without needing central authorities like banks or governments. Key characteristics include their decentralized nature, the potential for users to remain pseudonymous, and the ease of transferring them across borders.
This report offers an in-depth look at the geopolitical weight of cryptocurrencies. We'll explore how they interact in complex ways with established financial systems, international relations, regulations, and global power dynamics. The analysis examines how cryptocurrencies push against standard monetary ideas, their function in global finance, the different regulatory reactions they've sparked, and how both state and non-state entities use them for strategic gain. We also look into the development of Central Bank Digital Currencies (CBDCs) as a government response, the importance of crypto mining operations, and what all this means for technological rivalries and the global order. To wrap up, the report points out emerging trends and possible future directions, considering their long-term geopolitical effects. Throughout, the analysis stays neutral, relying on documented facts and known trends rather than pushing any political agenda.
II. Challenges to Traditional Fiat Currencies, Central Banking, and Monetary Sovereignty
Cryptocurrencies pose some basic challenges to how national and international finance usually works. They particularly affect fiat currencies, central banking systems, and the idea that nations control their own money. These effects play out differently in developed versus developing countries.
Undermining Fiat Currencies and Central Bank Authority
Traditional fiat money gets its value because a government says so and people trust the central bank issuing it, which manages money policy for stability. Cryptocurrencies, especially decentralized ones like Bitcoin, work outside this system. They don't have a central issuer or controller. Market forces, investor feelings, and how much they're used usually set their value, not central bank decisions. This decentralization naturally challenges the government's exclusive power to issue and manage currency.
Still, cryptocurrencies have major weaknesses compared to central bank money. They don't have a stable value anchor and their prices swing wildly, making them unreliable for storing value or measuring costs. So-called stablecoins try to fix this by linking their value to national currencies, basically piggybacking on the credibility of central banks. But even their stability is shaky, as shown when TerraUSD collapsed and with ongoing questions about the reserves backing major stablecoins like Tether. Also, the way many cryptocurrencies confirm transactions is decentralized, which can lead to network jams, high fees, and trouble scaling up. This tends to split the market across different blockchains instead of creating the unified network effect you see with trusted central bank currencies.
Eroding Monetary Sovereignty and Policy Effectiveness
If cryptocurrencies become widely used—a situation called "cryptoisation"—it directly threatens a nation's control over its money. When large parts of an economy start using cryptocurrencies (especially stablecoins tied to foreign money or global cryptos) for everyday payments, savings, or investments, it can make the country's own monetary policy less effective. A central bank's power to manage inflation, credit, and economic activity using tools like interest rates weakens if a lot of the economy uses assets it can't control. International groups like the IMF and FSB see giving cryptocurrencies legal tender status, like El Salvador did with Bitcoin, as particularly harmful to monetary policy and financial stability.
Crypto-assets can also make managing capital flows trickier. Because they cross borders easily and offer some anonymity, they can be used to get around rules meant to control the movement of capital, especially in countries that have such controls. This might lead to more volatile capital flows, potentially destabilizing finances and making it harder for governments to manage exchange rates and keep the financial system steady.
Divergent Impacts: Developed vs. Developing Economies
Why people use cryptocurrencies and how much impact they have varies quite a bit between developed economies (AEs) and emerging market/developing economies (EMDEs).
In Developed Economies: Here, cryptocurrency use is often about speculative investment, driven by market hype and global financial trends. While there are regulatory issues around protecting investors and market fairness, the immediate risk to monetary control is generally seen as lower because these countries have stronger institutions, more stable currencies, and well-established traditional financial markets.
In Developing Economies: In these places, cryptocurrencies often seem to offer real transaction benefits beyond just speculation. Their popularity is growing due to several factors:
Accessibility: They can provide financial services to people without bank accounts or with limited access to traditional banking.
Lower Transaction Costs/Speed: They might offer cheaper and faster ways to send money across borders, which is vital for economies that depend heavily on money sent home from abroad.
Hedging against Weak Currencies: They can act as an alternative way to store value or make payments in countries facing high inflation, falling currency values, and financial instability. Research indicates Bitcoin trading increases in EMDEs when their local currencies weaken. Examples include usage seen in places like Venezuela, Zimbabwe, Nigeria, and across Sub-Saharan Africa.
Although there are potential upsides like better financial inclusion, the higher adoption rates and specific uses in EMDEs also mean greater risks. These economies are more susceptible to financial instability from "cryptoisation" because they often have weaker monetary systems, more unbanked people, lower financial literacy, and pre-existing currency problems. The volatility of crypto-assets can hit vulnerable populations particularly hard.
III. Cryptocurrencies in International Trade and Finance
Besides challenging national monetary systems, cryptocurrencies are making waves in international trade and finance. This is mainly because of their potential for cross-border payments and their ability to bypass traditional financial middlemen.
Addressing Cross-Border Payment Frictions
Traditional ways of sending money internationally, which mostly rely on correspondent banks, often have problems: they're expensive, slow, not easily accessible, and lack transparency. These issues hamper international trade, economic growth, and efforts to include more people in the financial system. Recognizing this, the G20 launched a Roadmap back in 2020, overseen by the Financial Stability Board (FSB) and the Bank for International Settlements' Committee on Payments and Market Infrastructures (CPMI), aiming to improve cross-border payments for wholesale, retail, and remittance transactions. This plan focuses on things like making payment systems work together better, sorting out legal and regulatory issues, and standardizing data exchange.
Cryptocurrencies and Stablecoins as Payment Alternatives
Cryptocurrencies, especially stablecoins, are being looked at as possible fixes for the inefficiencies in traditional cross-border payments.
Potential Benefits: Supporters claim cryptocurrencies could make international transfers faster, cheaper, and more available, particularly for remittances. The underlying distributed ledger technology (DLT) allows for peer-to-peer transactions, which could cut out some intermediaries and reduce associated fees and hold-ups. Stablecoins, which are designed to keep a steady value against a fiat currency, are often pointed to for their usefulness in payments and settlements. Some projects, like Ripple/XRP, are specifically trying to use crypto-assets as "bridge currencies" to avoid the need for traditional correspondent bank accounts.
Limited Current Use: Despite the possibilities, the actual use of cryptocurrencies and stablecoins for everyday payments and settlements is still quite limited. A lot of stablecoin transactions seem to be related to activities within the crypto world itself – like arbitrage, providing liquidity, or automated bot trading – rather than for paying for real-world goods and services.
Bypassing Traditional Financial Intermediaries
A major geopolitical aspect of cryptocurrencies is their potential to go around established financial middlemen and the networks they use, like the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
Mechanisms for Disintermediation:
Peer-to-Peer (P2P) Transfers: Cryptocurrencies let users send value directly to each other anywhere in the world, without needing banks or payment processors in between.
Distributed Ledger Technology (DLT): Blockchain serves as a shared, unchangeable record book, lessening the need for the central reconciliation and verification services that traditional intermediaries usually provide.
Tokenization: Turning traditional assets (like currencies or stocks) into digital tokens on a blockchain enables nearly instant transfer and settlement across borders. This bypasses complex steps like SWIFT messaging and chains of correspondent banks. It can dramatically cut settlement times (from days down to almost nothing) and costs. Examples include internal transfers within big institutions or settling tokenized real-world assets.
Implications: This ability to cut out the middleman challenges the business models of current financial players. More importantly from a geopolitical view, it weakens the systems often used to enforce financial sanctions and anti-money laundering (AML) / counter-terrorist financing (CFT) rules. The traditional payment system, especially the dollar-focused network using SWIFT and correspondent banking, has become a key tool for national security and foreign policy, used to isolate countries and groups involved in illegal activities. Cryptocurrencies could offer ways to get "off" this system, possibly reducing how effective financial sanctions are.
Incumbent Responses: Realizing this threat, traditional players are also exploring blockchain and tokenization. SWIFT itself is testing blockchain solutions to connect different token platforms and potentially weave DLT into its existing network, trying to stay central even in a tokenized world. Major banks are also piloting their own stablecoins and token-based settlement systems.
IV. The Global Regulatory Maze: Fragmentation vs. Harmonization
The growth of cryptocurrencies has led to a wide range of regulatory responses around the world. This has created a complex and inconsistent landscape with considerable geopolitical consequences. While there are efforts to align regulations internationally, they face significant hurdles.
Divergent National Approaches
Countries have taken very different positions on regulating cryptocurrencies, influenced by their unique economic goals, risk tolerance, political views, and how well they understand the technology. Some key examples show this variety:
United States: Known for a fragmented approach. Multiple agencies like the SEC, CFTC, FinCEN, and the Treasury claim authority, often with different interpretations and goals. The SEC tends to see many crypto-assets as securities and applies existing securities laws, whereas the CFTC treats some (like Bitcoin) as commodities. FinCEN focuses on making sure exchanges and wallet providers comply with AML/CFT rules, using regulations like the Bank Secrecy Act (BSA) and the Travel Rule. This lack of a clear, single federal framework causes regulatory uncertainty, potentially slowing innovation and leading to "regulation-by-enforcement". State-level rules add another layer of complexity. Recent political discussions suggest a possible move towards clearer federal rules, maybe favoring stablecoins but opposing a retail CBDC.
European Union: Adopted a more unified and thorough approach with its Markets in Crypto-Assets (MiCA) regulation. MiCA sets up a licensing system for crypto-asset service providers (CASPs) and issuers, including those behind stablecoins. It imposes requirements similar to banks regarding capital, governance, and risk management. The aim is to create legal certainty, protect investors, ensure financial stability, and encourage innovation within a regulated space across the EU.
China: Enforced a strict ban on cryptocurrency trading and mining, citing worries about financial stability, money leaving the country, and energy use. At the same time, China is actively developing its own CBDC, the e-CNY (digital yuan), looking for greater state control over digital payments. Despite the ban, substantial underground mining still occurs.
El Salvador: Uniquely made Bitcoin legal tender in 2021. The goals were to increase financial inclusion, lower remittance costs, and attract investment. However, the decision has drawn criticism over the economic risks from Bitcoin's price swings and difficulties in putting it into practice.
India: India's regulatory position has shifted back and forth, from considering bans to thinking about regulation. Currently, cryptocurrencies aren't illegal, but there's no clear framework, which creates uncertainty. During its G20 presidency, India stressed the need for global coordination on regulating digital assets.
Other Approaches: Places like Japan and Singapore have set up regulatory systems, either applying existing laws or creating new specific rules. They often focus on licensing exchanges and ensuring AML/CFT compliance.
International Harmonization Efforts
Understanding that crypto-assets cross borders and that businesses might move to places with looser rules (regulatory arbitrage), international organizations are working to set global standards and encourage consistent application.
Financial Stability Board (FSB): Developed a Global Regulatory Framework for Crypto-asset Activities. It's based on the idea of "same activity, same risk, same regulation". This includes broad recommendations for crypto-assets and markets generally, plus stricter revised recommendations for "global stablecoins" (GSCs) because of their potential systemic importance. The framework aims for a comprehensive and consistent approach to financial stability risks across countries. The FSB coordinates with other bodies and checks on implementation.
Financial Action Task Force (FATF): Sets the worldwide standards for AML/CFT. FATF has applied its standards to virtual assets (VAs) and virtual asset service providers (VASPs). It requires countries to license or register VASPs, assess risks, and use preventive measures like customer due diligence (CDD) and reporting suspicious transactions. The FATF "Travel Rule" mandates that VASPs collect and share info about the sender and receiver for transactions over a certain amount. FATF monitors how well these rules are being implemented and points out countries with weak systems.
International Organization of Securities Commissions (IOSCO): Focuses on market integrity and protecting investors. IOSCO has issued policy recommendations for Crypto and Digital Asset (CDA) markets, covering CASP activities like trading, custody, and handling conflicts of interest. It also published specific recommendations for Decentralized Finance (DeFi), trying to ensure consistent regulatory outcomes even when systems claim to be decentralized. IOSCO highlights the importance of cross-border cooperation among securities regulators.
IMF and World Bank: Offer technical help, oversight, and policy guidance to member countries regarding the macroeconomic, fiscal, and financial stability effects of crypto-assets. They back the implementation of international standards and contribute to efforts like the G20's cross-border payments roadmap.
Geopolitical Implications of Regulatory Approaches
How cryptocurrencies are regulated—or aren't—has direct geopolitical effects.
Regulatory Arbitrage: Differences in rules create chances for crypto businesses to set up shop in places with lighter regulations. This can undermine stricter rules elsewhere and create an unfair competitive landscape. It influences where companies decide to base their operations.
Financial Fragmentation: If different standards emerge, especially along geopolitical lines, it could split the global financial system. This might increase difficulties in international trade and capital movement, possibly reducing global GDP and job growth.
Competition and Standards Setting: Countries and blocs (like the US and EU) compete to attract crypto innovation and establish regulatory models. Differences, like the EU's comprehensive MiCA versus the US's piecemeal approach, affect which standards might become global norms and influence the market share of firms (for instance, US-based stablecoin issuers operating in the EU).
Need for Cooperation: The borderless nature of crypto makes strong international cooperation and information sharing among regulators essential for effective supervision, rule enforcement, and preventing illicit activities. Lack of cooperation hampers proper oversight. Some see US leadership as crucial for global alignment, although its own internal regulatory divisions and "America First" stances can sometimes complicate this.
V. Use by State and Non-State Actors for Strategic Purposes
The distinct features of cryptocurrencies—like pseudonymity, borderless transfers, and operating outside traditional financial systems—make them appealing tools. Both state and non-state actors might use them to pursue strategic goals, especially when it comes to getting around economic sanctions or funding illegal activities.
Circumventing Economic Sanctions
Several countries facing international economic sanctions have reportedly used cryptocurrencies to bypass these restrictions, access the global financial market, or generate income.
North Korea (DPRK): It's well-documented by the UN Panel of Experts, the US Treasury, and cybersecurity companies that North Korea uses sophisticated cyberattacks to steal cryptocurrency from exchanges and DeFi platforms. Estimates suggest billions of dollars have been stolen over the years. These funds are thought to finance the regime's weapons of mass destruction and ballistic missile programs. North Korean groups, such as the Lazarus Group, use advanced laundering methods, including mixers (like Blender, Tornado Cash, and ChipMixer before it was shut down) and moving funds across different blockchains via DeFi protocols and bridges. Reports also indicate North Korean bank representatives use crypto in schemes involving shell companies and foreign banks, including some in Russia and China. Weak government oversight in the global crypto sector has allowed this activity to flourish.
Iran: Iran has utilized cryptocurrency mining, which it legalized in 2018 (though sometimes restricted due to energy shortages), partly to lessen the impact of sanctions. Reports suggest mined cryptocurrencies are used to pay for imported goods. Iran has also reportedly used crypto transactions to fund groups like Hamas and Hezbollah. Iranian networks have apparently used crypto to buy US technology needed for blockchain infrastructure. The US Treasury has sanctioned entities involved in ransomware attacks linked to actors associated with Iran's IRGC who laundered money through crypto exchanges.
Russia: After facing extensive sanctions following the invasion of Ukraine, there are signs Russia is increasingly looking at cryptocurrencies to get around restrictions. This reportedly includes Russian banks offering crypto trading services and the use of Russian virtual currency exchange services (like Garantex, which OFAC sanctioned) to move money. Russian networks procuring sanctioned goods might also be using crypto. Russia legalized crypto mining in 2024. Russia-based ransomware groups (e.g., Conti, Evil Corp), believed to be linked to Russian intelligence, have generated significant income via crypto. Russia has also cooperated financially with North Korea using crypto and correspondent banking to bypass sanctions.
Venezuela: Venezuela has also reportedly used cryptocurrencies to dodge sanctions.
While just how much sanctions evasion happens via crypto compared to traditional methods is debatable, the fact that these actors have proven it's possible presents a growing challenge to the effectiveness of sanctions as a foreign policy instrument. In 2024, sanctioned entities reportedly received $15.8 billion in crypto, making up 39% of all illicit crypto volume tracked by Chainalysis.
Financing Illicit Activities
Beyond state-level sanctions evasion, cryptocurrencies are employed in various illegal activities because they seem anonymous and are easy to transfer across borders.
Money Laundering (ML): Criminals use crypto to clean money from crimes originating both within the crypto world (like hacks, scams, darknet markets) and from traditional offline crimes (like drug trafficking, fraud). In 2023, illicit addresses sent $22.2 billion to various services, down from $31.5 billion in 2022. Laundering methods include using mixers, moving funds across different blockchains via DeFi protocols and bridges, using exchanges that don't follow regulations, and employing money mules. A large portion of illicit funds still flows through a small number of exit points, although the concentration at the deposit address level seemed to decrease in 2023.
Terrorist Financing (TF): Although evidence of large-scale use is scarce, terrorist groups and their supporters show increasing interest in using cryptocurrencies (like Bitcoin) and online crowdfunding to raise funds. FATF has warned about TF risks associated with crowdfunding. The potential anonymity can help facilitate secret activities.
Ransomware: Cryptocurrency is the main form of payment demanded by ransomware attackers. Ransomware continues to bring in hundreds of millions annually for these criminals. The money is laundered using techniques similar to general money laundering (mixers, chain-hopping, non-compliant VASPs).
Other Crimes: Cryptocurrencies are also used in transactions on darknet markets, in fraud schemes (like "pig butchering"), for payments related to child sexual abuse material (CSAM), and possibly in human or weapons trafficking.
Tracing, Detection, and Countermeasures
Despite the difficulties posed by techniques designed to enhance anonymity, the public nature of many blockchains actually provides ways to trace illegal funds.
Blockchain Analysis: Specialized tools and methods allow investigators to follow crypto flows, group related wallets together, identify connections to real-world entities (like exchanges), and map out transaction networks. Companies such as Chainalysis, Elliptic, and TRM Labs offer these services to law enforcement, regulators, and financial institutions. Blockchain intelligence combines on-chain data (from the blockchain itself) with off-chain information (from other sources) for a more complete picture.
Effectiveness: Blockchain analysis has proven useful in many cases. It has led to the seizure of illicit funds (for example, recovering the Colonial Pipeline ransom and funds from the Bitfinex hack), the identification of criminal networks, and evidence used in prosecutions. The traceability of crypto actually makes large-scale sanctions evasion harder compared to using cash.
Limitations & Challenges: Sophisticated criminals use mixers, privacy-focused coins, move funds across different blockchains (chain-hopping), and utilize non-compliant services to cover their tracks. Following funds across different blockchains (cross-chain analysis) is still complicated. The reliability and acceptance of blockchain evidence in court can sometimes be questioned. A lack of expertise and over-reliance on private commercial tools can also be issues.
Regulatory & Enforcement Actions: Implementing and enforcing FATF standards, particularly the Travel Rule, is crucial. Authorities are increasingly targeting the infrastructure used for illicit activities. This includes imposing sanctions on mixers like Blender, Tornado Cash, and Sinbad, as well as exchanges like Garantex and Bitzlato. International cooperation is essential for effective enforcement. OFAC sanctions are increasingly targeting specific crypto addresses and individuals/entities involved in sanctions evasion and illicit finance.
VI. Central Bank Digital Currencies (CBDCs) as a State Response
The spread of private cryptocurrencies and stablecoins has pushed central banks around the globe to explore, develop, and sometimes even launch their own digital currencies, known as Central Bank Digital Currencies (CBDCs). CBDCs are a major government-led reaction, aiming to use new technology while also strengthening control over the monetary system.
Definition and Motivations
A CBDC is essentially a digital version of a country's fiat currency, and it's a direct liability of the central bank. Unlike private cryptocurrencies, it's centralized and backed by the government's full authority. Central banks are looking into CBDCs for several reasons, which often vary between advanced and developing nations:
Countering Private Digital Currencies: A key driver is to offer a secure, state-backed digital option to compete with private cryptocurrencies and stablecoins. This helps lessen the risks if those private options become too popular and preserves the nation's control over money.
Improving Payment Systems: Making domestic payment systems more efficient, faster, stronger, and competitive is a major goal, especially in advanced economies. CBDCs could provide a modern, digital public payment choice.
Promoting Financial Inclusion: Particularly important for emerging and developing economies, CBDCs could give people without bank accounts access to digital payments and basic financial services. Well-designed CBDCs might lower costs and make it easier to join the formal financial system. Data on CBDC use could potentially help people build credit histories.
Enhancing Monetary Policy Implementation: Some central banks think CBDCs might help monetary policy work better, though this is a complex and debated topic.
Improving Cross-Border Payments: Wholesale CBDCs (WCBDCs), which only financial institutions could use, are being explored to make international payments quicker, cheaper, and more transparent. They could potentially replace or supplement the current correspondent banking system.
Reducing Illicit Finance: Since CBDCs would be traceable by the central bank (depending on how they're designed), they could potentially help fight money laundering and illegal transactions better than cash or pseudonymous cryptocurrencies. However, this raises significant privacy concerns.
Global Landscape and Key Projects
CBDC research and development is happening worldwide, with considerable activity in various types of economies.
Global Status: As of early 2025, 134 countries and currency unions (covering 98% of global GDP) are exploring CBDCs. This is a huge jump from just 35 in 2020. Sixty-six are in advanced stages (development, pilot, or launch), including 19 of the 20 G20 nations. Three countries—The Bahamas (Sand Dollar), Jamaica (Jam-Dex), and Nigeria (eNaira)—have fully launched retail CBDCs, although getting people to actually use them has been slow initially. Globally, there are 44 ongoing pilot projects.
China (e-CNY): The digital yuan pilot is the world's largest. It's running in many provinces, being used for more and more things (like payroll, shopping, transportation), and handling a massive amount of transactions (reaching $986 billion by June 2024). China wants to boost efficiency, compete with private payment giants (like Alipay/WeChat Pay), and potentially increase the international use of the RMB.
Eurozone (Digital Euro): The European Central Bank (ECB) is in a "preparation phase" (since Nov 2023). They're finalizing rules and choosing tech providers, with potential development starting late 2025. Their reasons include ensuring Europe has control over its own payment systems and providing a digital anchor for their money system.
United States: Officially, the US has been more hesitant. While it's involved in wholesale CBDC experiments like Project Agorá, there's significant political resistance to a retail CBDC due to worries about privacy and government overreach. A bill prohibiting direct issuance passed the House in May 2024 but hasn't cleared the Senate. The current administration seems to lean towards supporting private, dollar-backed stablecoins as an alternative strategy.
Cross-Border Projects: Exploration into cross-border wholesale CBDCs has surged, especially after the sanctions on Russia. Notable projects include:
Project mBridge: A joint effort involving China, Hong Kong, Thailand, UAE, and Saudi Arabia. It uses a shared DLT platform for real-time, multi-currency international payments, potentially lessening dependence on correspondent banks and the US dollar.
Project Agorá: Involves the BIS and central banks from the US, UK, Eurozone, Japan, Mexico, South Korea, and Switzerland. It's looking into how tokenized commercial bank money and wholesale CBDCs could improve cross-border payments via a public-private programming interface.
Geopolitical Implications of CBDCs
The creation and rollout of CBDCs have deep geopolitical significance, potentially changing global currency influence and financial power balances.
Challenge to US Dollar Dominance: CBDCs, especially cross-border projects like mBridge and initiatives by groups like BRICS to build alternative payment systems using their national digital currencies, could pose a long-term threat to the US dollar's leading role in international trade and finance. By allowing direct digital exchange of national currencies, CBDCs might reduce the need for the dollar as a go-between or reserve currency.
Formation of Currency Blocs & Fragmentation: If different technological standards and regulations for CBDCs develop, combined with geopolitical alliances, it could lead to clusters of interoperable CBDCs among allied nations, separate from others. This might increase financial fragmentation—making things less efficient globally but also allowing blocs (like one led by China or aligned with BRICS) to operate more independently from the US-dominated system.
Enhanced Sanctions Circumvention/Enforcement: Depending on how they're designed and how much international cooperation there is, CBDCs could either make it easier for states to track transactions and enforce sanctions domestically, or conversely, open up new ways for sanctioned states to trade and finance internationally outside traditional, monitored systems, especially if alternative CBDC platforms catch on.
Standards Setting and Technological Leadership: The rush to develop CBDCs is also a competition to set the international technical and regulatory benchmarks. Countries or blocs that create dominant platforms or rules could gain considerable geopolitical clout. Some argue that the US lack of leadership in retail CBDC development is letting competitors like China gain ground.
Privacy vs. Surveillance: CBDC designs inherently involve balancing user privacy against the government's ability to monitor transactions. Models like China's e-CNY prioritize state surveillance, which raises concerns about potential misuse and sets a precedent different from Western privacy values.
VII. The Geopolitics of Cryptocurrency Mining
Cryptocurrency mining, especially the energy-hungry Proof-of-Work (PoW) method used by Bitcoin, has important geopolitical aspects. These relate to energy use, where mining happens, competition for resources, and its potential use as a tool by governments.
Energy Consumption Debate
Bitcoin mining uses specialized computers (ASICs) to solve complex math problems, which validates transactions and keeps the network secure. This process uses a huge amount of electricity.
Scale of Consumption: Estimates suggest global Bitcoin mining consumes electricity comparable to entire countries. The Cambridge Centre for Alternative Finance (CCAF) tracks this with its Cambridge Bitcoin Electricity Consumption Index (CBECI). Preliminary US EIA estimates put Bitcoin mining at 0.6% to 2.3% of total US electricity consumption. This significant energy demand worries policymakers and grid operators due to potential impacts on electricity prices, grid stability, and carbon emissions.
Environmental Impact: The environmental effect really depends on where miners get their energy. Mining powered by fossil fuels (especially coal) leads to substantial greenhouse gas (GHG) emissions. However, mining using renewables (like hydropower) or nuclear power has a much smaller carbon footprint. CCAF estimated Bitcoin's yearly GHG emissions were around 48.35 million tonnes of CO2 equivalent as of Sept 2022 (about 0.10% of global emissions), with fossil fuels making up about 62.4% of the power mix in Jan 2022.
Surplus/Wasted Energy Argument: One counterpoint is that Bitcoin mining is mobile and can tap into energy resources that might otherwise go unused or be wasted. This could include using excess renewable energy (like extra hydropower during rainy seasons) or capturing flared natural gas at oil drilling sites, potentially turning waste into profit. In these specific scenarios, mining might not directly compete with other energy needs. Still, the overall environmental impact is complex and depends heavily on the specific situation.
Geographic Concentration and Shifts
Where mining operations are located is mostly determined by the availability of cheap electricity and, more recently, by the regulatory climate. This has resulted in mining being heavily concentrated in certain areas, with dramatic shifts over time.
Dominance and Ban in China: China was the clear leader in Bitcoin mining until mid-2021, hosting over 60-75% of the global mining power (hashrate) at its peak. This was largely due to cheap electricity, especially seasonal hydropower in Sichuan. The Chinese government banned mining in June 2021, citing financial risks and environmental worries. This caused an immediate, significant drop in global hashrate and led to a massive exodus of mining operations from the country.
Rise of the United States: After the China ban, the US quickly emerged as the world's top mining location. Friendly regulations in states like Texas, Georgia, and Kentucky, along with access to capital, existing infrastructure, and varied energy sources, attracted a large share of the hashrate.
Kazakhstan's Boom and Bust: Kazakhstan initially saw a huge influx of miners after the China ban because of its cheap, coal-based energy and proximity. But the surge overloaded its energy grid, causing power outages. This led to government restrictions and tighter regulations, causing its market share to fall quickly.
Russia's Growing Role: Russia has become a major mining destination, benefiting from abundant, low-cost energy (natural gas, hydropower) and a cold climate that helps cool mining equipment. The government legalized mining in 2024, possibly indicating strategic interest, though geopolitical tensions and sanctions create risks for foreign miners there.
Current Distribution (Estimates Vary): Pinpointing the exact geographic spread is tricky. Data often relies on mining pool IP addresses (like CCAF's) or industry estimates (like Hashrate Index), which have limitations (e.g., VPNs can hide locations, pool data might not be fully representative). However, available data generally shows:
United States: Remains dominant (~36% estimated Dec 2024), driven by state-level regulations, energy mix, infrastructure, and capital access.
Russia: A strong second (~16% estimated Dec 2024), leveraging cheap energy and recent legalization, though with high regulatory risk for foreign firms.
China: Still holds a significant underground presence (~14% estimated Dec 2024), despite the official ban.
Kazakhstan: Share has declined sharply (~2.5% estimated Dec 2024) due to energy constraints and regulations.
Canada: A notable player (Top 10), benefiting from hydropower and stable regulations.
Other Countries: Collectively account for a substantial portion (~31.5% estimated Dec 2024), including smaller operations and unattributed hashrate.
Note: Data from sources like CCAF and Hashrate Index use different methods and timings, causing variations. CCAF's IP-based data might inflate figures for countries like Germany or Ireland due to VPN use. Iran has also used mining to counter sanctions, though energy shortages are an issue.
Mining as a Geopolitical Lever: Resource Competition and Sanctions Evasion Links
The physical equipment and energy needs of mining firmly place it within geopolitical contexts.
Energy Resource Competition: The search for cheap power drives mining location choices. This can lead to competition with other industries or homes for electricity, affecting local energy prices and grid stability, especially in areas with limited supply, as Kazakhstan experienced. On the flip side, the ability to use surplus or stranded energy can be presented as an economic plus.
State Control and National Interest: Governments look at mining differently. China's ban showed its priorities were financial stability, energy control, and preventing capital flight. The US sees competition among states to attract investment and jobs. Russia's 2024 legalization hints at a potential strategic interest – perhaps seeing mining as a revenue source or a way to use its energy resources domestically, particularly while under sanctions.
Direct Link to Sanctions Evasion: Cryptocurrency mining gives sanctioned nations a concrete way to generate hard currency outside the traditional financial system. They can directly turn energy resources into globally tradable digital assets. Iran explicitly legalized mining partly to soften the blow of sanctions, using mined crypto to pay for imports. Russia's legalization and vast energy reserves put it in a position to potentially use mining similarly, bolstering its resilience against Western economic pressure. This shifts mining from just an economic activity to a potential tool of statecraft for resisting sanctions.
Therefore, where mining power is located isn't just a technical matter. It reflects global energy economics, regulatory choices, and underlying geopolitical strategies, especially concerning control over resources and resilience to sanctions.
VIII. Synthesis: Cryptocurrencies and the Evolving Global Order
The rise and development of cryptocurrencies are connected to wider changes in international relations, technological competition, and existing global power arrangements. They both drive change and mirror current geopolitical situations.
Impact on International Relations and Power Dynamics
Cryptocurrencies add new layers of complexity to relationships between countries, and between countries and non-state groups.
Challenge to State Authority: By providing decentralized ways to transfer and potentially store value, cryptocurrencies challenge the state's traditional monopoly over currency and the control it exercises through central banking and financial surveillance. This can weaken the state's power compared to individuals, companies, or international networks that use these technologies.
New Arenas for Competition and Conflict: The crypto world has become a new field for geopolitical games. Countries compete to attract innovation with favorable rules, race to develop CBDCs to maintain monetary control and possibly extend influence, and try to set international standards. At the same time, it creates avenues for conflict, like state-sponsored theft of crypto-assets, using crypto to dodge sanctions, and funding illegal activities that can destabilize regions. On the other hand, international cooperation is vital for effective regulation (like through the FSB and FATF) and managing cross-border payment systems.
Erosion of US Financial Hegemony: Cryptocurrencies and related tech, especially CBDCs developed by rivals or groups like BRICS, offer potential alternative financial pathways. Over the long run, these could lessen reliance on the US dollar and the US-centered financial system. This includes reducing the dollar's role as the go-between currency in foreign exchange and trade settlements, and potentially weakening the impact of US financial sanctions if alternative systems become popular. While the dollar's dominance is still strong now, the emergence of viable alternatives signals a potentially significant shift.
Empowerment of Non-State Actors: Cryptocurrencies can empower various groups outside of governments. People in countries with unstable economies or oppressive governments might gain access to financial tools or protect themselves against inflation. Companies could potentially make their international operations more efficient. However, illegal networks (like terrorist groups, criminal organizations, ransomware gangs) also get new tools for funding and money laundering, challenging state control.
Technological Competition and the Future of Digital Infrastructure
The development of cryptocurrencies, stablecoins, DeFi platforms, and CBDCs is all part of a wider global contest over who controls the architecture of future digital financial infrastructure.
Race for Technological Standards: Countries and economic blocs are competing, directly or indirectly, to establish the dominant tech protocols and regulatory rules for digital finance. China's advanced e-CNY pilot and its role in Project mBridge, the EU's comprehensive MiCA rules, and the US debate over stablecoins versus CBDCs all show different strategies and ambitions for shaping this future. Who wins this race will influence global compatibility, efficiency, and control.
Control over Infrastructure: Geopolitical power lies not just in the digital assets themselves, but in controlling the underlying infrastructure. This includes the blockchain networks, the payment platforms built on them, the manufacturing of key hardware (like mining ASICs, where China used to dominate), and access to the energy needed for mining. Government influence over national CBDC platforms is another form of infrastructure control.
Interoperability vs. Fragmentation: There's a major tension between the potential economic gains of a globally connected digital financial system (making cross-border payments and trade smoother) and the trend we're actually seeing towards fragmentation. Different regulations and the development of CBDC platforms along geopolitical lines (like mBridge) risk creating separate, siloed "intranets" of money instead of a truly global system. This could mirror the kind of fragmentation seen elsewhere on the internet.
In the end, cryptocurrencies and the wider digital asset world act as both triggers for and reflections of geopolitical shifts. They offer new tools that allow challenges to the current financial order (like aiding de-dollarization efforts or sanctions evasion). At the same time, they mirror existing tensions and competing ideas about global governance among major powers like the US, China, and the EU. The ongoing struggle over how to regulate and adopt these technologies is really a debate about the future balance between state control, private innovation, decentralization, privacy, and economic power in our digital era.
IX. Horizon Scanning: Future Trends and Geopolitical Consequences
The geopolitical scene being shaped by cryptocurrencies is constantly changing. Future advances in the technology itself, how it's regulated, and how widely it's adopted will keep influencing international relations and global finance.
The Evolving Ecosystem: DeFi, Stablecoins, and Innovation
Several key parts of the crypto world look set for further change, with potential geopolitical effects.
Decentralized Finance (DeFi): DeFi tries to copy, and maybe improve upon, traditional financial services (like lending, borrowing, trading) using smart contracts on blockchains, cutting out intermediaries. While it holds promise for efficiency gains and broader access, DeFi currently faces big risks. These include operational weaknesses, vulnerabilities in smart contracts leading to hacks, unclear leadership structures, the potential to worsen traditional financial risks like excessive borrowing (leverage) and not having enough ready cash (liquidity mismatches), and difficulties in applying current regulations. Regulators like IOSCO are working on rules, but effectively overseeing genuinely decentralized systems is still tough. If DeFi matures, becomes safer, and finds ways to connect with regulated finance or operate effectively on a large scale, its power to disrupt traditional finance and challenge state control could grow significantly.
Stablecoins: Stablecoins, especially those aiming for worldwide use (GSCs), continue to be a major focus for regulators. This is because of their potential systemic importance and the risks they carry (like the possibility of bank runs or questions about whether they have enough reserves). More regulatory clarity, like MiCA in the EU or potential future laws in the US, could lead to wider use for payments and international transfers. However, how they maintain stability and link up with the traditional banking system still raises concerns about financial stability. If the US strategically promotes USD-backed stablecoins, it could strengthen the dollar's influence in digital systems, pushing back against CBDC projects from rivals. Conversely, if stablecoins backed by other currencies or currency baskets gain traction, it could further divide the landscape.
Technological Breakthroughs: Ongoing innovation could change the geopolitical game. Progress in making blockchains handle more transactions faster (scalability solutions) might overcome current limits. Advances in privacy-enhancing tech (like zero-knowledge proofs) could make transactions more anonymous. This might make it even harder for regulators and law enforcement to track illegal money flows and enforce sanctions. Better protocols for connecting different blockchains and traditional systems (interoperability) could allow smoother links, either encouraging standardization or enabling alternative financial systems to work more effectively. Integrating Artificial Intelligence (AI) with blockchain and finance could bring new efficiencies but also new, unforeseen risks.
Tokenization: The trend of representing real-world assets (like property, bonds, commodities) as digital tokens on blockchains is likely to continue. This could make traditionally hard-to-sell assets more liquid and speed up settlements. But it also creates stronger connections between the crypto world and traditional financial markets, potentially opening up more ways for risks to spread.
Long-Term Scenarios and Strategic Considerations
Looking further out, we can imagine several possible futures for how cryptocurrencies, regulation, and geopolitics might interact:
Scenario 1: Deepening Fragmentation: If countries keep going their own ways with regulations, and competing, incompatible CBDC platforms develop along geopolitical lines (e.g., a US/Western bloc, a China-led bloc, a BRICS bloc), we could end up with increasingly isolated digital financial systems. This would likely add friction and cost to global trade and finance, possibly undoing some benefits of globalization.
Scenario 2: Gradual Harmonization: Maybe, driven by the need for efficiency and stability, and guided by international bodies like the FSB, FATF, and IOSCO, nations could slowly move towards common regulatory standards and technical compatibility for digital assets and CBDCs. This would need significant political determination, compromise, and trust-building among the major powers. Such a future could allow for a smoother integration of digital assets into the global financial system.
Scenario 3: A Complex Hybrid System: The most probable outcome, at least in the near to medium term, might be a mixed landscape. Traditional finance would exist alongside regulated crypto markets (including stablecoins), various national CBDCs with limited international use, and maybe persistent pockets of unregulated or illegal DeFi activity. This multi-layered system would pose ongoing difficulties for regulation, oversight, and keeping the financial system stable.
Strategic Imperatives:
For governments, navigating this changing scene means balancing the push for potentially helpful financial innovation against the need to manage the risks—like financial instability, illegal finance, consumer harm, and threats to control over money.
International cooperation is still vital, even with geopolitical friction, because digital assets naturally cross borders.
For banks and other private companies, adapting to new technologies, changing rules, and more competition from both old and new players will be key to surviving and thriving.
The future geopolitical impact will largely hinge on which technologies become mature, how they end up being regulated, and how strategically different global players use them. The development of DeFi and stablecoins, in particular, needs close watching, as they seem to have more potential than early cryptocurrencies like Bitcoin to fundamentally change financial structures and state power.
X. Conclusion
Cryptocurrencies and the wider digital asset field have clearly become factors with major geopolitical importance. They challenge the very basis of traditional money systems, affecting national sovereignty, the power of monetary policy, and the usual ways international finance works. While cryptocurrencies offer the potential for faster and cheaper cross-border payments, especially remittances to developing countries, they have also been demonstrably used to get around economic sanctions and fund various illegal activities. This creates new difficulties for regulators and law enforcement worldwide.
The emergence of Central Bank Digital Currencies is a direct government reaction, aiming to adopt digital innovation while reinforcing sovereign control. Yet, CBDC development itself carries geopolitical significance. It could potentially shift global currency rankings, enable alternative payment alliances, and establish new norms for financial surveillance.
