Both sides in the Ukraine-Russia War are using cryptocurrencies because no one institution can control them, and they’re easily transportable too
Some are calling it the First Crypto War. Cryptocurrencies have very much become a part of the Ukraine-Russia War. While the Ukrainians are raising funds in cryptocurrencies to finance the war, and stashing away their wealth in digital wallets as they escape their country, the Russians are using it to bypass the economic sanctions imposed by the West.
Since the war began, the Ukrainian government has used crypto to facilitate donations and for military and other purchases. Kyiv was relatively well-positioned to take advantage of crypto networks. Last year, a market consultancy ranked Ukraine fourth globally for crypto adoption. In September 2021, Ukraine formally legalized crypto. As of March 28, Kyiv had raised roughly $56 million in crypto with a median donation of about $30, Chainalysis, a research organization. The Ukrainian government, however, claimed to have raised nearly $100 million from crypto donations.
Crypto currencies to dodge sanctions
Even before Russia’s invasion of Ukraine, the United States government was worried that cryptocurrencies could blunt the impact of economic sanctions. Iran has used bitcoin mining to bypass trade embargoes, according to research from the blockchain analytics firm Elliptic.
According to the New York Times, the Russian government has been developing a digital rouble, and Russia has been building tools to help hide the origins of digital transactions. Basically, if sanctions are meant to keep countries and businesses from dealing with Russia, crypto would be a way to get around them. It would be “naive” to think Russia hadn’t gamed out a scenario where sanctions were imposed, and it would have to find alternatives.
Ukraine had started soliciting and accepting crypto donations within 48 hours of the war starting. After initially accepting only bitcoin and tether, the Ukrainian government has expanded its capacity to now accept over 70 forms of crypto. Ukraine’s largest crypto exchange, Kuna, helped organise this effort.
Though some institutions have donated to Ukraine using crypto, most donations come from individuals around the world. The crypto donations allow Kyiv to obtain funding instantly and are faster than soliciting donations settled through traditional financial channels.
NFTs in the fray
Digital art commoditized as non-fungible tokens (NFTs), an emerging medium for cross-border financial flows, has also become a significant donation source for the Ukrainian government. The Ukrainian government had received hundreds of NFT donations as of March 5, including a CryptoPunk valued at over $200,000. The Ukrainian government and external organisations have also started minting and selling NFTs to raise funds, with a recent Ukrainian flag NFT sold for US$6.5 million in ether. However, these crypto donations to Ukraine are relatively small compared to the billions of dollars in international military and humanitarian aid flowing to Ukraine from partner governments.
The possibility of Russia dodging the sanctions using cryptocurrencies has not escaped the Biden administration which is weighing how it might sanction Russian crypto currency assets and has already urged crypto exchanges to ensure that specific, sanctioned individuals and organisations from Russia aren’t using their platforms. Four USsenators, including Sens. Elizabeth Warren and Mark Warner, wrote to the US Treasury Department h to ask how crypto is impacting sanctions enforcement.
While cutting off Russia’s access to crypto could have real repercussions for the country – crypto has become increasingly popular in Russia, which is also the world’s third-largest bitcoin miner – it may not be possible. Not all exchanges confirm the identity of their customers, and it’s generally difficult to track the origin of crypto currency transactions. Whether a crypto currency exchange legally has to comply with sanctions may depend on where they’re registered and where they operate. Many exchanges have snubbed calls for them to freeze Russian accounts, and others have argued that crypto isn’t a realistic option for people looking to evade sanctions.
Coinbase, for example, has reaffirmed that it will follow applicable US sanctions laws to screen customers on sanctions lists and block transactions from IP addresses that might be tied to sanctioned individuals or entities. As of March 6, Coinbase had blocked over 25,000 IP addresses it believes are related to sanctioned individuals or entities.
Crypto for ransomware
Russia has heavy ties to crypto-linked cybercrimes and illegal activity such as money laundering and ransomware. According to one analysis from Chainalysis, three-quarters of the money made through ransomware attacks in 2021 went to hackers linked to Russia. In January, the Ukrainian government was targeted by a series of cyber-attacks that disguised themselves as ransomware that demanded bitcoin, before destroying data on government computers.
A safe haven for refugees
ome Ukrainians escaping the country seem to be taking their crypto with them, which they hope to convert back into fiat currency once they arrive in safety. Others seem to be looking toward crypto as a way to store their wealth as Ukraine’s economy collapses; the country’s central bank suspended electronic cash transfers at the start of the invasion and is blocking Ukrainian citizens from withdrawing foreign currency for many types of transactions. In the last week of February, trading on the Ukrainian crypto platform Kuna reached its highest level since May 2021.
Though crypto currencies have been extremely volatile, its advocates say bitcoin can be better than the alternatives – like cash, bank accounts, or other physical assets, like gold or real estate – because it’s beyond the control of any one institution and easily transportable. And while crypto may be volatile, it can be less volatile than some countries’ fiat currencies or markets. Earlier this year, the Turkish lira became more volatile than bitcoin, which prompted some people in Turkey to cash in their fiat currency for bitcoin and Tether.
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