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Bitcoin dips as US moves to rein in crypto rally

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Bitcoin dips as US moves to nuzzle crypto rally
Bitcoin dipped on Thursday as US lawmakers gear up to rein in the cryptocurrency industry to prevent Russia from using it to avoid sanctions. Photo: Dado Ruvic/Reuters

Bitcoin dipped on Thursday as US lawmakers gear up to rein in the cryptocurrency industry to prevent Russia from using it to avoid sanctions.

Cryptocurrency markets have soared since Russian tanks crossed the border into Ukraine last Thursday, with bitcoin (BTC-USD) jumping to $43,324 — up 16% in a week.

Following a fresh round of sanctions, Russia's central bank hiked interest rates from 9.5% to 20% to stabilise a nose-diving ruble that is now worth less than one US cent.

But this has done little to mitigate fears of a bank run as many Russians have desperately transferred wealth into cryptocurrencies before the country feels the full brunt of the west’s salvo of unprecedented sanctions.

Read more: Live crypto prices

Ruble to bitcoin trading has soared on cryptocurrency exchanges, with daily trade volume topping $16m on the first day of the invasion, its highest this year.

But bitcoin’s triumphant rally has been dampened after news that US lawmakers are turning their attention to the cryptocurrency industry, fearing it could be used as a backchannel for Moscow to circumvent sanctions.

Chart: Yahoo Finance UK
Bitcoin has rallied since the beginning of the Russian invasion of Ukraine. Chart: Yahoo Finance UK

On Wednesday, a group of US congressmen urged president Joe Biden to provide lawmakers with additional tools to ensure Russia can’t use the cryptocurrency market to bypass US and multilateral sanctions.

A letter to the US Treasury, headed by US senator and crypto opponent Elizabeth Warren, stated that “a strong enforcement of sanctions compliance in the cryptocurrency industry is critical given that digital assets, which allow entities to bypass the traditional financial system, may increasingly be used as a tool for sanctions evasion”.

Read more: How Russia's war on Ukraine is impacting stock prices

The letter added that “there are growing concerns that Russia may use cryptocurrencies to circumvent the broad new sanctions it faces from the Biden administration and foreign governments in response to its invasion of Ukraine".

The request to the US government comes after most major cryptocurrency exchanges refused a request from Ukraine to block Russians from using their platforms.

A spokesperson for Coinbase (COIN), the largest US exchange, told Decrypt that "a unilateral and total ban would punish ordinary Russian citizens who are enduring historic currency destabilisation as a result of their government’s aggression against a democratic neighbour".

Watch: Bitcoin ‘decoupling’ from risk-on assets

On Thursday bitcoin was down 1.6% to trade at $43,462.

This comes after a week of what economist Steve Hanke, professor of Applied Economics at Johns Hopkins University, called “bitcoin hype on steroids”.

“There is always a great deal of hype surrounding cryptos. The recent alleged surge of transactions in Russia just put the hype on steroids,” he said.

Hanke, who was a member of president Ronald Reagan’s Council of Economic Advisers, said he doubted the widespread use of bitcoin in Russia and its potential disruptive effect on international currency markets.

He added that increased use of bitcoin within Russia would have a limited impact on the rest of the world, “because Russia is now disconnected, and when disconnected, no shocks can be emitted”.

However, some analysts do not see the recent geopolitical calamity in Ukraine as the main reason for the upward trend in bitcoin prices over the last week.

Read more: How economic sanctions work

Gunnar Jaerv, COO of First Digital Trust, said traders could be “pricing out a Federal Reserve interest rate hike in March”.

Jaerv told Yahoo Finance UK that it is still uncertain whether the latest uptrend will be sustained over the long term and is dependent on a “return of investor risk-appetite across asset classes”.

The current conflict in Ukraine could have added to the price dynamics in crypto markets in the last week but “quantitative easing policies in the wake of the pandemic which created unprecedented liquidity in the financial system” should also be considered, he said.

He added: “This stimulus contributed to the rise in CPI (consumer price index) and share prices of other risky assets, so while bitcoin remains volatile, investors still look to it as a way to protect against fiat money devaluation, or global money supply growth.”

Watch: Can you live exclusively off bitcoin?

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