[Feature] Two Sides of a Coin: Crypto’s Role in the Russia-Ukraine War

The saying goes, “There are two sides to a coin; two sides to every story.” The same can be said about crypto’s role in the ongoing Russia-Ukraine war. Crypto is neither good nor bad; but that changes in different people’s hands and how it is utilised. For an instance, a weapon can be used to defend or protect, but it can also be used to hurt or damage. One way or another, cryptocurrencies have been and still are playing an unprecedented role in the war effort in both countries.

Ever since the full-blown invasion of Ukraine by Russia in February, millions of dollars have continuously flowed into Russian’s war efforts in the form of crypto, with a minimal $4m worth of crypto, and increasing, being collected by pro-Russia militias in Ukraine. This flow of funds is still snowballing: close to $1.8m of funds has been traced to the Russia military groups in the past two months compared to the $2.2m they received in the five months before.

Recipients include paramilitary groups offering ammunition and equipment, military contractors, and weapons manufacturers, based on analyses by Chainalysis, Elliptic, TRM Labs, and Binance

The freezing or blocking of the funds is an ardous process despite being able to trace them largely due to unregulated or sanctioned crypto exchanges withdrawing out millions in donations for invaders. Serhii Kropyva, who recently served as deputy of Ukraine’s Cyber Police and advisor to the country’s prosecutor general, explained, “Our aim is to identify all the crypto wallets being used by Russian military groups and the people helping them… we can see all the wallets involved in this criminal activity, these money flows of millions of dollars. But we can, unfortunately, see that the transfer is continuing all the time.” Pro-Russian nationalist groups, Save Donbas and REAR, and Russian arms manufactuer, Lobaev, have been spotted raising money through crypto crowdfunding on Telegram.

Stopping crypto from continuing to boost Russia’s incursion into Ukraine is harder than finding a needle in a haystack. Blockchain analysts pointed out seven other exchange services in India and China that have received funds from the pro-Russian groups they tracked. Examples of more well-known exchanges used are Huobi and Binance ─ MOO Veche send over $150,000 worth of Bitcoin (BTC) to Huobi while Binance mentioned that its exchange accounts were used by four of the groups it tracked and received over $208,000 worth of crypto. Jennifer Hicks, who manages Binance’s intelligence and investigations team, pointed out that when crypto exchanges are aware that something illicit is occurring that will translate to real-world effects, it is the exchange’s responsibility to put a stop to it urgently.

Based on Chainalysis’ chart, Russia’s and Ukraine’s crypto transfers saw an increase in March 2022 shortly after the war started on 24 February.

Since 9 March, restrictions on cash withdrawals in Russia have been in force with the end set on the same date in 2023. Along with other factors like “frozen” currency in their bank accounts for numerous Russians, the solution was stablecoins. Despite the European Union’s (EU) attempts to restrict Russian access to crypto as well as banning crypto wallets’ operation that is related to the Russia Federation from the start of October, stablecoins remain a real substitute. Exchange offices have appeared on the streets of Russia cities where transactions using digital assets can be carried out.

Chainalysis’ chart shows the share of transaction volume on predominantly Russian crypto services by asset type

A report released last Wednesday disclosed that the share of stablecoin’s transaction volume on primarily Russian services upped from 42% in January to March’s 67% following the invasion. The increase show no signs of stopping as of yet. It can be noted that crypto being used to work around sanctions means further discussions on improving the sanctions’ effectiveness are necessary.

The EU introduced new sanctions on 6 October against Russia, enforced by Dapper Labs, Local Bitcoins, and Blockchain.com. Come 27 October, Blockchain.com will block accounts of Russian nationals and will cease offering custody and rewards products to Russian clients. Earlier in the year, Coinbase and Binance mentioned that they would not support a blanket ban on Russian citizens, opting to block specific accounts with Russian ties.

Alex Murashev, head and founder of AM Capital, tweeted the above on 6 October

With that said, that is just one side of the coin, one side of the story. Based on Elliptic’s report, Ukraine has raised more than $77m in crypto donations since the onset of the war. A major part is thanks to the West’s vast support of Ukraine. Michael Chobanian, founder of the Ukrainian crypto exchange Kuna, expressed a month odd after the war began, that they are still collecting crypto and it is being spent on aid like daily rations and bullet-proof vests and helmets. Initially, two different funds were set up ─ one to support the Ukrainian military, the other for humanitarian purposes. Unfortunately, the funds had to be combined and concentrated on supporting the military when the violence intensified across the country. Michael also said that the majority of crypto donations came in the form of BTC, ETH, and USDT.

Compared to fiat money, crypto donations hold more value to Ukraine because they are less influenced by macroeconomic and geopolitical factors. In addition, while bank wires may take up to a day to be validated, crypto transfers are typically faster. The conflict in Ukraine is “forcing governments to develop their understanding of cryptocurrencies and their regulation”, based on Caroline Malcom, head of international public policy and research at Chainalysis.

In a nutshell, crypto’s role in both countries carries some similarities: one largely to attack and inflict, the other to defend and sustain. Two sides of a coin, two sides to the story that is still unfolding.