March 15, 2022
Finance usually plays a big role in wars, but the Russian-Ukrainian war is the first major conflict with a prominent role for cryptocurrencies. Since Russian forces invaded Ukraine on February 24, the United States and its partners have imposed an unprecedented series of sanctions on Russia. These efforts have raised questions, even in Congress, about whether Russian actors can use cryptocurrencies to circumvent sanctions. More broadly, the Russian-Ukrainian crisis comes at a time when lawmakers are trying to decide how to regulate digital assets. This month, President Biden signed an executive order requiring a government-wide strategy on digital assets, including to mitigate national security risks and illicit finance. The European Parliament is debating whether to impose power usage standards on cryptocurrencies that could limit certain types. the prominence of cryptocurrencies in this conflict could influence global perceptions of the technology, including among governments considering new regulations.
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Q1: How has the crisis between Ukraine and Russia intersected with talks on cryptocurrencies?
a1: Since the advent of cryptocurrencies, proponents have argued that decentralized digitized assets will be a democratizing force in global finance. Against the background of Russia’s invasion of Ukraine, cryptocurrency advocates argue that cryptocurrencies help undermine Moscow’s authoritarian regime by providing an alternative to the Russian ruble, facilitating capital flight from Russia. Proponents argue that cryptocurrencies provide average Russians and Ukrainians with a store of value and a medium of exchange that could reduce the humanitarian costs of sanctions and war. they also highlight cryptocurrencies as an important medium for donations to the Ukrainian government that supplement Western aid. however, some skeptics see the decentralized and loosely regulated nature of cryptocurrencies as a vehicle for illicit transactions, including as a means for Russian individuals and entities to evade sanctions.
Within the crypto community, the crisis has highlighted ideological tensions between the purely libertarian and actively anti-authoritarian sides, particularly regarding the degree to which cryptocurrency exchanges must comply with sanctions on Russian entities. Major exchanges appear to be strictly adhering to the sanctions, but are resisting calls, including from the Ukrainian government, to proactively suspend cryptocurrency trading for everyone in Russia.
Q2: Can Russia use cryptocurrencies to evade sanctions?
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a2: In theory, cryptocurrencies can be leveraged for illicit purposes, such as evading sanctions, but in practice, technological barriers, market structures, and limited liquidity will make it difficult for Russian actors to sanctioned evade sanctions at scale using cryptography. while the us The treasury department is monitoring whether cryptocurrencies are used to evade sanctions, with a national security council official reportedly saying that cryptocurrencies are an ineffective tool for sanctions evasion.
- Technological barriers: Cryptocurrencies rely on blockchain technology, digital public ledgers that are transparent and permanent. Because all transactions are recorded on the blockchain, cryptocurrencies are the digital equivalent of “marked bills” in the realm of physical cash. bitcoin and many other crypto assets are pseudonymous, not anonymous, which means your transactions and wallets can be traced. if a wallet can be linked to an entity or person, the actor can be identified. law enforcement agencies already employ such methods. Private companies like chainalysis assist in these efforts by using creative analytics to identify and quantify illicit uses of cryptocurrencies. that firm, for example, estimates that last year, 0.15% of all crypto transactions by volume were used for illicit purposes, primarily scams.
Market Structures: Most cryptocurrencies are traded on centralized exchanges like binance and coinbase because they offer convenient platforms and custody services for crypto wallets. These exchanges must comply with Know Your Customer, Anti-Money Laundering, and Anti-Financing of Terrorism (KYC/AML/CFT) laws in the United States and other major jurisdictions. this means that the authorities can identify who owns the crypto assets and can order the accounts of certain entities to be suspended or frozen.
Russia’s cryptocurrency exchange rules are more relaxed. Consequently, it may not be clear which entities hold crypto assets in Russia. Although crypto exchanges have not completely banned transactions from Russia, they are tightening enforcement of sanctioned individuals and entities. Coinbase, for example, has reaffirmed that it will follow applicable US regulations. uu. Sanctions laws to screen customers on sanctions lists and block transactions from IP addresses that may be linked to sanctioned individuals or entities. As of March 6, Coinbase had blocked over 25,000 IP addresses that it believes are related to sanctioned individuals or entities.
Alternatives to centralized exchanges with hosted wallets are decentralized exchanges or direct peer-to-peer (p2p) transactions, both using non-custodial wallets. decentralized exchanges are distributed applications that use “smart contracts” to manage liquidity pools. their use is growing rapidly, but at the end of last year they only supported about 5 percent of the volume of centralized exchanges. non-hosted wallets are controlled by individuals and stored on their electronic devices. they are risky for crypto owners because if the owner loses his digital keys or physical access to the device on which the crypto is stored, he can lose the assets entirely. these alternative methods of trading and holding crypto are more likely to be used for illicit transactions.
- Limited Liquidity: Cryptocurrency trading volumes between rubles and the two most liquid cryptocurrencies (bitcoin and tether) have more than doubled since February 24. however, the value of these transactions remains in the tens of millions of dollars per day. In the second half of 2021, imports from Russia averaged more than $900 million per day. the relatively small volume of crypto being bought with rubles suggests that ordinary Russians are trying to get rid of their rubles. Total crypto trading volumes across all exchanges worldwide averaged around $24 billion in February, compared to $5 trillion a day in transactions on swift, the financial messaging system from which major banks are now banned Russians.
In order to trade with foreign entities in cryptocurrencies, foreign counterparties should be willing to accept cryptocurrencies as payment. The most permissive jurisdictions with cryptocurrencies and with large exchanges are generally the ones that lead the sanctions on Russia. Many emerging market countries, on the other hand, have implicitly or explicitly banned cryptocurrencies, most notably China.
Q3: How is Ukraine using cryptocurrencies during this crisis?
a3: Since the war began, the Ukrainian government has used cryptocurrencies to facilitate donations and for military and other purchases. kyiv was relatively well positioned to take advantage of crypto networks. Last year, a market consultancy ranked Ukraine fourth globally for crypto adoption. in september 2021, ukraine formally legalized cryptocurrencies.
On February 26, the Ukrainian government began publicly soliciting cryptocurrency donations online. After initially only accepting bitcoin and tether, the Ukrainian government has expanded its capacity to now accept more than 70 forms of crypto. kuna, the largest cryptocurrency exchange in ukraine, helped organize this effort. Although some institutions have donated to Ukraine using crypto, the majority of donations come from people around the world. As of March 9, the Ukrainian government claimed to have raised nearly $100 million from crypto donations. crypto donations allow kyiv to obtain funds instantly and are faster than requesting donations settled through traditional financial channels.
Digital art traded as non-fungible tokens (nfts), an emerging medium for cross-border financial flows discussed in a previous csis economics show article, has also become a major source of donations for the ukrainian government. The Ukrainian government had received hundreds of NFT donations as of March 5, including a cryptopunk worth more than $200,000. The Ukrainian government and outside organizations have also started minting and selling NFTs to raise funds, with a Ukrainian-flagged NFT recently selling for $6.5 million worth of ether. however, these crypto donations to ukraine are relatively small compared to the billions of dollars in international humanitarian and military aid pouring into ukraine from partner governments.
The Ukrainian government has used your crypto donations for various purposes. none of the nft donated to ukraine had been sold as of march 3, and a ukrainian official admitted that nft donations, while valuable, are not that useful in the short term given that they are illiquid assets and difficult to sell. cryptocurrencies are much more liquid, and so far the Ukrainian government has converted less popular cryptocurrencies into dollars and euros, while holding bitcoin and ether in reserve. Some $15 million of these cryptocurrency reserves have already been used to purchase non-lethal military equipment such as body armor, night vision goggles, and battlefield medical supplies, with roughly 40 percent of vendors willing to transact directly. in cryptocurrencies as of March 5.
aidan arasasingham is program coordinator and research assistant in the economics program at the center for strategic and international studies (csis) in washington, d.c. gerard dipippo is a senior fellow at the csis economics program.
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