The First Cryptocurrency Outbreak: Can Russia Counteract Sanctions with Cryptocurrencies
On February 24, the Central Bank of Ukraine suspended electronic cash transfers and ATMs can no longer be used. This means that millions of Ukrainian citizens, even refugees and fugitives, are unable to access the funds necessary to meet their basic needs.
Amidst such chaos, one Ukrainian commented in a tweet that his Ukrainian credit card is no longer working, everything he had in his Ukrainian bank account has gone with the wind and now, all he has left in his hands is cryptocurrency. Cryptocurrency saved his life, he is now in a safe place outside of his country, he has cryptocurrency that can secure his livelihood, but the benefits of cryptocurrency are not only limited to individuals, but can also benefit governments.
The Ukrainian government has raised more than $10 million in cryptocurrency donations in what has turned into a crowdfunding effort to help the country defend itself against an all-out invasion from Russia. The Ukrainian government's official Twitter account on Saturday published the addresses of two cryptocurrency wallets, one of which only accepts bitcoin and the other that accepts "ethereum" and "tedatcoin" (USDT), a digital currency based on traditional currencies such as the U.S. dollar or the euro for cash transfers. digital currency based on traditional currencies such as the U.S. dollar or the euro for cash transfers. According to research published by analyst firm Elliptic Blockchain, these wallets have attracted $10.2 million worth of cryptocurrency.
Elliptic noted that approximately $1.86 million of the funds donated to the Ukrainian government were obtained through the sale of irreplaceable tokens, or so-called "NFTs," which are unique digital assets designed to represent ownership of virtual items such as artwork or characters in video games. designed to represent ownership of virtual items, such as artwork or characters in video games.
Major volunteer organizations have played a crucial role in the conflict in Ukraine within the past decade. During the Maidan revolution that led to the ouster of pro-Russian Ukrainian President Viktor Yanukovych in 2014, many volunteer organizations emerged to support protesters and help the wounded. Shortly thereafter, Russia occupied the Crimean Peninsula and provoked war in the Donbas region of eastern Ukraine. Volunteer groups stepped in again and provided soldiers, weapons and medical supplies to fill the gap.
These charitable organizations are funded by private sector donors who have donated millions of dollars using bank transfer and payment applications. Such donations are usually made in the traditional way, i.e. through major banks, but in Ukraine, cryptocurrencies have become a fast and easy way to handle fund transfers, especially through Bitcoin.
The crypto industry's fame in Ukraine lies in its abundance of skilled personnel - the country has more than 200,000 skilled workers, and in the last year, the country's IT export business was worth $6.8 billion. In addition, the country officially legalized Bitcoin and other cryptocurrencies last year, and to that end introduced a law that regulates digital financial assets and provides fraud protection for Ukrainians. In Ukraine, you can see the widespread use of cryptocurrencies, even among those who are not practitioners of crypto projects.
In addition to being rich in technical talent, another important factor driving the cryptocurrency trend in Ukraine is its relative lack of investment options. Aside from the real estate market, "the only investment opportunity is cryptocurrency." As a result, Ukraine ranks fourth in Chain Analysis' global cryptocurrency adoption index, behind Vietnam, India and Pakistan, with an estimated $8 billion worth of cryptocurrencies passing through the country each year. Ukraine's Deputy Minister of Digital Transformation Alexander Boenyakov told a New York Times reporter last year that "the idea at the macro level is to make the country one of the most crypto-friendly jurisdictions in the world."
Given the disruption of the traditional financial system, the presence of cryptocurrencies in the war in Ukraine is not limited to securing aid and facilitating daily operations, but with the West using sanctions as a weapon to deter Russia, Ukraine is now trying to expose cryptocurrency wallets used by politicians in Moscow, against the backdrop of warnings that Russia may use digital currencies to circumvent sanctions, especially as some Russian banks are banned from using the SWIFT global interbank payment system.
Authorities in Kiev have put out a call on social media for information about cryptocurrency wallets controlled by politicians in Russia and Belarus. Ukrainian Deputy Prime Minister Mikhailo Fedorov announced in his tweet on Saturday that the country's cryptocurrency community will reward those who provide detailed information to identify the politicians in question.
The rewards will be provided through private donations, said Artim Avion, the lawyer in charge of the effort. Bloomberg reports that the campaign has received information about the crypto addresses of some of these politicians, which they will legally share with large stock exchanges and with Chainalysis, the company that oversees Russian transactions, under the plan. Avian said, "We hope they will understand that they are not welcome in Ukraine or in the crypto community."
In this context, Caroline Malcolm, head of international policy at analyst firm Chainalysis, stressed that the presence of bad actors within the cryptocurrency space will work to help Russia circumvent sanctions, as well as within the traditional financial sector. On the other hand, Robbie Lau, senior researcher at Babylon Finance, a crypto company based in Hong Kong, China, stressed that it is unrealistic for Russia to avoid sanctions through cryptocurrencies, as the market is still mainly priced in stable currencies pegged to the US dollar.
The Battle for Cryptocurrency
Over the years, Russia has established itself as a hub for illicit crypto activity, including ransomware attacks and cryptocurrency-based money laundering, and Chainalysis has found that cryptocurrency companies operating in Moscow's financial district have acquired $700 million worth of digital assets from entities linked to criminal activity over the past three years. This opens up a possible avenue for companies seeking to evade sanctions, but it is unclear whether they will choose to go down this route, as the sanctions announced by the U.S. Biden administration primarily target banks and do not cover energy payments, meaning that some of Russia's largest companies do not need to resort to the dark web of crypto payments just yet.
On the other hand, the U.S. authorities' improving performance in tracking and confiscating illegal crypto funds could hinder efforts to circumvent sanctions. The U.S. Department of Justice announced last month that it had recovered an additional $3.6 billion worth of bitcoins that were allegedly stolen in a hack of the "Bitfinex" trading platform in 2016. Last summer, the DOJ recovered $2.3 million worth of bitcoin that had been paid to cybercriminals in Eastern Europe for shutting down U.S. Colonial Pipeline Lines in a ransomware attack that led to fuel shortages on the U.S. East Coast.
What we want to point out here is that cryptocurrencies have already become useful in financing violent conflicts or other conflicts. This means that in the future, we run the risk of crypto communities using their wealth to intervene in political or military conflicts, which also includes the possibility of politicizing cryptocurrencies themselves. The Internet is increasingly becoming part of the world of war, and the war between Russia and Ukraine may be "the world's first crypto war," but it certainly won't be the last.