22.03.2022 Finance Expert Luxembourg

The two sides of a (bit)coin

Imagine the two sides of a (bit)coin, a bit like “Two-Face”, the supervillain created by DC Comics. One side is hopeful, and the other side is much darker. When analysing the role of cryptocurrencies in the current war in Ukraine and the economic sanctions applied to Russia, we see both sides at work.

Using Crypto to avoid sanctions?

After the invasion of Russia in Ukraine, tough sanctions were deployed against Russia. Many Russian financial institutions and oligarchs have been placed on sanctions lists. Russian banks have also been cut off from SWIFT, the international payments network. Excluded from the traditional financial services system deprived of access to global financial markets, these sanctions have had a heavy impact on the Russian economy. In this context, can cryptocurrencies be a way for Russian financial institutions and oligarchs to escape or instead circumvent sanctions?

Cryptocurrencies are based on a decentralised system, meaning they are not issued or controlled by a central entity such as a central bank. Cryptocurrencies do not circulate through traditional financial channels. But this is much easier said than done. Many people still see cryptos as something hidden, underground, untraceable and used in a harmful way. This is a complete misconception. Blockchain, the technology behind bitcoin, is a public ledger of activity. It is transparent and open. Hence, it is possible to easily track the movements of funds from one account to another, making it very difficult to avoid sanctions with cryptocurrencies.

Using Crypto in response to the war?

“The Ukrainian government, as well as the NGO providing support to the military, have raised $63.8 million, through more than 120,000 crypto asset donations since the start of the Russian invasion”[1] Crypto donations have been vital in the Ukrainian response to the Russian invasion and to support the Ukrainian economy and wartime effort. Ukraine was no stranger to cryptocurrencies. According to analysis made by Chainalysis in 2020[2], Ukraine was ranked fourth for cryptocurrency adoption among its citizens in a global index. Being already a “tech-native population”, this devastating war has accelerated the Ukrainian government’s ambition to develop a blockchain and crypto-friendly economy. In February, Ukraine’s parliament passed a bill to legalise cryptocurrency. And on the 16th of March, Volodymyr Zelensky, the Ukrainian President, signed into law that bill establishing a legal framework for the country to operate a regulated crypto market, intending to support the wartime effort. The law determines the “legal status, classification, ownership and regulators of virtual assets, and setting registration requirements for crypto services providers”[3]. Thanks to this new law, Ukraine’s first crypto exchange, Kuna, will allow the conversion of Crypto to much-needed fiat money. And as stated by TechCrunch, Ukraine also “partnered with the Bahamas-based exchange giant FTX to convert crypto contributions to aid Ukraine’s war effort into fiat for deposit at the National Bank of Ukraine.”[4]

If the terrible war in Ukraine made the understanding of cryptocurrencies and their regulation move ahead more quickly than it had been, only the future will tell us if blockchain and Crypto will be the backbone of the resilient Ukrainian economy and the country’s future.

[1] Elliptic

[2] Coindesk

[3] Coindesk

[4] Techcrunch