Last updated on September 21, 2022
This year saw Russia invade its neighbor to the west, Ukraine. The conflict has been condemned by many countries and justified by Moscow, depending on what news stations you watch. In addition to the political and environmental toll that this conflict is having on the world, there’s also a shift occurring in the financial sector due to how the military incursion is being countered.
5th Gen War space
To understand how war is changing your financial system, you simply need to look at the generations of warfare and how each has altered the battlefield. Notably, each generation of warfare takes aspects from the one before and expands. As such, a conflict can include all generations of warfare.
The first generation of warfare can be categorized by large formations, cavalry, spears, swords, arrows, and other primitive means of vanquishing your enemy. Think of Roman legions marching or even Napoleon’s army conquering Europe. These were large uniformed battles that usually operated by some code of battlefield conduct.
The second generation of warfare came about in WWI. This generation of warfare saw the introduction of mechanized killing machines like machine guns. You also had advancements in firearms such as rifling of barrels which provided better accuracy to shooters. These developments led to the birth of precision rifles and sharpshooters, better known as snipers today. These actions made it even easier to get your point across on the battlefield.
The 3rd generation of warfare begins in WWII and all following conflicts. It includes the introduction of advanced aircraft, precision-guided weaponry, nuclear weapons, and the idea of battling for “hearts and minds.” The third generation of warfare is the most familiar to people as it has been in use for nearly a century. Notably, the need for fighting skills geared toward large equally balanced forces began to dwindle as conflict broke down into proxy wars.
Effects of 2cd-3rd Gen Warfare on Global Finances
The sheer devastation of 3rd generation warfare changed the financial markets forever. For one, Europe was destroyed and broke following the global conflicts. To keep their war effort alive, they had spent all of their reserves with the US, which was now the world’s first superpower.
This designation enabled countries to peg their currencies to the USD and make USD legal tender in their nations. However, the need to continue fighting the expensive battle in Vietnam led the US to go off of the gold standard during the war. At this point, USD’s value was backed by the fact that it was the only currency used to purchase oil globally.
The cold war led to smaller conflicts and the birth of the 4th generation of warfare, which is large forces battling smaller insurgencies. This style of warfare changed military doctrine forever. Now, you had a large highly advanced force battling a small underpowered guerrilla movement. Interestingly, fourth-generation warfare has shown just how effective insurgencies can be. They blend the lines between combatants and civilians which makes warfare much harder to conduct in a positive light.
The rise of insurgencies leads to the 5th generation of warfare. This is the style of warfare we are seeing today in Ukraine put forth by the country’s allies. In a fifth-generation war, it’s hard to determine who is friend or foe. The constant threat of insurgencies has led forces to consider all sides hostile. It has also led to the use of unorthodox methods of fighting such as financial warfare.
Weaponization of the Dollar
Russia isn’t the first country to receive US sanctions, but it is the largest and most financially capable. Countries like Venezuela have felt the brunt of unilateral US sanctions that crippled their local currency. They have also had their gold reserves confiscated and delivered to opposition pro-US governments. Russia is now facing down the barrel of an intense sanctions package meant to cripple the country’s economic sector.
NATO members have voted to cut Russia’s central bank off from the SWIFT payment settlement system. This news caused the Ruble to lose 70% of its value following the announcement. This maneuver effectively wiped the savings accounts of all Russians clean. However, Russia is no stranger to sanctions, and it has put forth some of its financial might to counter these actions.
This month, Russia announced that all international oil payments must be made in Rubles. This maneuver shocked G7 countries like Germany that have moved to sanction Russia but depend heavily on its oil. Currently, 40% of all German oil is imported from Russia. This move boosted the Ruble’s value immediately. Then, Russia played another strategic chess move by pinning the Ruble to the country’s vast gold reserves. This maneuver pegged the Ruble to a floor on the USD via gold.
5th Generation Warfare, Civilians are Open Targets
In this new gyration of warfare, countries will attempt to turn civilians against their governments using economic depression and other methods of social engineering. The goal of these projects is to get the people to become so upset that they topple your enemy for you. Sadly, this style of warfare is already here, with people suffering in the millions globally for political agendas.
What Do These Maneuvers Mean
There are several implications that one can surmise from these actions. One, the USD is set to see rising competition as a global settlement currency. Additionally, there is a growing mistrust among countries outside of the G7 in terms of financial freedom. The US and UK have shown they will confiscate your country’s gold reserves held in their vaults if they don’t approve of your actions.
Cryptocurrencies are Center Stage
Another effect of these actions is a steady rise in cryptocurrency use. The conversion rate of Rubles to cryptocurrency hit all-time highs following the launch of sanctions. Cryptocurrencies have proven to be an excellent way to fight induced inflation on a local currency. Russian civilians that managed to convert their savings into cryptos like Bitcoin managed to avoid the 70% loss in value that followed.
Ukrainians Use Cryptocurrencies to Secure Global Support
Another advantage of blockchain-based currency has been demonstrated during the Ukraine conflict. Millions in international donations were sent to Ukrainians via cryptocurrencies. These protocols enabled people to send their donations directly in a peer-to-peer manner to those in need. Notably, these systems worked great because they were unaffected by the country’s conflict. People began receiving crypto in the safety of their homes which made it possible to purchase food and other vital survival supplies. The country moved to make Bitcoin legal tender this month.
More Countries will Go Full Crypto
The weaponization of the centralized financial system has left countries with few options. They must consider how to protect their national wealth without relying on the traditional means of accomplishing this task. Even NATO friendly countries are seeing the benefits of changing their reserves to cryptocurrencies like Bitcoin
The Latin American country of El Salvador raised eyebrows when they made Bitcoin legal tender. As legal tender, merchants and government services must now accept Bitcoin. This maneuver helped El Salvadorians avoid the crushing hyperinflation their local currency had. It also provided better store-of-value characteristics. As such, the country continues to add to its Bitcoin reserves, with the president often tweeting about adding million in Bitcoin to the country’s balance sheet.
Better Options than Bitcoin – Safehaven Tokens
Safehaven tokens combine the stability of stablecoins with the yield generation strategies of DeFi and value locking smart contracts. These systems improve store of value capabilities considerably. A perfect example of a safehaven token is META 1. The META 1 safehaven token is pegged to a basket of gold-related assets. These assets appreciate over time which makes the token inflationary resistant.
Additionally, the developers have put in a value-locking smart contract that prevents large whale dumps. The system leverage off-chain sensors called oracles. These sensors monitor the value of all pinned assets and trades. The system ensures the tokens can’t trade for less than their underlying asset’s value. This strategy prevents whale manipulation.
These techniques are highly effective and eliminate volatility from the equation. However, there is little chance of governments getting to use META 1. The developers have blocked the network from these groups. Only private users can leverage META 1’s next-gen features.
What if the US Tries to Block Crypto in Russia?
The concept of blocking people’s access to cryptocurrencies goes against everything these networks were built to accomplish. Already, there has been considerable effort put forth to pressure large CEXs (centralized exchanges) to block Russians. Large highly-regulated CEXs may have to bend to this pressure, but DEXs operate as pure code. There is no way to ban users on these systems.
You could see the US attempt to flag or color code Bitcoin they find associated with Russians. This maneuver is dangerous for Bitcoin as a network because it threatens the protocol’s fungibility. Fungibility is a requirement for a currency to operate correctly. For example, every $1 bill holds the same value for the most part. The same goes for gold bars of the same quality.
Bitcoin is no different. People need to have faith that their Bitcoin is equal to any other Bitcoin on the blockchain. If the government were to attempt to criminalize certain Bitcoin, it could cause a hard fork as many will refuse to operate with these tokens in the network. In the end, this maneuver could have a long-lasting effect on Bitcoin’s community.
What if Russia Adopts Cryptocurrencies
Another scenario that could play out is Russia moving towards cryptocurrencies. If the country were to make such a maneuver, it would bolster the price of Bitcoin considerably. Additionally, it could inspire other countries to follow suit. Some analysts predict that an economy of the size of Russia could usher in hyperbitcoinization. Hyoperbitconization is a term that describes a sudden shift in global finances towards Bitcoin.
Where Do CBDCs Fit Into this Equation?
CBDCs (central bank decentralized currencies) provide central banks with more manageability over their monetary policies. Russia previously announced work on the digital Ruble to supplement its fiat currency. The current uptick in sanctions could force the country to put its plans into overdrive. They could seek advice from one of their strategic partners China. China already distributed its digital Yen to millions of people last year. The project has been a success that could help Russia follows in their footsteps.
What if the Conflict Escalates?
If the Ukraine conflict expands to encompass other regions, it could cause a cataclysmic effect on the current centralized financial system. In the past, large wars were followed by traders going into gold as a neutral appreciating asset. This strategy has been good in the past, but won’t work for the average civilian today.
Instead, the use of cryptocurrencies provides a better alternative for the average person. Protocols like META 1 leverage the value of gold, and a basket of gold-related assets to remain stable. These assets provide the convenience of cryptocurrencies, which enables you to send value globally in a frictionless manner.
Crypto Comes Out on Top in Most Scenarios
When you look at the trajectory of the financial system, it’s easy to see multiple scenarios in which cryptocurrencies come out better than before the conflict began. War is never a pretty sight, and its effects often change the economy forever. This latest conflict is no different. The introduction of fifth-generation warfare has turned economics into one of the battle zones. Rather than be swept up in the tides of war, many people have chosen to stay peaceful and profitable using cryptocurrencies