Russia-Ukraine: Which side is crypto helping?

Does this even matter?

This may seem like an insignificant topic to talk about, in the face of a humanitarian crisis. I don't think it is. Situations like this involve a lot of moving parts, and because of crypto's newfound significance to the financial system, the crypto world is one of these moving parts. It affects how impactful sanctions can be, and it can be used to help people who are fleeing war or facing a collapsing banking system. Crypto has been playing an important role in this war, and may yet have an important role to play in future conflicts to come. 

Can Russia Use Crypto to avoid sanctions?

The Russian economy is facing a financial meltdown because of the sanctions imposed by governments around the world. When these sanctions were announced, the value of the Russian ruble tanked. It has now lost almost 50% of its value since the start of 2022. 

Russian banks have been removed from SWIFT, a system used worldwide for communication within the finance sector. Its central bank assets have also been frozen. Putin had been building up a war chest, consisting of assets like Gold and US Dollars for years. Capital Economics estimates that around 50% of this war chest is now off-limits to the Russian government. The assets are still there, but they can't be used to buy anything at the moment. 

A "freeze" only works because governments and banks around the world agree to stop doing business with a certain party. If the Russian government can find ways to transact anonymously using cryptocurrencies, it could, theoretically, mitigate the effect of some of these sanctions. The problem for Russia - all crypto transactions are recorded on the blockchain. This provides transparency and means that Russian crypto transactions might be too traceable to get around sanctions. New tools are being developed in Russia help to mask the origin of some of these transactions, and this would help banned Russian entities to trade and do business. But for now, the traceable nature of transactions on the blockchain means that Russian oligarchs are unlikely to use it to move money around. 

The Russian government is developing a digital ruble. It hopes to use this to trade with parties who are willing to accept this digital ruble without converting it into dollars first. Hacking techniques could also allow the Russian state to steal crypto from other parties, and make up for some of the revenue that has been lost due to sanctions. 

Ukraine's vice prime minister has called for crypto exchanges to block the addresses of all Russian users. This would be a blunt tool but would make it difficult for the Russian government to get their crypto out in any form. But a complete ban on the country may not even be possible. Some crypto exchanges do not confirm the identity of their customers, and so far major exchanges like Coinbase haven't agreed to ban all Russian accounts. Although they have said they will ban transactions coming from IP addresses that belong to sanctioned individuals and entities. 

Crypto might be too small for Russia

An official for the US treasury made the point that it would be difficult for Russia to use crypto to evade sanctions in any substantial way. 

“You can’t run a G20 economy on crypto. Big banks in an economy need real liquidity and conducting large transactions in virtual currency is likely to be slow and expensive”

The Russian central bank has $630 billion in reserves. It may be able to use cryptocurrencies to chip away and move some money out. But there is currently no way it can use crypto to access a large chunk of its reserves

How has Ukraine been using Crypto?

Ukraine has been using crypto to collect donations. These donations have helped to support the war effort and to buy essential resources for Ukrainians. So far, Ukraine has raised $100 million through crypto donations. The Ukrainian government itself has been raising funds using crypto. They have raised at least $54 million using this channel. There is a big reason Ukraine has been able to use this channel so effectively. They had infrastructure around crypto, to begin with. Last year, Ukraine was ranked fourth in the world for crypto adoption. 

Ukrainian citizens have also been using crypto as an alternative to Ukrainian Banks. Banks have been limiting access to bank accounts and foreign currency. Crypto provides a way around this. 

There is also evidence that some Ukrainians are using crypto to assist them while fleeing. They are leaving the country, and they hope to access their crypto wallets and turn that crypto back into fiat currency, once they reach safety. 

However, it must be said that dealing with crypto requires some level of technical sophistication. And for those who hadn't set themselves up already, the onset of war was never going to be a time where they could quickly learn the ins and outs of the crypto ecosystem. Not only this, you need the infrastructure too. You need a working device and an internet connection. Some people in Ukraine are facing a situation where they have no power or access to running water. It is not at all reasonable to expect that they will have the ability to set themselves up on or access crypto exchanges. 

Volatility is an issue for both sides

Imagine this: you've been able to flee war, you've found a device and an internet connection, you've logged into your MetaMask wallet and found all the crypto you kept there for a rainy day like this one. But you also find that in this time, the cryptocurrencies you were holding have lost half of their value. That would be a devastating blow and is a real problem with using crypto in this scenario. One way to get around this (potentially) is to store your assets in the form of Stablecoins rather than traditional cryptocurrencies like Bitcoin and ETH. More on that in future posts. 

Certain Other Countries are Watching

I will mention no names. All I'll say is - it's very clear that Russia is not the only country in the world with ambitions of invading its neighbours. These countries might have been shocked by the unity of the west and the severity of their response. Russia has been frozen out of the global financial system and is in a real bind. Could they buy more crypto to protect themselves from the fate that Russia has suffered? It wouldn't be the worst idea. 

Conclusion

Is crypto a force for good or is it evil?  Crypto is just new technology. It's neutral. The best analogy I heard was this: think of crypto as like a car. A car can be used by criminals as a getaway vehicle. Does that mean cars are evil? Not really. They can just as well be used to drive a sick person to the hospital. In the case of this war, is crypto being used for good or to get away from crime scenes? The answer, it seems, is both. But one thing is clear. Crypto is being used most effectively by those who were prepared and had owned crypto before any of this started. The Ukrainian citizens who already had crypto assets are the ones that can access them easily now. Whereas the Russian government finds itself in a bind because it didn't own much crypto before and it's too late for them to start buying now - a lot of the damage has already been done. Maybe individuals and governments will take heed of these lessons in future.