Can Cryptocurrencies Be Useful in War? Interpreting the Impact of Cryptocurrencies from Data on the Ukraine-Russia Conflict

Chainalysis has released the 2022 Geography of Cryptocurrency report, which mentions the use of cryptocurrencies in the midst of the war in Ukraine and Russia. The report highlights an increase in cryptocurrency usage as people seek to transfer wealth during times of conflict. Data analysis also reveals the impact of Western sanctions on the Russian market and the supportive role of cryptocurrencies in facilitating cross-border humanitarian aid efforts.

Cryptocurrency Usage After the War Breaks Out

The Ukraine-Russia war that broke out in February this year continues to escalate. This war has had a significant impact on the lives of businesses and people in both countries. Apart from the transfer of personal wealth, since the start of the war, the United States and several other countries have begun imposing sanctions on Russian oligarchs and individuals connected to the Putin government. This, coupled with Russia's historical acceptance of cryptocurrencies for both legitimate and illegitimate purposes, has raised questions about whether Russians will turn to cryptocurrencies to evade sanctions.

According to data from Chainalysis, the liquidity in the cryptocurrency market may not be sufficient to avoid large-scale, systemic sanctions. However, preliminary growth in cryptocurrency transfers for both countries in March 2022 can be seen shortly after the war began. However, following that, Russia's transactions have remained within a relatively narrow range, possibly due to the impact of many cryptocurrency services beginning to restrict them. On the other hand, from the start of the war until June 2022, cryptocurrency transfers in Ukraine have steadily increased.

However, in emergency situations or situations of malignant inflation, people tend to focus more on protecting or transferring their fiat assets. Chainalysis also utilized order book data from two exchanges that accept local fiat currencies: Binance and LocalBitcoins. A clearer trend can be observed here, especially in March, where the trading volume of the Ukrainian currency UAH increased by 121% compared to the previous month, and the trading volume of the Russian currency RUB also increased by 35%. However, the trading volumes of both countries have since decreased.

Tatiana Dmytrenko, a senior advisor to the Ukrainian Ministry of Finance and a member of the World Economic Forum's Digital Assets Working Group, was asked by Chainalysis about her views on this data. She mentioned the currency control policies implemented by the Ukrainian government.

Due to the martial law in Ukraine, the National Bank of Ukraine has imposed restrictions on currency cash transactions, such as purchasing US dollars or euros, and shortly after, currency fund transfers were also restricted. Therefore, some Ukrainians may wish to convert UAH into cryptocurrencies to cope with these measures.

She also pointed out that these currency controls were relaxed in July 2022, so we can see a decrease in the volume of UAH exchanged for cryptocurrencies.

How is Russia Evading Sanctions?

To understand similar activities in Russia, Chainalysis interviewed a regional money laundering expert who requested anonymity. He pointed out that not only for oligarchs but also for ordinary people, how to get money out of Russia is a crucial issue during the war. Many people are beginning to look for new places where they can cash out cryptocurrencies. He suggested that the UAE and Turkey were countries Russia had relied on in the past, while Kazakhstan and Georgia are countries where the demand for such services has increased since the war began. Although quantifying such activities is difficult, the increased internet traffic to cryptocurrency services primarily serving Russian users in these four countries has been a useful indicator. After the war started in February, internet traffic to Russian cryptocurrency services in these four countries increased significantly.

The expert explained that with Russia being removed from the SWIFT network, cryptocurrencies may play a role in Russia's international trade financing. The Central Bank of Russia recently agreed to use cryptocurrencies for cross-border payments and international trade legalization, which he believes may already be operational on a small scale and will become more widespread. This expert pointed out that China and Iran are potential trading partners for this plan, and stablecoins may be the preferred medium of exchange as they are less volatile than assets like Bitcoin.

Recently, Russian media also reported that Russian lawmakers are discussing amendments to the country's existing digital financial assets law, which will establish a legal framework for national exchanges to launch a national cryptocurrency exchange. Economic Policy Committee member Sergey Altukhov emphasized the need to create conditions for the legalization of cryptocurrencies:

Denying the existence of cryptocurrencies is meaningless; the issue is that they circulate in large volumes outside of state regulation. These are tens of billions of rubles in budget revenues lost in the form of taxes.

The Cross-Border Unifying Role of Cryptocurrencies

In addition, cryptocurrencies have clearly played a role in this war: supporting donations to Ukraine from around the world. Since the start of the war, cryptocurrency users have donated over $65 million in humanitarian aid, demonstrating that cryptocurrencies can unite people across borders to support international causes.

Perhaps due to the significant damage to infrastructure caused by the war, the National Bank of Ukraine has recently been actively discussing the feasibility of a CBDC with banks, non-bank financial institutions, and participants in the virtual asset market. Deputy Governor Oleksiy of the National Bank of Ukraine stated:

This can have a positive impact on ensuring economic security and strengthening national monetary sovereignty, enhancing the ability of central banks to maintain price and financial stability as a guarantee of sustainable economic growth.