Crypto’s role in the Russia-Ukraine conflict
The first global crypto war?
This week has been intense to say the least.
The Russia-Ukraine conflict continues to escalate, and I’m honestly at a loss for words. It almost seems inappropriate to focus on crypto at a time when casualties are being reported.
However, I want to use this opportunity to talk about the larger role of crypto within geopolitical issues. This is not meant to be an in-depth analysis but a way to highlight some important ideas in the context of the current conflict.
I want to say that I am not trying to cover the intricacies of what is going on between Russia and Ukraine. I do encourage everyone to read more about this topic.
-Katja
P.S. As you can see, I’m moving my newsletter publication day to Sunday. I think this will give me a more manageable timeline and (hopefully) allow me to produce better writing.
Crypto’s role in the Russia-Ukraine conflict
To no surprise, when war breaks out, fear grows. During such geopolitical uncertainty, risk-on assets take massive plunges as people try to redirect their money into safer avenues.
With crypto specifically, high stress gets coupled with depressed market liquidity and low exchange balances, making markets react aggressively to any sell pressure. This is what contributed to the overnight crypto market crash when Russia first invaded Ukraine.
However, this risky asset behavior is relative. At the same time that crypto fell, it also showed signs of a safe-haven, especially for Russian and Ukrainian citizens. Public sentiment drives the market and largely depends on two factors: availability of alternatives and timeframe.
War or intense geopolitical conflict calls for massive shifts in policies and economic relationships among countries. Sanctions and the recent exclusion from SWIFT (a system that coordinates transfers among banks) meant that Russia’s economic growth is slowing significantly, and the government must implement monetary action to not only prevent bank runs but raise funds for the war effort.
Such actions would inevitably lead to inflation, pushing people to rush to banks and ATMs to retrieve their fiat so they can store their wealth and savings in a safer alternative. Because of the ease of access and inherent qualities that make it a good long-term store of value, crypto (especially Bitcoin and stablecoins) is serving as the safer investment instrument.
“When it comes to the alternative assets, I would far rather be holding Bitcoin than the Ukrainian hryvnia or Russian ruble. Moreover, given that this will lead to broader geopolitical uncertainty in Eastern Europe, I wouldn't want to hold any fiat in the Eastern Block.”
Michael Chobanian, the founder of the Ukrainian crypto exchange Kuna, stated that there was now a “limited supply of tether (USDT)” and that limits had “pushed up the exchange rate to a sizeable premium.”
Considering this conflict through a wider lens, crypto is offering a new way to fundraise in support of Ukraine. Although crowdfunding for a global cause is not a new concept, using crypto makes it easier and faster to transfer funds.
On Thursday, donations were around $400,000, and within 24 hours increased 10-fold to over $4 million. After the Ukrainian government appealed for more crypto donations yesterday, it raised an additional $10 million in a single day.
“Elliptic says that donors are using Bitcoin to funnel money to such NGOs, bypassing any banks and financial institutions that might block payments…the organizations are taking the idea from pro-Russia groups, who began using Bitcoin fundraising as early as 2014.”
On the other hand, technology is agnostic. Just as Ukraine can employ crypto, so can Russia; therefore, the Washington Post has dubbed this the “world’s first crypto war.”
This concept of a crypto war is still up for debate. First, Russian sanctions are largely focused on banks, not energy payments, so Russia’s biggest businesses don’t necessarily need to reconfigure their processes. Even if they applied to energy sources, crypto mining still provides a way for Russia to monetize its oil and gas reserves without having to physically export them. Iran is showing this possibility.
If Russia were to turn to crypto, it could experience difficulties. In theory, no one can stop the Russian government from turning to the blockchain to surpass sanctions. However, depending on how crypto is applied, it may or may not help Russia.
If Russia uses crypto as a means of exchange, it could continue to transact and get value from trades. But, if it does need to cash in the crypto, like with exports, certain crypto exchanges that are centralized and fall under specific jurisdictions (like the US) will not allow Russia to withdraw those funds.
Coinbase, the largest US-based crypto exchange, has started blocking IP addresses in sanctioned areas and monitoring “threat actors and their networks.” As Caroline Malcolm, Chainalysis’ head of international policy, also explained,
“We've seen that in the past with sanctions, you've got examples where wallet addresses have been named as sanctioned entities, and that allows Chainalysis to put in place alerts for our customers, whether they be government or from industry … So that if they have transactions, which you know, intersecting with sanctioned entities, they'll be able to see those and get an alert on those immediately.”
Mykhailo Fedorov, Vice Prime Minister of Ukraine and Minister of Digital Transformation of Ukraine, took an even more extreme stance on crypto censorship
Andrew Jacobson, an associate with law firm Seward & Kissel, expanded on another issue facing Russia if it chooses to adopt crypto,
“I think Russia probably is thinking about using bitcoin or other cryptocurrencies to evade sanctions, but on the other hand, is probably concerned about those cryptocurrencies getting too much popularity within their own country, because that impacts their own control of their own monetary system, and therefore impacts their power.”
Although the debate continues around Russia’s use of crypto, this conflict embodies the positive effect crypto can have, especially in times of trouble. It allows for individuals to store their wealth and governments to receive aid.
I do not want to reduce the Russia-Ukraine conflict to some positive message about crypto. However, these are the times that can really demonstrate what this technology was built to do and the potential it has for the future.