Coins in Times of War: The Role of Crypto Amidst the Russia-Ukraine Conflict

The Russian invasion of Ukraine on February 24th marked an unfortunate circumstance in international politics, but it likewise spurred a significant turning point regarding the role of cryptocurrency in financial systems and economics on a global scale — especially as it continues to penetrate into the mainstream. What once served as Ukraine’s necessary springboard into the future has now become the country’s primary avenue for receiving aid and funding as the conflict ensues, which simply puts the emerging technology in the limelight. Along with this, traders, platforms, and key stakeholders that make up the industry’s community are left to grapple with disruptive questions requiring substantial answers that will undoubtedly pave the way for the future of crypto.

“Stand with the people of Ukraine. Now accepting cryptocurrency donations,” tweeted Ukraine’s First Vice Prime Minister and Minister of Digital Transformation Mykhailo Fedorov on February 26, which also included crypto wallet addresses for Bitcoin, Ether, and Tether. Three weeks since the beginning of the conflict, Ukraine has been able to raise over $60 million sourced from crypto donations alone. While traditional assets need not be overlooked, the funds collected from digital coins have allowed countless humanitarian and non-government organizations to provide immediate assistance to the vulnerable civilians who have been caught in the middle of the war because of its ease in navigating international borders.

“It’s just the cheapest, fastest, and most secure way to transact financially,” noted a Canadian user identified as Artemis, who donated $280 worth of Bitcoin to the Ukrainian military NGO Come Back Alive. “They can safely store it without any fear of the invading force stealing it, or the banking system collapsing due to war.” UkraineDAO spokeswoman Nadya Tolokonnikova expressed similar sentiments saying that “blockchain allows us to scale our efforts in a way that wasn’t possible for us before. The old ways of raising money sometimes are really slow and just clumsy.” UkraineDAO is a crypto collective that backs Come Back Alive and a number of other Ukrainian organizations in collecting decentralized aid.

A Departure Prompted by Circumstance

What’s more startling, however, is that the world is currently witnessing the weaponization of crypto as the Ukrainian government funnels portions of the donations it has solicited into purchasing military equipment and other essential supplies. The country has also gone so far as to expand its cyber unit using crypto, which helps in providing intelligence, subduing military systems, and even defacing Russian government websites. This is in stark contrast to the initial plans Ukraine had when it first started to explore blockchain technology and digital assets around two years ago which was focused on the digitalization of all government processes to help reinvigorate its economy.

Ukraine was poised as among the most crypto-friendly countries in the world merely because it wanted “to move 100% of government services online and build a digital state to make all the government services transparent, easy to use, and convenient for citizens of Ukraine,” explained Alexander Bornyakov, the Deputy Minister for Digital Transformation. Following the invasion of Russia, however, this stance took a complete turn. “It was the second or third day that we decided that we needed money to go in [to the country] because there was a problem with banking liquidity.”

“We decided to go and create wallets and build this infrastructure to get money and send money [crypto] to different suppliers, so that we could buy all of the things that the army needs,” added Bornyakov after he received the signal from Fedorov, his superior. This also led the ministry to tap the crypto exchange Kuna, which is the largest in the country, especially as crypto theft remained a rampant issue. “There’s a lot of complexity when it comes to security, because if you do not protect your infrastructure, someone can hack you and steal all of your crypto…but it’s not only a matter of security, it’s also the ability to convert holdings into different types of fiat currencies.”

The Crypto Dichotomy

On the Ukrainian front, crypto appears to have become a redeeming force for a country engulfed in an international conflict and for countless innocent citizens hoping to flee to safety with their assets in tow. “The fact that it can’t be frozen, the fact that it can’t be censored, and the fact that it can be used without ID is very, very important. And they are why bitcoin is such an important humanitarian tool,” affirmed Human Rights Foundation chief strategy officer Alex Gladstein. “In Ukraine right now, you can download a bitcoin wallet open source — totally unconnected from your ID — and you can generate an address via a QR code or an alphanumeric string. You can paste that to me, I can send you $1,000, and it goes through in a few minutes.”

Of course, dabbling in crypto can prove to be quite troublesome, especially for individuals that are not as well-versed in the technology. Granted there is a steep learning curve in attempting to grasp how crypto works — coupled with pertinent concerns such as volatility and cyberattacks — making the crisis an inopportune moment to dive into the industry. Norwegian Refugee Council global digital specialist Giulio Coppi puts it succinctly: “This is not a time for disrupting things. Folks have their lives disrupted already.” Yet, millions of Ukrainians may very well be experienced enough for this to no longer matter given the country’s steadfast position regarding crypto adoption over the past few years.

Consequently, there is also a more ominous face to the other side of the crypto-in-times-of-war coin, particularly when it comes to how Russians might exploit the technology for their own gains. Following the invasion, the European Union along with the U.S., Canada, and other countries were quick to slap heavy economic sanctions on Russia to condemn the country for its actions. However, cryptocurrencies allow money to be moved easily and without being detected — opening up a bypass of some sort — which could reduce the effects of these penalties to insignificance. Similar tactics have been employed before with Iran using the technology to evade trade embargoes.

“It is most likely already happening,” said Mark Basa, global brand and business manager at HOKK Financial. “We know Russia is already developing its own digital currency, the digital ruble, that it will use to trade globally. What is certain is that Putin has already thought about this prior to the conflict with Ukraine and has a plan that probably involves crypto.”

Pro-Russian groups and other bad actors could also utilize crypto to raise funds, which is nothing novel. Jess Symington, head of research at blockchain analytics firm Elliptic, noted that “the pro-Russian groups were particularly active around the 2014 conflict,” referencing Russia’s annexation of Crimea. Further, data gathered by Chainalysis — also a blockchain research company — reported that a huge chunk of the money that was made from ransomware attacks in 2021 was traced back to hackers with links to Russia, solidifying the aggressor’s outstanding connection to illegal activity surrounding crypto.

Should this continue, the scope of the battlefield could extend into cyber warfare which would only make Ukrainians and even other crypto holders become victims of the current conflict. “Capital flight by economically distressed Ukrainians, or even Russians, is a very different thing than the Russian state attempting to launder money or evade sanctions,” explained Alex Zerden who served as a former Treasury Department official for the Obama and Trump administrations. This could also become a precedent for other disputes since “most conflicts are going to be more and more about cyberwarfare. You risk becoming a target,” added Coppi.

Going Against the Philosophy

In an effort to address this looming threat, the Ukrainian government has been adamant in urging major crypto exchanges to freeze the accounts of all Russian users. Most of these platforms have been hesitant to answer the call, but they did guarantee their compliance with the sanctions that have been implemented. Asking for supplementary action beyond the law would simply be too much, especially as crypto is founded on largely libertarian ideals. “There is a libertarian strand that runs through cryptocurrency, but I think the pushback many people in crypto have is against dragnet surveillance and extrajudicial seizures,” explained Ryan Selkis, CEO of crypto research and data firm Messari. “We all respect the rule of law and respect the system we’re operating under.”

Binance, the world’s largest crypto exchange, has also weighed in on the issue at hand with one spokesperson saying that the proposed move to block the access of all Russians to the technology “would fly in the face of the reason why crypto exists.” The platform’s CEO Changpeng Zhao also put out a statement in response.”Why won’t Binance go one step further and sanction/freeze all Russian users’ assets? The most important point: we don’t think we have the authority to do so.” Basa also echoed similar sentiments, claiming that “sanctions aimed at hurting Putin will only hurt the Russian people. ”

Ultimately, this untimely dispute between Ukraine and Russia highlights one prominent thing about crypto: it now has an essential role to play in global economies and in shaping the course of international/geopolitical conflicts. Amidst all of these, it also maintains a firm stance on its fundamental goal of providing individuals with an avenue that functions outside the purview of traditional financial institutions. But, crypto is still widely caught within a gray area — whether this emerging technology will be used for the forces of good or with ill intent is evidently up in the air at this point.

References: The Guardian, Forbes, CNBC, Vox, CoinDesk