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Cryptocurrencies are being targeted by the G7 countries because of their possible use to circumvent the sanctions imposed on Russia, but at the same time, they have become a tool used by Ukraine to finance its war economy.
In recent weeks, the United States, Japan, and the European Union have tightened their controls over bitcoin and other virtual currencies, considering them potential mechanisms to circumvent the economic blockade on Russia, due to their anonymous nature and the ease of using them outside the conventional financial system.
These same peculiarities have led the Ukrainian government to promote cryptocurrency donations during the Russian invasion to finance the purchase of defense material and other supplies, when its banks cannot operate normally and its foreign currency reserves are scarce.
Experts doubt the ability of regulators to put effective barriers to digital currencies, while movements in the markets point to their growing use as a safe-haven asset by both Russian and Ukrainian citizens.
Cryptocurrencies cannot be controlled by a central authority
Using cryptocurrencies to evade sanctions on Russia “is still possible” despite the new controls applied by the international community, Naoyuki Iwashita, a professor at Kyoto University in Japan specializing in “Fintech,” tells EFE.
The measures taken by countries such as Japan or the U.S. require cryptocurrency exchange houses to block any transaction that could involve individuals or entities subject to sanctions, and for this, they are based on a previous legal framework that obliges these entities to identify their users.
But that does not prevent transactions with Bitcoin or other virtual currencies without resorting to exchange houses, for example by remitting cryptocurrencies directly between two private “digital wallets,” for which only a few destination keys — or a simple QR code — are needed, and without revealing the identity of sender or recipient.
“No country has effective tools to control cryptoasset transfers from users without intermediaries,” explains Iwashita.
“Bitcoin was developed with the goal of making money transfers anonymous. It is impossible to impose the same kind of controls that apply to international financial transfers,” stresses this academic and advisor to the Japanese Executive on cryptocurrencies.
A lifeline for Ukraine
Ukraine’s Ministry of Digital Transformation has raised more than $65 million since the start of the war through a cryptocurrency donation platform it launched together with industry players FTX and Everstake, in the first public-private initiative of its kind in the world, according to its creators.
The money raised is used to buy “helmets, bulletproof vests or night-vision goggles” and other non-lethal equipment for Ukrainian troops, the head of the aforementioned ministry Mykhailo Fedorov explains on the platform’s website, Aid for Ukraine.
“Crypto proved to be a real life saver thanks to its ease of use,” Ukrainian Deputy Minister of Digital Transformation Alex Bornyakov, who together with Fedorov, has promoted a law to legalize such currencies in the country, said via his Twitter account.
Donations are converted into hryvnia, the national currency, and other current currencies in Kiev’s public coffers. Ukrainian authorities have also arranged payments directly in cryptocurrencies with their suppliers, as these can be made in a matter of minutes instead of the “days” it takes for a conventional international transfer, according to Bornyakov.
Safe-haven assets
The volume of cryptocurrencies exchanged for rubles and hryvnas has soared since the start of the war, data compiled by market analysis firm Arcane shows, pointing to the search for safe-haven assets in the face of the risk of collapse of the domestic banking system in both countries as possible causes.
Last February 28, a daily record of USDT (Tether, a cryptocurrency with value linked to the dollar) purchases of $35 million was reached, while ruble to bitcoin (BTC) exchanges increased tenfold.
On similar dates, transactions between the Ukrainian currency and bitcoin and USDT tripled or quadrupled, according to data from the exchange house Binance, which moves the largest volume of transactions globally.
The Ukrainian war, in any case, seems to show new practical cases of use of cryptocurrencies, considered until now mainly speculative assets, as well as having attracted even more the magnifying glass of regulators.
BlackRock, the world’s largest investment firm, said Thursday in a letter to its shareholders that the conflict could accelerate the adoption of cryptocurrencies by countries that want to reduce their dependence on other currencies.
