Visa, Mastercard Pullout in Russia Underscor­­­­es Importance of Traditional Networks to Crypto

With Visa and Mastercard pulling out of Russia, the two easiest and most convenient ways to make payments with bitcoin — really the only two easy and convenient ways to make day-to-day payments with any cryptocurrency — have vanished.

This makes it is far harder to use crypto as anything other than an investment in Russia as its economy implodes under the weight of both public and private sanctions.

Crypto debit cards remain the only effective way to turn even the best known and most widely accepted virtual asset into something usable at retail merchants and websites. And even in those cases, you are rarely paying with crypto. Instead, the card issuer is selling it for you and paying the merchant in the local fiat currency as part of a single transaction.

The same applies to PayPal, the first major payments processor to pull out of the country on its own rather than as required by formal sanctions — but only in a theoretical sense as it had not yet enabled crypto payments in Russia.

This means two things: First, you have moved your bitcoin into the traditional financial system rather than using it as a way to opt out of its intended use — as “a purely peer-to-peer version of electronic cash [that] would allow online payments to be sent directly from one party to another without going through a financial institution,” according to the first line of the Bitcoin whitepaper that launched cryptocurrency and other blockchain technologies.

Second, it means that the merchant likely does not even know you are paying in bitcoin, which in turn means there is no impetus to consider even looking into other ways of integrating an API that lets them accept crypto at the point of sale — why go to that trouble if the demand is not (as far as they know) there?

It’s noteworthy that Discover card hasn’t pulled out as well. They franchise their Diners Club network to banks; Russia is a big franchisee, and franchises are very hard to control.

Russia has made clear that internally issued Visa and Mastercard cards will continue to work through an alternative payments processor, which doesn’t help crypto users of non-Russia issued crypto debit cards.

Alternate Routes

That’s not to say that crypto has no value as a currency in Russia.

For one thing, even if the major cryptocurrency exchanges like Binance, Coinbase and Kraken do pull out — and many have made very clear they will continue to resist Ukraine’s pleas for them to shut off all Russian accounts, not just sanctioned ones, unless legally required to do so — there are other avenues to turn crypto into cash.

See also: Citing Libertarian Values, CEOs of Crypto Exchanges Won’t Cut Off Russian Customers

One obvious answer is that as sanctions bite, more and more merchants will be willing and even eager to accept bitcoin or other cryptocurrencies that can be turned into hard currency. Certainly that is happening in Venezuela as the bolivar’s collapse made any currency not undergoing hyperinflation desirable.

Related reading: Bitcoin Daily: Venezuela's Simon Bolivar Int'l Airport to Accept Crypto for Flights

Another is that there are informal ways to exchange crypto — giving someone a flash drive, for example. Mixing services and privacy coins would make it easy for somewhat sophisticated crypto users to get around sanctions and “wash” crypto bought for fiat currency in Russia.

More here: PYMNTS Crypto Crime Series: When Privacy Counts, Crypto Users Turn to Mixing Services

Financial institutions in a sanctioned country could also assist in the process.

Beyond that, not all countries — most notably China — have sanctioned Russia.

Then there’s decentralized finance, or DeFi, exchanges that have no centralized management and cannot effectively be forced to do so, even by legal full-blockade sanctions that have not yet been imposed.

These decentralized exchanges, or DEXs, are run by decentralized autonomous organizations (DAOs) that are controlled by users voting with governance tokens. They have no centralized management or managers, and are (generally) not licensed by any jurisdiction, meaning there is no one that can be threatened with legal consequences for failing to impose sanctions.

You may also like: PYMNTS DeFi Series: Unpacking DeFi and DAO

It should be noted that this is a theory that has not been tested. For one thing, decentralized exchanges are created by companies or developers before being turned over to the decentralized control of a DAO. That said, the U.S. Justice Department has said it thinks there are ways around decentralization, although it hasn’t given any details.

But all of those remain substantial hills to climb. Right now, cutting off the world financial system cuts off a whole lot of crypto’s day-to-day utility.