Assessing the Role of Cryptocurrencies in Ukraine

By: Jack Fraser

April 18, 2022

The purpose of cryptocurrencies continues to evolve in nations throughout the world. While many countries have legalized components of digital assets for investment purposes, some countries have gone so far as to introduce cryptocurrencies as legal tender. In recent weeks Ukraine has taken formidable steps in encouraging the use of cryptocurrencies within its borders.

Just days before the Russian invasion of Ukraine, on February 17, 2022, the Ukrainian parliament decided to pass a bill that would legalize cryptocurrencies in the nation. The bill sought to afford protection to asset holders who deal in cryptocurrencies and allow cryptocurrency exchanges–such as Kiev-based Kuna–to operate legally.

On February 24, 2022, Russia launched its first attacks on Ukrainian soil. The invasion, perpetrated by one of the world’s largest superpowers, triggered substantial support from businesses, governments, and citizens around the world, which has since been pouring into Ukraine. While early support initiatives included heavy Russian sanctions and sending military aid, such as weaponry and troops into neighboring countries, additional forms of support have emerged. According to reports by Ukraine’s Ministry of Digital Transformation, the country has since received close to $100 million in cryptocurrency-related donations alone.

Donations in the form of cryptocurrencies have had their own, unique advantages. Many of these benefits involve the speed at which it can be transferred to the country, and how quickly it can be disbursed. First, rather than sending cash or wire transfers, Bitcoin can be sent and received almost immediately; it has been said that Bitcoin can be transferred as much as 432 times faster than our legacy, fiat system. Second, of the millions of dollars in digital donations Ukraine has already received, the nation has been able to disburse roughly half in almost no time at all. Much of this spending has either come in the form of converting it into fiat currencies in Ukraine, or using it with merchants equipped to accept payment in the form of cryptocurrencies.

Another distinct advantage involves the growing number of donors that have been able to contribute, merely by extending these opportunities to digital asset holders. In many crises, donors have had to rely on sending funds to charitable organizations, who would then redirect these funds accordingly. This process could prove both cumbersome and slow, and consumer distrust in charities themselves (such as the proportion of funding that is spent on charity administration, rather than actually received by the needy) may prevent donors from contributing at all. Allowing citizens to donate cryptocurrencies not only allows givers to circumvent charitable organizations and governmental entities, but also expands the ways in which the public can get involved. For example, after the Ukrainian Government’s official Twitter account requested cryptocurrency donations, reports emerged that civilian donations included a CryptoPunk NFT–worth roughly $200,000–and a $5.8 million donation from Ethereum Co-Founder, Gavin Wood. The benefits of having a universally accepted currency, like Bitcoin or Ethereum are clear; digital asset holders can transfer funds almost immediately, and these funds can then be used in relatively little time. Moreover, regular citizens now have better opportunities to donate; they can avoid the need for a middleman and may donate assets in a variety of forms like NFTs or digital currencies.

On the other hand, despite the many benefits of cryptocurrencies, digital assets may also undermine Ukrainian support efforts as well. Studies have suggested that Russia may be exploiting digital assets to evade sanctions measures within the global financial system. Following some Russian banks’ expulsion from the SWIFT system, cryptocurrencies could allow these banks to “bypass the international banking system . . . by offering an alternative way to make irreversible cross-border transactions.” This problem has been seen before; following heavy US sanctions against Iranian exports, Iran was able to convert its oil reserves into cash by trading it for Bitcoin, which went undetected by the international banking system.

Ultimately, while cryptocurrencies may provide valuable opportunities for funding and support in Ukraine, they may have consequences as well. The new bill to legalize digital assets within Ukraine should both expedite funding and expand the opportunities for regular citizens to get involved. Additionally, it may also encourage wider adoption of Ukrainian merchants in accepting transactions in cryptocurrency payments, that in turn could allow the Ukrainian government to disburse foreign aid more effectively. Nevertheless, by allowing bad actors to undermine sanctions measures, cryptocurrencies are not foolproof, and additional support is needed to provide a truly comprehensive response to the Russian invasion.

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