Role of cryptocurrencies in the Russian-Ukrainian War

Translated by Farah El Desouky

“Cryptocurrencies” play a prominent role in the Russian-Ukrainian war, particularly after the apparent escalation between the conflict’s parties, which has reached intensity since the start of the fourth week of the war. While Russia uses cryptocurrencies to mitigate the consequences of its celibacy, Ukraine’s state institutions have begun to rely on them to fund the military and meet basic needs. In the midst of these increasingly threatened digital financial transactions, the European Central Bank expressed concern about the use of cryptocurrencies to avoid Russia’s sanctions over the Ukraine conflict. The United States, its European allies, and Canada have agreed to isolate major Russian banks from the SWIFT interbank messaging system, which connects more than 11 thousand banks and financial institutions in more than 190 countries and territories, hindering their access to global financial markets.

The United States and its allies have sparked debate about whether cryptocurrencies, particularly bitcoin, can be used to circumvent sanctions. The reason for asking the previous question was that cryptocurrencies are frequently decentralized, which means that they are not issued or controlled by a central entity representing the central bank. Additionally, when encryption is sent to other users, it does not go through the traditional way of remittances – all of which raises the questions that we will address in this analysis, the limits of Russia’s and Ukraine’s use of cryptocurrencies, and European apprehension about them.

Cryptocurrencies and Russia:

Russians were hesitant to purchase cryptocurrencies traded outside of the official banking system. Because of the ongoing war, this was nothing new for Russia. In contrast to most other countries, cryptocurrency currencies are part of the Russian financial system, with Russia being the third largest bitcoin mining country, a highly amortized accounting operation. The circulation of ruble-denominated “composition” grew in size to around $14.2 million in early March 2022, and the average deal on the “formation” of rubles on the Penance platform reached its highest level in 10 months, at approximately $580 in 24 million 2022, when the Russian invasion of Ukraine began.

Following the exclusion of Russia’s major banks from SWIFT’s global system, Russia discovered in cryptocurrencies a way to transfer money without using official global channels, with digital currencies providing an infrastructure for transferring money to and from Russia. According to The New York Times, Russia’s growing reliance on cryptocurrencies is also assisting Russian President Vladimir Putin in evading the first wave of Western financial sanctions. This coincides with the Russian government’s efforts to create its own central bank digital currency, the so-called “digital ruble,” which it hopes to use to conduct direct trade with other countries that wish to accept it without first converting it into dollars.

Representatives of the Russian Central Bank confirmed in October 2020 that the new “digital ruble” would make Russia less dependent on the US and more resistant to sanctions, and would allow Russian entities to conduct transactions outside the international banking system with any country that wanted to trade in the digital currency. According to the Russian Central Bank, the digital ruble is an additional form of Russian currency that will be issued digitally by the Bank of Russia, and both monetary and non-monetary rubles will have common characteristics. Russia’s digital ruble development follows an estimated $50 billion in losses.

Cryptocurrency rationing in Ukraine:

Ukraine ranks fourth in Chainalysis’ global cryptocurrency currency adoption index, trailing only Vietnam, India, and Pakistan; approximately $8 billion in cryptocurrencies pass through the country each year; the authorities have taken significant steps in developing appropriate regulations for bitcoin mining over the last two years; and Ukraine’s Ministry of Energy has encouraged the use of nuclear power sources for digital coin mining projects. The Ukrainian Parliament passed this bill a month ago to legalize cryptocurrencies and establish a framework for their regulation and management. With the new law in place, Kuna, Ukraine’s first crypto-currency platform, assists the government in spending donations and converting crypto-currency into paper currency.

Ukraine has raised $35 million in coin donations through thousands of donations since the beginning of the war in order to increase the government’s coin donation campaigns, and a non-governmental organization has received one donation of 80 bitcoin. Donations to the government’s cryptocurrency portfolio have come in from a variety of digital currencies, including Ptolemaic, Ethereum, Tether, and even Dogquin, but this has opened the door to warnings about fraudulent cryptocurrencies, and some hackers and fraudsters may be taking advantage of the situation and deceiving people who want to donate to Ukraine.

Ukraine has raised $35 million in coin donations through thousands of donations since the beginning of the war in order to increase the government’s coin donation campaigns, and a non-governmental organization has received one donation of 80 bitcoin. Donations to the government’s cryptocurrency portfolio have come in from a variety of digital currencies, including Ptolemaic, Ethereum, Tether, and even Dogquin, but this has opened the door to warnings about fraudulent cryptocurrencies, and some hackers and fraudsters may be taking advantage of the situation and deceiving people who want to donate to Ukraine.

Based on the foregoing, Ukrainians looking for alternative banking systems, particularly during the war, are likely to welcome the legalization of digital money, which promotes the use of cryptocurrencies.

To counter the rise of “cryptocurrencies” and respond to the growing shift toward non-cash payments, the European Central Bank is considering the creation of a “digital euro,” the Central Bank’s digital currency CBDC will be an electronic version of euro banknotes and coins, and the United States is considering including cryptocurrencies in a new round of sanctions against Russia. Experts believe that prohibiting transactions through cryptocurrencies is difficult because digital currencies are designed to exist indefinitely and frequently outside of the government-regulated financial system. As a result, introducing penalties for cryptocurrencies would be difficult. The decentralization of cryptocurrency also poses challenges to such initiatives, particularly given that the cryptocurrency community was founded, in large part, on the blockchain with the aim of providing greater financial freedom for people around the world.

Finally, it is clear that the easing of the power of US sanctions stems from a system in which these countries can conduct transactions without going through the global banking system, which Russia is working hard to achieve. This has also been observed in Russia, where the average number of cryptocurrency transactions has increased since the beginning of the Ukrainian conflict. Transfers of rubles to fixed cryptocurrencies or digital currencies have reached an all-time high, possibly since 2021, and when the digital ruble is officially issued this year, it will be possible to use it to make payments to institutions and states, make money transfers, and pay transactions using digital financial instruments and assets. This implies that bitcoin and other cryptocurrencies are now a real factor in global economies and a new way to circumvent conflict.