The Growing Digital Asset Lifeline in Ukraine

As Russia’s invasion of Ukraine continues, digital assets have played an important role in international support for Ukraine’s defenses and humanitarian efforts.

In an outraged response to the war, people from around the world are pouring assets into Ukraine – at least $100 million, as of earlier this month – using the alternative financial system built around cryptocurrencies.

“There are a couple of things going on here: One is that crypto enables you to move assets person to person without intermediaries, which is a virtue when you are in a conflict zone and access to financial intermediaries is unreliable at best,” said Alex Tapscott, managing director of alternative investment manager Ninepoint Partners and co-author of “Blockchain Revolution.” “In Ukraine, not only are charities raising money, but other civil and societal organizations are raising money as well, including the government.”

The decentralized autonomous organization (DAO) UkraineDAO has raised over $7 million in direct crypto payments for nonprofit organizations in the country, supported by the sale of Ukrainian flag non-fungible tokens (NFT) and promoted by Russian art collective Pussy Riot, in addition to a number of fintech and crypto concerns.

A number of organizations and individuals, including Ukrainian boxer Wladimir Klitschko, are also raising and sending money to benefit the work of organizations like the Red Cross within Ukraine, at times involving digital assets in their giving.

Big giving

Digital assets have also enabled millions of dollars to be transmitted directly to these organizations, to civilians on the ground in Ukraine and to the Ukrainian government and military, said Tapscott, as Ukrainians were cut off from some charity and crowdfunding campaigns.

“At least one of the big charities in Ukraine that was using crowdfunding platforms found itself cut off,” said Tapscott. “The concern was that they were violating the platform’s terms of service, which didn’t allow you to raise money to buy weaponry.”

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Individuals, organizations and countries have had major security and logistical issues sending cash into conflict zones, said Tapscott. Notoriously, in 2007, the U.S. sent $12 billion to Iraq, including billions of dollars of shrink-wrapped cash on pallets, only to have much of it go unaccounted for. But cryptocurrency transactions are irrevocable, and for the most part transparent. So not only can cryptocurrency get to where the donor wants it to go but the donor has evidence that it went into the right hands –and crypto is allowing donors to give more directly than they have in the past.

Many of the suppliers to the Ukrainian military prefer to be paid in crypto, said John Sarson, the CEO of Sarson Funds, a crypto asset manager.

“With the ability to donate cryptocurrency, never before have you been able to see donations make such a difference,” said Sarson. “Generals in Ukraine say that 40% of their suppliers are now accepting cryptocurrency directly. For those that don’t, Ukraine can just sell crypto into cash and then pay cash. Ukraine passed legislation in recent weeks to legalize crypto because they are getting a giant net benefit out of it.”

Tapscott said the donations are coming from all over the world using different kinds of tokens and assets, ranging from a few dollars to hundreds of thousands of dollars. Notably, Polkadot ecosystem co-founder Gavin Wood sent over $5 million worth of his DOT tokens to support Ukraine’s defense.

“There are remarkable people just looking for ways to make a difference,” Tapscott said. “For 30 years we’ve had this internet of information, an amazing tool for communication and sharing but not so good for moving and sharing money. A decade ago, in this kind of situation, what could someone do? Donate to the Red Cross, or post something on social media showing their support for whatever side they wanted to support; now you can put ammunition in the hands of people fighting for their freedom.”

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Crypto in Russia

On the other side of the conflict, Russia’s population of more than 145 million is now cut off from the global financial system and the global economy, said Tapscott, and cryptocurrencies might be a refuge for Russian citizens amid international sanctions.

“It’s not the fault of the people that they live in a country where the government devalued their own currency; here you have a situation in Russia where many people don’t care for this war and it isn’t fair to them that their bank accounts are frozen and the ruble isn’t worth anything,” said Adam Blumberg, co-founder of PlannerDAO, an educational provider for financial advisors in the digital assets space.

In recent weeks, banks and payments companies have frozen, suspended or completely discontinued their business in Russia. In some cases, the exits have been devastating for the Russian people – according to Tapscott, Visa (V) and Mastercard (MA) alone account for 70% of transactions in Russia, and both companies have suspended operations in the country.

While banks and other traditional financial institutions flee Russia amid sanctions, many crypto companies are staying put. Binance, for example, deemed calls to freeze Russian accounts as “overreach,” and Kraken has also resisted calls for a blanket suspension on all Russian users. Others, like MetaMask and Coinbase (COIN), have temporarily frozen Russian accounts.

“So far most crypto companies have resisted the mass exodus from Russia, though they are suspending the accounts of people suspected of criminal activity and freezing the accounts of sanctioned individuals, but they’re not suspending the ability of typical Russians who are not criminals from using their services,” Tapscott said. “Businesses usually operate the way they think the world should work, and the crypto industry generally has this belief that it’s bad behavior to just cut people off when there’s no requirement that they do so.”

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Because crypto transactions are irrevocable, they have some attraction to Russians seeking to circumvent sanctions, but because they are transparent the international community will likely know who is sending money and where that money is going. Experts have noted that crypto is unlikely to be a workaround for sanctions evasion.

Most crypto firms seem to be taking a targeted approach, freezing the accounts of individuals who are being sanctioned but allowing assets to continue to flow. Russians are increasingly turning to digital assets to make payments, save and make payroll, Tapscott said, as the value of the ruble has cratered.

Crypto’s evolving role

As the world becomes more unstable, there’s a growing role for digital assets as a hedge against geopolitical risk and as a lifeline for people whose access to the global financial system has been removed or restricted, Tapscott said.

“There’s a Lenin quote, ‘There are some weeks where decades happen,’” he said. “I believe that was meant to refer to political change, but I think it also applies to an acceleration in the adoption of crypto assets. We’re seeing clear signs that this conflict is accelerating the adoption and use of crypto. The fact that American and European officials have weaponized fiat currencies to penalize Russia acts in the long term as a tailwind as well for anything you can self-custody and is not tied to a government or a corporation.”

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