Ukraine: World’s Crypto Capital

How the rise of digital economic power adds to the backstory of the Russia-Ukraine crisis

An estimated 70% of new value created in the world economy(currently US$93 trillion), over the next decade will be based on digitally enabled platform business models. The US digital economy continues to rank first in the world, reaching $13.6 trillion in 2020, China comes second with a scale of $5.4 trillion, according to the China Academy of Information and Communications Technology (CAICT). Ukraine wants to play a prominent role in this new-tech economy by being the world’s cryptocurrency hub, while its hostile neighbour Russia is threatening to ban cryptos.

Ukraine enjoys a currency edge over Russia

At this moment, the two economies are simply not comparable. While Russia has a GDP of US$1.71 trillion, the Ukrainian GDP at US$181 billion pales into insignificance. Nevertheless, this tiny former Soviet bloc country punches above its weight with a currency that is far more robust than the Russian rouble. While US$1 fetches about 77 roubles, the same is worth only 27.85 Ukrainian hryvnia. Geopolitics, especially the threat of US sanctions, is rattling the rouble but leaving cryptos relatively unscarred. No wonder Russian cyber criminals are attacking Ukraine’s digital infrastructure.

Building a robust crypto hub

Ukraine is mining cryptos at a frenetic pace to fuel its ambition to be among the top nations in a digital economy. The country sent and received over $8 billion worth of cryptocurrency from July 2019 to June 2020. It is the birthplace of teams and organizations that built crypto start-ups like Weld Money, Hacken, and Propy; the country has a robust industry of crypto and blockchain developers, with over 100 companies in the cryptocurrency sector. Dutch IT company Daxx puts Ukraine as No. 1 for attractiveness in terms of IT outsourcing in 2021 and the best in the world for hiring programmers.

Ranked 10th globally

According to a survey done last year, Ukraine now ranked 10th globally in bitcoin investment gains. At the head of a rapidly developing global bitcoin market is the US, raking in over $4 billion in profit from bitcoin last year, three times as much as China with its $1.1 billion in bitcoin profits.

US$150 billion daily crypto trading

Ukrainians earned around US$400 million from Bitcoin investments in 2020, making its cryptocurrency investors some of the richest in the world. The cryptocurrency craze in Ukraine isn’t just limited to the public but has been embraced by Ukraine’s civil servants and large swaths of the government. Ukraine’s civil officials in early 2021 reported owning over US$2.6 billion of bitcoin, and a report stated that “The largest number of owners of cryptocurrencies work in city councils, the Ministry of Defence and the National Police.”

The daily volume of cryptocurrency transactions stands at around $150 million—exceeding the volume of interbank exchanges in fiat currency, the hryvnia, according to the New York Times. Ukraine’s pitch as a crypto hub is simple: low taxes, light paperwork, a surplus of highly talented engineers, and a strong local tech economy.

Rebranding as an innovation hub

But within Ukraine, it offers a lot more. The burgeoning tech economy would help the Eastern European country rebrand itself from a service economy, where Western companies often outsource back-end development, to a place where there is innovation and development independent from both the West and the East. Other former Soviet bloc countries too are in the same race. Poland is offering tax breaks and financial support to beckon tech professionals, even poaching in Ukraine. Lithuania, Estonia, Malta, Mexico, Thailand, and Vietnam are in the fray, too.

Energy needs could be a weakness

However, crypto’s could also be Ukraine’s vulnerability. Crypto mining is massively energy hungry. Ukraine is heavily dependent on nuclear energy – it has 15 reactors generating about half of its electricity. Ukraine receives most of its nuclear services and nuclear fuel from Russia, but is reducing this dependence by buying fuel from Westinghouse.

Any potential conflict in Ukraine is necessarily linked with the issue of Europe’s gas needs and Ukraine’s role in supplying them. Poland has already made its strategic move, building a pipeline to Norway and LNG terminals to import gas from the US and Qatar. But, experts say, Ukraine, which earns more than Poland from gas transit fees, may have to look at ways to diversify its own supplies and rethink its function in the European gas system. Until it does, it will continue to depend on Russia.