Bitcoin and Sanctions: A Complex Financial Tool

An Israeli Prime Minister suggested last Thursday that cryptocurrency and Bitcoin could be used to circumvent economic sanctions. However, by Saturday evening, the Bank of Israel issued an unusual statement clarifying that crypto is not an effective tool for this purpose. In reality, Bitcoin has long served as an alternative to the SWIFT system for regimes facing heavy sanctions, such as Russia, North Korea, and Iran, and is also widely used by criminal and terrorist organizations. Beyond the geopolitical arena, Bitcoin has undergone a significant transformation in recent years, evolving from a fringe or speculative asset into a prominent player in economic discourse and in the portfolios of institutional entities, investment managers, and private clients. Political instability, uncertainty about the stability of state institutions, and inflation are eroding trust in fiat currencies, driving investors to seek alternatives like gold, silver, and Bitcoin. Once an investor decides to gain exposure to Bitcoin, the question arises how to do so practically, considering their needs and risk tolerance, through direct or indirect holdings. Those who choose to hold Bitcoin directly must understand it is not like money in an account but rather control over digital keys. Whoever holds the private key controls the currency and can transfer or sell it. The method of storing these keys differentiates between a hot wallet and a cold wallet. A hot wallet, connected to the internet via a phone app or computer software, offers convenience and quick access for frequent trading or holding non-substantial amounts. Its main drawback is security, as online connectivity exposes it to hacking risks or platform crashes, making it less suitable for significant long-term holdings. A cold wallet is an offline device where keys and crypto are stored disconnected from the network. Performing a transaction requires physically connecting the device and authenticating, which is less fast and convenient but offers significantly higher security. Users of cold wallets must manage backups and understand there is no customer support for lost keys. This is ideal for long-term investors prioritizing security over convenience. Many investors combine both, keeping a small, liquid amount in a hot wallet and the majority in a cold wallet. Indirect exposure to Bitcoin is possible through leading ETFs on foreign exchanges or local financial instruments tracking its price. This method avoids dealing with wallets, keys, or security, operating smoothly through a trading account. It offers convenience, allows for simple tax offsetting against profits and losses, and relatively easy withdrawal of funds to an Israeli bank account. However, indirect holding does not exempt investors from sanctions or regulatory limitations, as funds and securities are held within regulated bank accounts and brokerage firms linked to traditional banking and SWIFT. Investors seeking a complete alternative to financial systems will not find it here, as this is a security in every respect. This information is not investment advice. The author previously worked in investment consulting and is now an independent investor.