As war in Ukraine intensifies, cryptocurrencies are getting a global test-run like never before.
Not long after Russian troops crossed into the country, the Ukrainian government's official Twitter account posted the addresses for two state-owned crypto wallets with a request for donations.
https://twitter.com/Ukraine/status/1497594592438497282?ref_src=twsrc%5Etfw
Those accounts and two non-governmental organizations launched to support the Ukrainian war effort have together raised $31.7 million in crypto assets through more than 26,000 donations as of the afternoon of March 1, according to crypto analytics firm Elliptic. The donations are split roughly between Bitcoin and Ethereum, with stablecoins coming in a distant third.
Crypto exchanges have also stepped up to support Ukraine. FTX doled out $25 to every Ukraine user, while Binance donated $10 million to humanitarian efforts in the country.
Suddenly, the controversial crypto sector is playing the role of philanthropist, and in the process proving out one of its primary use-cases: decentralized cross-border payments.
But there's a flipside to crypto's wartime altruism. As donations flow into Ukraine, crypto is also emerging as a way to bypass recent sanctions against Russia's financial sector.
While the scale and scope of crypto's role in sanction-dodging is still unclear, Elliptic said there does appear to be an uptick in payments to the wallet addresses of sanctioned individuals.
"What we do know is that there has been a steady flow of funds to associated accounts coming from people internationally looking to evade sanctions and support the Russian cause," said Chris DePow, senior advisor for financial institution regulation and compliance at Elliptic.
The U.S. Office of Foreign Asset Control publishes a list of cryptocurrency wallets that are known to be associated with people who are sanctioned, or addresses that are related to them. That's how Elliptic was able to see an increase in crypto payments to sanctioned individuals. In general, however, tracking crypto activity in Russia has proven more difficult than in Ukraine.
"On the Ukrainian side, it's a very public effort," DePow said. "Folks are proud in a sense to be associated with helping maintain the independence of Ukraine with financial support. On the Russian side, it's all being done surreptitiously, as a means of effectively evading sanctions."
The threat that Russia is using crypto to get around sanctions is spurring some lawmakers who are already crypto-skeptics to call for new regulations on the industry.
"Cryptocurrencies risk undermining sanctions against Russia, allowing Putin and his cronies to evade economic pain," tweeted Senator Elizabeth Warren of Massachusetts. "U.S. financial regulators need to take this threat seriously and increase their scrutiny of digital assets."
Warren isn't the only one concerned. Well before the current Ukraine crisis, the Treasury Department issued a report back in October, 2021, that crypto could weaken U.S. sanctions.
"These technologies offer malign actors opportunities to hold and transfer funds outside the traditional dollar-based financial system," the report said.
While this is true in theory, some are questioning whether it's a viable alternative to fiat currencies, given the sweeping restrictions now being placed on Russian banks and oligarchs.
"Could crypto be used to evade sanctions? Of course," wrote Jerry Brito, executive director of CoinCenter, a cryptocurrency advocacy group. "Could it be used at a scale that would seriously undermine the measures being taken this week? I don’t see how."
How does crypto measure up to types of financial activity that are now being curbed by sanctions? The Bank of Russia in late 2021 said the total annual value of crypto transactions was $5 billion. For comparison, capital flows were more than $33 billion in a single month that year, according to Trading Economics. Replacing the existing financial system would thus require a massive expansion of crypto adoption across the country.
The biggest challenge, according to DePow, is that converting digital currencies into fiat currencies is no cakewalk, especially when the most powerful nation on Earth is making every effort to cut off your access to dollars.
"Let's say you're attempting to move sanctioned funds from a Russian crypto wallet into a more stable currency than the ruble like the euro or U.S. dollar, you're going to have to find a regulated exchange in Europe or the United State to provide that off-ramp," he said.
Without that access, your money is stuck in crypto, and even the most adamant crypto-maximalist would admit that crypto is still extremely limited as a way to make payments or purchase goods in the real world.
"I think Russia is going to use crypto to get around sanctions, but the degree to which they do that will likely be limited," said Michael Boutros, a strategist at DailyFX. "You can't purchase something with Bitcoin yet. It's not that widely used."
Further gumming up the works of a large-scale transition to crypto is growing pressure from U.S. regulators on crypto exchanges to crack down on Russian sanction-dodgers.
While there's been some pushback from exchanges such as Binance and Kraken against banning all Russian users, U.S.-based exchanges at least are regulated as money transmitters and will be forced to comply with sanctions.
"By and large, the industry is very geared toward eliminating that type of financial crime, so that they can promote broader adoption," DePow said.
