Ukraine War: The Dual Role of Cryptocurrencies

The US Treasury Department warned back in the fall that cryptocurrencies were threatening the effectiveness of sanctions. In fact, Bitcoin & Co. play a central role in the Ukraine war.

States have always financed wars with the help of more or less voluntary donations. With special taxes, for example, or with war bonds with a promise of interest. In this respect, Ukraine’s call two days after Russia’s attack is not unusual – would not the government specifically ask for cryptocurrencies.

“A protective shield for people”

“Nevertheless, I wouldn’t call it a crypto war, but rather a protective shield for people,” says Alex Galdstein of the New York human rights organization Human Rights Foundation. He helped organize the call for donations for Ukraine – successfully: so far, the equivalent of almost 60 million US dollars in various cryptocurrencies have been raised for the war chest. “The Ukrainian government used the money to buy military equipment to defend the country,” explains Galdstein.

But that’s not all: “Crypto-technology also provides peaceful humanitarian aid to hundreds of thousands of people who have fled, been displaced or are suffering in dire economic conditions.” There are special funds to help civilians escape and provide them with food and fuel.

“Black list is useless”

But the brave new crypto world also has its downsides, says Hanna Halaburda, a professor of business technology at New York University. “Even before the Ukraine war, cryptocurrencies were used for good and bad things because they circumvent state control and regulation,” says the scientist. “And in this conflict it is shown again very clearly: You can do better and worse things with crypto.”

Because cryptocurrencies are also used in Russia – there to circumvent the drastic sanctions of the West. With the invasion of Ukraine, more rubles have been exchanged for Bitcoin than ever before. “Let’s take the oligarchs: they can exchange money for cryptocurrencies to avoid sanctions,” says Halaburda. You can hardly prevent that. First of all, you would need the addresses of the virtual wallets of these oligarchs. “Then you would – secondly – have to block them in all trading platforms. And thirdly, there are not only bitcoins; there are cryptocurrencies that are so protected that a blacklist is useless.”

Access to cryptocurrencies not regulated?

The US Treasury Department had already warned in October last year that cryptocurrencies pose a threat to the effectiveness of sanctions. Entire departments are now busy tracking down suspicious transactions.

The trading platforms are not of much help. “We are a private company,” says Kraken CEO Jesse Powell. “It’s not our job to freeze the accounts of Russian citizens. That would be going too far.” Denying someone access to their finances is different “than not selling them shoes or camera lenses anymore,” Powell said. “We will only take such extreme measures if we are forced to do so by the government.”

In the meantime, several thousand crypto accounts have been blocked under pressure from Washington, but most Russian oligarchs and Putin supporters have probably remained unmolested, says expert Halaburda. “Bitcoin was invented precisely to circumvent government regulations.” The Bitcoin community could theoretically introduce black lists now. But to do this, she would have to coordinate herself first, according to the scientist. “And then there’s all the second-generation cryptocurrencies. We’re pretty much powerless to limit the use of cryptocurrencies.”