Crypto and the Russo-Ukraine War

Crypto’s going to war. Cryptocurrencies are likely to play an increasingly important role on both sides of the Russo-Ukraine War. Earlier in the week, Russia invaded Ukraine in what Vladimir Putin stipulated was a “special military operation.”

With Western nations’ response to this military conflict becoming increasingly economic, Russia may be in search of alternatives in an attempt to blunt the impact of the sanctions. One such alternative may be cryptocurrency.

In contrast, Ukraine has received an outpouring of bitcoin donations. Activists have deployed Bitcoin in a variety of purposes, ranging from medical equipment to funding the development of a facial recognition app designed to identity if someone is a Russian mercenary.

Will Russia use Bitcoin to avoid International Sanctions?

The international response to Russia’s invasion has been relatively swift, leaving Russia to face a plethora of international sanctions including numerous Russian banks being cut off from the SWIFT payments system. There is a belief in some circles that bitcoin could be a means for Putin to evade some of these sanctions.

SWIFT is an acronym for the Society of Worldwide Interbank Financial Telecommunication. In laymen's terms, SWIFT is like Twitter for banks, a platform that provides information about where money is going. Significantly, about 300 leading banks and organizations in the country are users of SWIFT, more than half of the Russian credit organizations are represented in SWIFT, and Russia is ranked second by a number of users of the platform, after the United States. Consequently, expelling Russian banks from SWIFT would restrict the country’s access to financial markets around the world.

Alexandra Vacroux, executive director of the Davis Center for Russian and Eurasian Studies at Harvard University in Massachusetts has stipulated that because Russia's federal budget is so heavily dependent on taxes generated from the export of raw materials, Russia would struggle to conduct sales and also receive the money needed.

However, there are experts who have questioned how devastating expelling Russia from SWIFT will be. One such example is Caroline Malcolm, Head of International Policy at blockchain analytics firm Chainalysis, who informed Decrypt that “Russia can leverage cryptocurrency to evade the sanctions that are being put in place in response to their invasion of Ukraine."

This is because “Neither dictators nor human rights activists will encounter any censor on the Bitcoin network,” said Matthew Sigel, head of digital assets research at investment manager VanEck. Cryptocurrencies will help them buy goods and services and invest in assets outside of Russia all while avoiding banks or institutions that adhere to sanctions and could trace their transactions.

Despite the belief of many analysts that crypto will be used to bypass sanctions, this is not as likely as the headlines first suggest. Firstly, autocratic regimes find it difficult to adopt decentralised assets, evidenced by Xi Jinping, as it provides the populous with a level of freedom and independence that autocrats such as Putin fear. Secondly, companies might monitor sanctioned wallets for any transactions or refuse to transact with these addresses entirely. One such example is visible from the arrest of two individuals related to the 2016 Bitfinex hack. In addition to this, even if companies are unable to monitor these wallets, any assets held in crypto wouldn’t be easily converted into fiat currencies. With these facts in mind, it is hard to see Russia using crypto in the manner that is currently being advertised.

Ukrainian Fundraising in Cryptocurrency

There has been a long history of crypto fundraising for various causes, from WikiLeaks to Russian opposition politician Alexei Navalny, who has also been raising funds in bitcoin. The Bitcoin and Ethereum wallets listed by the Ukrainian government on Twitter have already received over $10m worth of crypto in total.

Bitcoin donations to Ukrainian NGOs and the Ukrainian army are soaring. New data from blockchain analytics firm Elliptic shows that over a 12-hour window, nearly $400,000 in bitcoin was donated to Come Back Alive, a Ukrainian NGO providing support to Ukraine’s armed forces. Moreover, the Ukrainian central bank has suspended electronic cash transfers, bolstering the use case for crypto.

The coordinated effort of people to donate crypto to Ukrainian NGOs and the Army demonstrates how crypto can be used as a public good. However, it should also be noted that it is easy to send crypto, but it is not necessarily easy for Ukrainians to receive crypto if the internet or power is cut off, and so for those who have it, cash may still be the best option.