Crypto networks, particularly Bitcoin, have overcome many challenges in their short life. However, global conflict is one challenge these networks have not faced. First, let me start by saying this is not a doomer post. Instead, I am writing this to try to think aloud about the effects a global conflict or increasing geopolitical tensions would have on crypto networks. By their very nature, crypto networks are permissionless, open, and uncensorable. But, as financial networks and open communication protocols with various levels of privacy, they will face much scrutiny for their ability to bypass national censure. We have already seen challenges like this occur on a small scale, with nations blacklisting addresses and censuring various protocols. But, we have not seen how crypto networks would behave in a more intensely conflictual world.
Since the fall of the Soviet Union, we have had a remarkable level of peace and prosperity. Globalization expanded trade networks, enriched billions, and taught nations that they are better served by trading than by conflict. Of course, there have been wars and conflicts. But, from a historical perspective, these wars were relatively ‘small-scale’ conflicts between nations of unequal power. By their nature, these conflicts didn’t hamper the general worldwide trend toward prosperity that most of the world experienced between 1990-2020. Crypto networks and the modern consumer internet are peacetime creations, and no one knows what these systems would look like during a world war or a new cold war.
It is hard to predict the future, but given the events of the last three years, like BRICs, the invasion of Ukraine, and tension around Taiwan, the peace of the previous decades seems frayed. Ukraine, in particular, has many similarities to the Spanish Civil War, which presaged WW2. The Spanish Civil War quickly became a proxy conflict between Fascists and left-wing ideologies like communism, anarchism, and republicanism. Fascist governments like Italy and Germany at the time lent aid to Fascists in Spain. Meanwhile, Communist governments like the Soviet Union sent aid to left-wing forces, and non-Spanish citizens worldwide volunteered for foreign volunteer forces on both sides – Orwell famously fought with a volunteer British contingent in Spain. It is easy to draw parallels between the events in Ukraine and what happened in Spain in the 30s. I sincerely hope we won’t look back on the events of the last two 2-years as the run-up to a more significant global conflict, but it’s hard to ignore how similar things look.
So, what would the effects be on crypto-networks if global conflict increases, either in a hot war between powerful nations or a new cold war?
First, I think crypto-networks and the internet would turn into walled gardens. I mean that each bloc/nation would have its internal internet, but connections to other blocs would be highly regulated and controlled, if not shut off completely. The internet dividing into blocs would have some wild consequences for crypto networks. Networks with nodes or validators in one bloc would be fine, but those more geographically dispersed, like Bitcoin and Ethereum, would experience a chain split. Nodes cut off from the network would probably continue to accept transactions and get blocks from those they could connect to. Still, the network in a bloc would essentially fork into a new chain – and I have no idea if merging the split chains after peace is even possible.
Based on Bitnodes’ information, most Bitcoin nodes are in ‘western’ bloc states – like the USA and Germany. But a significant portion, around 11%, reside in more ‘eastern’ bloc countries like Russia and China. These countries are the ones who are currently engaged in some level of increasing tensions. Of course, these blocs could change, and they are just my best guess at putting nations into blocs, given the current state of affairs. West and East blocs are terrible abstractions laden with historical weight, but they get my point across.
Secondly, regulatory pressure would become a lot more intense. Regulations are a work in progress, mainly because regulations are slow in coming, and there is little agreement on how these should be regulated. But, if global tensions continue to escalate, pressure from governments on these networks would be immense. Politicians would probably pass sweeping laws preventing crypto networks from transacting with enemy states. And crypto network participants like node runners and miners would almost certainly fall in line – few would risk decades in jail for this stuff. Those who decide to balk against new regulations would be testing the un-censorability of their networks, and in my opinion, they would lose. The result is that global conflict would probably make crypto-networks more permissioned and censorable than before.
Finally, global conflict would play havoc with markets and hurt risk assets. The last 30 years have been one of peace, increasing trade, and heavy integration of economies. As economies and countries get cut off from one another due to trade embargoes and instability in nations threatens supply chains, markets will be incredibly volatile, and risk assets will suffer. I do not think Bitcoin and Ethereum are anywhere near being considered safe-haven assets, so they will suffer along with others. Supply chains could also make hardware for crypto products hard to come by if it’s even allowed. It is not unrealistic to see a world where chip production is nationalized and allocated to strategically important industries – which crypto is not.
War and conflict are a colossal waste of human effort and potential. Who knows what we could achieve if humanity focused on working together? Regardless, as an analyst, I need to analyze the world as it is, as opposed to what I wish it to be. And what it looks like is that the world is heading to a time of increased conflict and deglobalization. Crypto networks were born out of a period of peace, and we have no idea how they will weather an increasingly fractured world – and it is high time that we start to consider some of the possibilities. As always, I could be wrong about a lot of this, but I am extremely curious about what others think about this as well. Leave a comment below if you think I am off base or how you think these networks would weather conflict.