ANALYSIS - New financial tool in wartime

By Ozgur Uckus

- The writer is pursuing a master's degree in Development Studies at the University of Sussex, with a focus on foreign aid policies, international development cooperation, and development studies.

ISTANBUL (AA) - While peace and welfare are expected to prevail in the world, the dominance of warfare continues in shaping international relations. Despite all international warnings, Russia launched an attack on Ukraine on February 24th, sparking the Russia-Ukraine War. Immediately after the invasion, we saw the engagement of new financial instruments of the digital age in war: cryptocurrencies.

- New instruments of war: cryptocurrencies

Money has always been one of the main factors affecting the course of wars. In this time, cryptocurrencies have emerged as an important financial instrument for the parties of the conflict as a "double-edged sword". Since cryptocurrency has evolved as a more popular component of the global financial system in recent years, it has been an inevitable part of the international conflict.

It's difficult to get money into and out of war zones. Since the beginning of the war, cryptocurrencies have played an important financial role to overcome this difficulty for both sides. On the one hand of the spectrum, the ability of cryptocurrencies to cross borders, regardless of rules or regulations, increases the power of the Ukrainian government to find financing easier and Ukrainian people to use an alternative way to access money just in case in the worst scenario. On the other hand though, it paves the way for the Russian elite to circumvent economic sanctions.

- Ukrainians requested donations in Bitcoin and Ethereum

In recent days, the unusual volume increases in USDT and BTC parities, the country unit of the cryptocurrency exchange, used dominantly in both countries, also prove this engagement. The invasion accelerated the Ukrainian government's adoption of regulations regarding cryptocurrencies. In February, the Ukrainian parliament approved amendments to the country's "On Virtual Assets" law, paving the way to establish a legal market for cryptocurrencies. According to an official announcement, Ukraine's parliament passed the crypto bill with a majority of the body's members. Ukrainian President Volodymyr Zelenskyy, signed the bill into law shortly afterwards to support the country's defense against a Russian invasion amid a frenzy of donations of digital assets.

Immediately following the invasion, the Ukrainian government, in serious need of further resources, tweeted a request for donations in Bitcoin and Ethereum. In the early days of the Russian invasion, Ukraine's official Twitter account shared two cryptocurrency wallet addresses: a bitcoin wallet address and an Ethereum wallet address, by posting "Stand with the people of Ukraine. Now accepting cryptocurrency donations: Bitcoin, Ethereum, and USDT."

In the last update of Elliptic, a blockchain analysis company, on March 11, the Ukrainian government and a non-governmental organization providing military assistance have gathered a total of $63 million from more than 120,000 crypto asset donations since the beginning of the Russian invasion. This includes a $5.8 million donation from Polkadot founder Gavin Wood and a CryptoPunk NFT worth more than $200,000 and a CryptoPunk NFT worth more than $100,000.

Digital Transformation Minister Mykhailo Fedorov has been advocating for cryptocurrency donations to be made to the government's wallets, which cryptocurrency exchange KUNA houses. Michael Chobanian, the founder of the Ukrainian exchange Kuna, is leading the crypto effort for the country. Chobanian tweeted on March 22 crypto fund, which has been collected since the beginning of the invasion of Ukraine, has reached the equivalent of nearly $60 million.​​​​​​​

- Government, individuals, and hacktivists received dollars in crypto

Ukraine's government and hacktivist groups received tens of millions of dollars in crypto in the early days of the war. Since the Ukrainian government has started accepting such donations, it has received the equivalent of 100 million dollars. Individuals who have cryptocurrencies made donations to Come Back Alive, a non-profit organization that helps the Ukrainian military, volunteers, and their families in the Russian-Ukrainian War, based on crowdfunding as well. A non-fungible token (NFT) of a Ukrainian flag for $6.5 million worth of Ethereum was auctioned by UkraineDAO, a crypto collective. According to the analytics firm Elliptic, it is the tenth most expensive NFT ever sold. It is declared that the funds will be spent on humanitarian aid. Ukraine's deputy minister for digital transformation, Alex Bornyakov, stated that crypto assets had raised donations for its military defense against Russia swifter than traditional banking systems.

Ukraine became a "crypto-friendly" country as a result of this. In 2021, the country ranked fourth in the world for cryptocurrency adoption, according to an indicator compiled by the analytics firm Chainalysis. Since the beginning of the war, the Ukrainian government has worked to upgrade its crypto infrastructure.

- Russians also benefited from cryptocurrency

Not only Ukrainians but also Russians can benefit from cryptocurrency. According to some experts, cryptocurrency has emerged as a "double-edged sword" in the war between Russia and Ukraine. It helps “oligarchs” and other officials skirt economic sanctions. Besides, Russia's citizens are also transferring their money into bitcoin as the ruble’s value falls due to the global sanctions that have crippled the country's economy. Massachusetts Senator Elizabeth Warren described crypto as a "shadow world" that Russians and others could use to help "sanction-proof" themselves.

As the ruble felt in those days, Russian activity in the cryptocurrency system increased significantly. According to researcher CryptoCompare, trading volumes between the ruble and cryptocurrencies reached 15.3 billion rubles ($140.7 million) on March 3, a threefold increase from a week earlier.

Following the Russian invasion of Ukraine on February 24, according to a report from the Bankless Times, the daily trading volume between Bitcoin and the Ukrainian currency soared by more than 270%. According to the same study, there was a 271% increase in Bitcoin-ruble trade volumes on the same day.

Ukrainian Vice Prime Minister Mykhailo Fedorov has urged crypto and blockchain platforms to restrict Russian users' addresses to avoid this trading in response to Russian cryptocurrency engagement.

- Crypto might be an important financial tool

Even before Russia invaded Ukraine, the United States administration was concerned that cryptocurrencies might dilute the impact of economic sanctions against the Russian government. According to a study conducted by the blockchain analytics firm Elliptic, Iran has exploited bitcoin mining to circumvent trade embargoes and economic sanctions.

The Biden administration is considering how it might penalize Russian cryptocurrency assets and has already advised crypto exchanges to ensure that their systems are not used by certain sanctioned persons and groups from Russia.

Christine Lagarde, the president of the European Central Bank, has urged the European Union to move forward with its Markets in Crypto-Assets legislation, which is intended to regulate the trade in cryptocurrencies to help efforts to prevent Russian cash from disappearing into the cryptocurrency market.

The modern operational zone has been reshaped through digital assets in recent years. Cryptocurrency will be a component of this reshaping. While it is still small in comparison to the billions of dollars flowing into the region for defense initiatives in response to the invasion of Ukraine, cryptocurrency has demonstrated that it can be a useful financial tool, particularly in times of crisis and war, for those who are sanctioned, immigrants, aid providers, and isolated entities who have difficulty in accessing financial instruments, as a borderless movement that takes control away from central banks and gives it to a large community (thanks to blockchain). This situation will accelerate regulations regarding cryptocurrencies and rethinking their impact on our world in the coming days. Policymakers need to acknowledge this rising dynamic in the complex era of great power competition.

*Opinions expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Anadolu Agency.