Can Russia and Ukraine Weaponize Cryptocurrencies?

When the Russians invaded Ukraine, bitcoin went from $37.000 to $44,000 and then settled back into the $40,000 range. Bitcoin and other cryptocurrencies took a significant fall from their $67,000 high in November of 2022. As inflation hit its highest levels in forty years cryptocurrencies did not seem to be safe haven investments. Crypto has paralleled digital tokens and stocks in value for months. That may be about to change if Russia and Ukraine can weaponize digital currencies.

Bypassing Sanctions with Digital Currencies

We recently asked if Russia can use cryptocurrencies to bypass sanctions by the USA, EU, and most of the rest of the world. The fact is that the Russian oligarchs and government could use crypto assets to bypass sanctions. The next problem, however, is finding a bank where they can put money that was in the cryptocurrency world. They might have to end up using just Russian and Chinese banks as Russia’s only refuge will be the new Sino Soviet Axis.

Can Russia and Ukraine Weaponize Cryptocurrencies?

Support for Ukraine Via the Cryptocurrency Route

Ukraine is David in the David and Goliath story of the Russian invasion and folks all over are not only cheering them on but also sending them money via cryptocurrencies. In the first week of the conflict Ukraine and non-government agencies helping Ukraine received nearly $40 million from crypto donors. They even received a CryptoPunk NFT said to be worth $200,000. Ukraine is benefitting from crowdfunding efforts both for humanitarian relief and for supporting their military.

Fleeing Ukraine with Crypto Assets on Hardware Wallets

The news has been full of images of more than a million Ukrainians fleeing the country with just the clothes on their backs. However, Vlad Panchenko who founded and runs DMarket (virtual gaming) moved the majority of his employees out of Kyiv two weeks before the war started. He and his employees are said to have brought their wealth with them carried using hardware wallets the size of USBs. Mr. Panchenko noted that you cannot take more than $10,000 across a border without going through a lot of paperwork and carrying devalued currency of a nation at war is also a problem. None of that is a problem when your assets are in cryptocurrencies.

Russia’s Problem with Cryptocurrencies

While cryptocurrencies may be useful to the Russian government, banks, and the oligarchs for skirting sanctions they also let ordinary Russians move their assets out of the country as well. A Russian who is not particularly happy with the economic mess that Putin has gotten the country into could easily walk across the border into Finland, the Baltic States, Poland, Slovakia, etc. with their assets on a USB just like Mr. Panchenko and his employees did. Before the war Russia started the year by suggesting a ban on both mining and using cryptocurrencies and now ways it will regulate instead. We suspect that “regulate” will mean you need to be a government entity, oligarch, or someone named Putin to use or mine cryptocurrencies.

Can Crypto Exchanges Freeze Accounts?

Sanctions against Russia include freezing assets held in foreign banks. Thus Putin’s “war chest” that he built up to protect against sanctions is unavailable to him. The next problem could be if crypto exchanges freeze assets with Russian addresses as well. Some exchanges have taken steps while others like Binance have stated that a total freeze of all assets out of Russia would be contrary to the principles of the crypto systems. However, they say that they will only take action against “sanctioned users” from Russia and will ramp up sanctions following actions of the international community.

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