Frankfurt / Main, Germany — March 2022

It is terrible to observe what is currently happening in Ukraine and how Putin is exploiting his power to destroy people’s lives. All topics related to this unjustified, unnecessary and cruel war are by far emotional, also for me as an distant observer without direct relation to the Ukrainian people. #standwithukraine

With this article, I have tried to take a rational approach to the question of what role cryptocurrencies and blockchain play in the Ukraine war. With this article, I aim to provide an overview and evaluation of current discussions in the news, representing my personal opinion.

# Introduction

Never before have cryptocurrencies like Bitcoin (and the underlying blockchain or distributed ledger technology) played such a major role in a war as they currently do in the Ukraine war.

However, there are two contrasting narratives in the news with regard to this:

• Positive: Cryptocurrencies are a major opportunity for Ukrainian people to secure payments despite collapsing banking infrastructures as well as to keep their own assets safe; and for people, the Ukrainian government and NGOs to receive quick international donations supporting their fight against Russian invaders.
• Negative: Cryptocurrencies and the blockchain technology are weakening sanctions against Russia, as the Russian government, the Russian economy and oligarchs can still use them.

A few observations at the beginning of the war in the crypto market:

• Investors have stocked up on cryptocurrencies. For example, Bitcoin increased in price at the beginning of the war by more than 28 percent from around $34,300 to more than $44,000, according to the Coinbase platform. It became visible that especially in Russia and Ukraine the Bitcoin trade increased significantly. However, the price increase was only short-term and in the meantime, the price has roughly returned to pre-war levels. (see e.g. Tagesschau)
• Transactions between the Russian Ruble and cryptocurrencies have doubled since the start of the war, reaching $60 million per day, according to Chainalysis. In Ukraine, the crypto exchange Kuna even tripled its daily transaction volume temporarily. (see e.g. Tagesschau)

# Russia

Just in January 2022, the Russian Central Bank had called for a ban on cryptocurrencies, especially Bitcoin. Not much later, in early February, Russia’s government and central bank had agreed to legalize cryptocurrencies like Bitcoin and recognize them as a currency (Wirtschaftswoche).

In the meantime, as a consequence of invading into Ukraine, Russia has been excluded from the SWIFT banking communication system. In addition to this, the Russian government, Russian companies and various individuals and oligarchs have been placed on the sanctions list and, thus, have been excluded from a great part of the international banking and payment system.
According to several media reports, cryptocurrencies now seem to be a viable payment alternative for Russian citizens, companies, as well as the government and oligarchs to circumvent these sanctions.

It is fundamental to understand at this point that trading cryptocurrencies based on blockchain technologies is not sanctionable in a purely technological term. While the exchange of fiat money and cryptocurrencies (e. g. from the Russian Ruble to Bitcoin via centralized exchanges such as Coinbase) can be regulated and sanctioned, the trading or exchange of cryptocurrencies (e. g. Bitcoin for Ether on decentralized crypto exchanges such as Uniswap) cannot be sanctioned. Sanctions can only be implemented if the identity can be verified. This is currently only possible in regulated centralized crypto exchanges through know-your-customer (KYC) requirements (e.g. in Germany).

Furthermore, each transaction on the blockchain is completely transparent (while cryptographically encrypted). It is important to understand that cryptocurrencies are usually not completely anonymous, but merely pseudonymous. Existing crypto research, analytics or forensics providers (e. g. Chainalysis) have already specialized in tracking und uncovering supposedly anonymous transactions in connection with illegal activities. For example, law enforcement agencies are monitoring major bitcoin movements between different crypto addresses or wallets. The likelihood is currently very high that many of these large-volume transactions originate from the Russian oligarchs being sanctioned.

Due to the transparency, privacy coins such as Monero or Zcash gained additional attention after the announcement of the sanctions against Russia, which in turn was reflected in the market price. Formerly, Bitcoin was also seen as a privacy coin. However, the increasing integration of cryptocurrencies into existing centralized payment systems and regulatory frameworks (including KYC requirements) has increasingly diminished anonymity in this regard. Privacy coins unlike other cryptocurrencies use techniques to make transactions almost completely anonymous. Privacy coins, in turn, might not be an optimal vehicle to circumvent sanctions on a larger scale as the transaction volume of privacy coins would not be sufficient and scalable enough. In addition, Monero, for example, is currently not practical enough because it cannot be used as a means of payment like Bitcoin due to a lacking broader acceptance as a means of payment.

There seem to be probably easier and less transparent ways for the Russian government and oligarchs to circumvent sanctions besides cryptocurrencies. For example, workarounds such as transactions via third countries (e.g. China) seem to be more feasible than a completely anonymous, untraceable conversion into cryptocurrencies, corresponding untraceable (small-volume) transactions, as well as the conversion back into fiat money in unregulated centralised crypto exchanges (as this would otherwise require KYC identification).

So far, cryptocurrencies seem to be mainly used in small-volume use cases by Russian private individuals. Cryptocurrencies do not seem to be a feasible short-term solution for companies to circumvent the sanctions, as system-side requirements in the payment processing infrastructure are lacking (Manager Magazin). According to Professor Dr. Sandner of the Frankfurt School Blockchain Center, it would take six to twelve months for this system-side conversion for at least parts of the Russian economy in order to being able to process cryptocurrencies for companies’ payments (Manager Magazin). In addition, it can be assumed that due to the sanctions, hardly any company in Western countries would risk becoming liable to prosecution by accepting cryptocurrencies from Russian companies or individuals (KYC requirement assumed, in regulated crypto markets). However, Russia could also join the Chinese digital currency (the digital Yuan), for example, or continue to work on its own CBDC project.

Due to the current debate about the role of cryptocurrencies to bypass sanctions, Mykhailo Fedorov (Vice Prime Minister of Ukraine and Minister of Digital Transformation of Ukraine) asked all central crypto exchanges to block all addresses of Russian users. Binance, Kraken and Coinbase, some of the largest crypto exchanges in the world, announced that they will not block the accounts of all Russian customers, as this would violate the principles of the distributed ledger technology (DLT) and cryptocurrencies. Binance and Coinbase, however, indicated that they provide support to the extent that they will explicitly block Russian customers / wallets that are on the sanctions list or related to “illicit activities”. For example, Coinbase reported that it blocked around 25,000 Russian addresses and passed them on to the Ukrainian government. (FinanceFWD, Tagesschau)

Binance CEO Changpeng Zhao stated that the crypto market is currently far too small to be effectively used by Russia in evading sanctions. In addition, cryptocurrencies are also still not common enough in Russia for a widespread use, he added. Zhao also stressed that the share of crypto transactions associated with illegal activities was at an all-time low in 2021. Criminals would increasingly emigrate from the crypto market as it is too traceable. (t3n)

In general, in Russia, we can observe a similar phenomenon as in other countries: Bitcoin and cryptocurrencies become particularly attractive in times of a crisis and/or strong inflation, which we can see in countries such as El Salvador, Venezuela and Turkey. Nevertheless, cryptocurrencies are not used by the general population there either, but tend to be used by younger, digital affine people. In this regard, Russia is ranked 18th among all countries in terms of the use of cryptocurrencies by the population, according to the Global Crypto Adoption Index by Chainalysis 2021. On the other hand, Russia is ranked 3rd among countries with the largest share of Bitcoin mining in 2021 (Statista, approx. 11%).

# Ukraine

Access to the banking infrastructure in Ukraine has been severely restricted through Russia’s invasion and attacks. Ukrainian citizens and refugees have experienced tremendous problems withdrawing cash in order to take their savings with them or processing bank transactions or credit card payments. Once they arrive e. g. in Germany, Ukrainian refugees also face problems to exchange Hryvnia, the Ukrainian national currency, into Euros (as there are currently no government securities for banks for this risky currency exchange) and, thus, cannot be used as a means of payment (Spiegel, FAZ).

As a consequence, the Ukrainian population has increasingly bought and traded cryptocurrencies such as Bitcoin, because of the followingreasons:

• Refugees trying to take their money with them.
• Refugees or citizens in the war zone receive money in this way through supporters and / or family members, without having to rely on a functioning banking system.
• People trying to hedge money against currency losses of their own currency.
• If credit cards no longer work, cryptocurrencies still technically function as an alternative means of payment for essential goods.

Ukraine had already started to engage in cryptocurrencies before the war. In a global index by crypto research group Chainalysis last year, the country ranked fourth in the use of cryptocurrencies by its citizens (see also Financial Times).

Cryptocurrencies also play an important role for the Ukrainian government. The Ukrainian government has opened wallets for e. g. Bitcoin and Ethereum as well as launched a dedicated donation website for crypto donations, through which donations can be transferred and accepted within seconds. The government has received more than $100 million in cryptocurrency donations since the beginning of the war. This seem to be a small amount in comparison to the billions of donations from Western governments and the IMF. However, according to Oleksandr Bornyakov (Deputy Minister of Digital Transformation of Ukraine on IT industry development), cryptocurrencies have become an important tool of war due to their high flexibility and transaction speed (Financial Times). While Russia can hack centralized infrastructures via cyberattacks, it cannot hack cryptocurrencies on public blockchains if securely stored on e. g. cold wallets.

In addition to donations via cryptocurrencies, Ukraine is increasingly receiving large amounts of money via NFTs (non-fungible tokens, a digital asset such as digital art that is unique and non-exchangeable; thus, cannot be exchanged one-for-one like cryptocurrencies). For example, the Kremlin critical punk band Pussy Riot launched an auction of a picture of the Ukrainian flag as a NFT for donation and collected around 2,258 Ether — the equivalent of about $6.6 million (t3n). Another example is Wladimir Klitschko who recently launched an NFT collection with New York artist “WhIsBe” to help fund the war against Russia. The motive of the NFTs, which are sold via Opensea, are four new versions of the “Vandal Gummy” bears created by “WhIsBe” (Business Insider, t3n).

Mykhailo Fedorov had originally planned to respond to the high volume of donations in cryptocurrencies with an airdrop (t3n). In the blockchain ecosystem, an airdrop is the often free distribution of digital assets / tokens by the developers of a particular blockchain project to the public or users. This is understood to be a marketing tactic to increase awareness of a project. However, the government ultimately abandoned this plan and prefers to work on its own NFTs — but explicitly not on fungible or exchangeable tokens such as its own cryptocurrency.

This will make the Ukrainian government the first industrialized country to issue its own collection of NFTs fixed on the blockchain. The plan is to launch a series of NFTs under the working title “Meta History: Museum of War.” The collection will include a token from each day of the war, with artwork corresponding to a news story. Bornyakov said the tokens would represent an immutable record on the blockchain that would not only document the conflict but also raise money for defense at the same time. (Financial Times)

Such alternative financial infrastructures can be used to maintain transactions for basic goods, but also to buy essential equipment for defence. The Ukrainian government says it has already spent half of its cryptocurrency donations on thousands of bulletproof vests, food rations, helmets and medical supplies, deliberately choosing to spend the funds on non-lethal equipment (Financial Times).

# Conclusion

The “world’s first crypto war” (titled by the Washington Post) provides an answer to those who have previously asked about the use cases for cryptocurrencies such as Bitcoin. Looking in particular at the activities around the use of cryptocurrencies on the Ukrainian side, use cases for helping forcibly displaced persons can be derived. However, with regard to the risk of sanctions circumvention by Russia, it also becomes clear that the topic of regulation and KYC requirements should be thought globally — nonetheless responsibly and not exclusionary. When evaluating activities around cryptocurrencies, however, it is essential to include the country’s context. Ukraine is certainly a pioneer in this regard, as the country has a large tech scene as well as a tech affine government.

The developments around the role of cryptocurrencies are currently still very dynamic and not fully transparent and predictable. It remains interesting to further observe how the role of Bitcoin and other cryptocurrencies — or the role of the blockchain technology in general — develops during and after the war for Ukraine but also for Russia. Above all, we can only hope for a short-term ending and withdrawal of the Russian army — for peace in Ukraine.

I hope this article was valuable for you to read. Feedback and further discussion are very much appreciated, either here in the comments or on LinkedIn. Please feel free to connect on LinkedIn as well.

#cryptocurrencies # bitcoin #blockchain #crypto #DLT #distributedledgertechnology #ukrainewar #ukraine
#standingwithukraine