Cryptocurrency and the Russia-Ukraine war

Mar 05, 2022 - 5 min read
Leonard Burger, Product Marketing Manager at Sopra Banking Software

At the time of writing, the Russia-Ukraine war is little over a week old. And as the horrifying and tragic events unfold before the world’s eyes, there is a strange side story taking place, too. The role of cryptocurrency in all of this, and what it means – for the war, the role of virtual currencies in society and maybe even the future of finance as a whole.

A call for cryptocurrency

On February 26, the same day that Putin’s forces launched a brutal and unprovoked attack on Kyiv, the Ukrainian government posted a request on Twitter, asking the world for cryptocurrency donations. As of March 2, they have received close to $34 million dollars’ worth of digital currency, per reports. This number will surely rise as the conflict continues.

There are also reports suggesting that some Ukrainians are seeking to store wealth in cryptocurrencies, in some cases as they flee into neighboring countries. This raises the question as to why crypto is being used as a tool of financial refuge, rather than fiat currencies. 

For a start, it’s important to note that even before the invasion, Ukraine was already an extremely advanced adopter of cryptocurrency. The New York Times recently described Ukrainians as among the “most avid cryptocurrency users in the world,” and last September, the country pushed through a progressive bill, enabling the government to regulate crypto.

It seems natural, therefore, that the Ukrainian government and its people would turn to crypto when the country’s economy is collapsing and established banks may not be as reliable as they were.

The problem with cryptocurrency as a solution

While cryptocurrency may well provide an ample short-term solution for many Ukrainians, it’s not without its challenges.

For a start, while the Ukraine is an advanced nation when it comes to technology (the country has an IT export business worth almost $7 billion), that doesn’t mean that all its citizens are tech-savvy enough to be investing in the occasionally confusing waters of cryptocurrency. And certainly, in the midst of a devastating war, it’s not the ideal time to be learning the dos and don’ts of crypto trading.

Secondly, cryptocurrency is volatile. And until a more mainstream adoption and use case can be established, its value can rise and fall suddenly. Ukrainians trading in their fiat money for crypto, with an eye toward trading back once they find themselves in a more stable situation, could see the original value of their wealth diminished.

Tragically, many Ukrainians don’t have the luxury of weighing up the pros and cons of this decision, and acting fast may well be the best way forward.

How Russians could be using crypto to avoid sanctions

Currently, economic sanctions against Russia are arguably the most effective way other nations can expedite an end to the conflict.

The US, Canada and European allies have frozen Russian assets and have cut them off from the SWIFT messaging system – moves that, however necessary, could have a devastating economic impact, in the short- and long term.

There are concerns, though, that Russian organizations and the Russian government could use cryptocurrency to evade the full impact of these sanctions.

This has been a long-standing concern from Western allies, dating back to sanctions imposed in Russia back in 2014, following the annexation of Crimea. Indeed, according to analytics firm Elliptic, Iran has previously used bitcoin mining to bypass trade embargoes.

Nevertheless, Russian is a G20 economy, and you can’t currently run an economy of that size on cryptocurrency.

While Russian bodies trading in crypto rather than the US dollar could dull the impact of sanctions, it’s unlikely to have a massive impact. The global economy – and by implication, those based in Russia – still relies predominantly on fiat money, meaning that the existing sanctions will have an impact, regardless of how Russian individuals and bodies try to leverage crypto.

Can Russia be blocked from using cryptocurrency?

Theoretically, there are ways that Russian individuals and organizations (including the government) could be prevented from using cryptocurrency. The addresses of Russian users could be blocked by crypto exchanges, for instance, effectively freezing their crypto assets.

Such a request was made by Ukraine’s vice prime minister and minister of digital transformation on Twitter on February 27. 

And while Ukrainian NFT and virtual goods startup DMarket is reportedly blocking new user registrations from Russia and Belarus, the vast majority of crypto exchanges – including Binance, Coinbase, and Kraken – have refused.

In fact, Kraken CEO Jesse Powell tweeted on February 28: “Bitcoin is the embodiment of libertarian values, which strongly favor individualism and human rights.”

The future role of cryptocurrency called into question

In the larger scheme of things, the role of cryptocurrency in this war is relatively small. It’s not the silver bullet for the Ukrainian government, businesses and people to avoid serious economic concern. And it will do little for Russian interests in assuaging the impact of international sanctions.

However, it does further spread the discussion around what role cryptocurrencies play – and will continue to play – in our societies. The decentralized phenomenon that’s taken the world by storm is being pulled into the geopolitical arena. And you can bet this won’t be the last time.