In Ukraine, Crypto finds a purpose
In the 12 months since Russia began its full-scale invasion of Ukraine, more than 14 million Ukrainians have been forced from their homes in what the UN has described as “the fastest, largest displacement in decades”.
Allied governments and humanitarian organizations have provided tens of billions of dollars in aid to support refugees. But, as in previous crises, it has been a big challenge to find out the right way to get help to people. For people who have been displaced, the best support is cash. Unlike in-kind aid such as food or clothing, cash can be used for anything and is flexible when circumstances change. “We always ask ourselves: Why not cash?” says Carmen Hett, treasurer of the United Nations High Commission for Refugees (UNHCR), the UN’s refugee agency.
The humanitarian sector has historically been reluctant to hand out money to refugees due to fears – since disproved by several studies – that the money would be squandered on so-called temptation goods, such as alcohol or tobacco. But cash has played a bigger role than ever in the Ukraine crisis. Almost half of all the aid provided by the Disasters Emergency Committee, a coalition of British charities, during the first six months of the war was in cash.
However, cash is difficult to move around. It must either be physically sent by pallet load into war zones and disaster areas, which creates logistical and security headaches, or delivered electronically via the traditional banking system, the rigidity of which can create problems for people who have lost their documentation.
Recognizing these limitations, UNHCR has moved to deploy an alternative system, partnering with the Stellar Development Foundation, a non-profit organization that supports the growth of the Stellar blockchain network. The two organizations are working with money transfer company MoneyGram and Circle Internet Financial, issuer of the USDC stablecoin, to set up a system to send aid directly to Ukrainian refugees using crypto. Cryptocurrencies have often been dismissed as only useful for financial speculation, but in Ukraine, the technology could be a solution to a real-world problem.
“This project is a prototype, but a very real one,” says Dante Disparte, chief strategy officer at Circle. “If you can solve the gaps in money logistics in such an acute conflict, it is natural that this type of innovation will be meaningful” in other contexts as well.
The system works like this: UNHCR supplies USDC, a cryptocurrency locked to a value of $1 and hosted on the Stellar network, to a digital wallet that can be accessed via smartphone. The recipient then exchanges their coins for local currency at any MoneyGram facility.
UNHCR also uses standard bank transfers to distribute aid. But, as Hett says, while the Ukrainian banking system has so far proven resilient, if a bank were to fail, customers would be left without access to the bailout on their accounts. But a stablecoin is hosted on decentralized infrastructure and in the custody of individual wallet owners, meaning funds cannot be held back. Digital wallets are also available for people who do not have a bank account.
The Ukrainian government has imposed strict capital controls to prevent money flowing out of the local economy, meaning refugees who have left the country face limited access to funds in their bank accounts. But stablecoins are geography agnostic; the only limitation in this context is the proximity of a MoneyGram location, of which there are 4,500 in Ukraine and approximately 350,000 worldwide.
Crypto has been used to collect donations during humanitarian crises in the past. It has been successful in amassing pots of money, but it can be difficult to actually spend on the ground. In Turkey and Syria, after a massive earthquake in February that killed more than 50,000 people, recipients of crypto donations complained that they could not use the coins or convert them into fiat currency, limiting their usefulness.
“The challenge is that there’s not much anyone can do with crypto once they have it in their possession,” says Alex Holmes, MoneyGram’s CEO. “It’s not so much a method of payment [vendors] accept.”
The UNHCR pilot overcomes this problem by building in a mechanism to convert crypto to cash.
For now, the stablecoin program in Ukraine is being piloted on a microscopic scale, with fewer than 100 participants in the cities of Kiev, Lviv and Vinnytsia. UNHCR is preparing to expand the initiative to up to 5,000 wallets by April, but this will still represent only a fraction of the number of Ukrainians displaced by the war.
Hett declined to disclose how much money has already been distributed through the program — information she describes as “not that important” — but insists the system is ready to scale. “It’s not about how many millions have flowed through,” she claims, “it’s about how many millions will flow through in the future.”
Ukraine could be an ideal testing ground for experimental financial services of this type. Even before the war, the country nurtured plans under President Volodymir Zelensky to become a digital-first economy and build a digital central bank currency – a blockchain-based version of Ukraine’s hryvnia.
“You have a community accustomed to change, with high consumer technology penetration and generations of people spread across the globe,” says Dora Chomiak, board member of the Ukraine-focused nonprofit Razom. “Combine all these things and it makes sense to go beyond formal banking.”
The process of launching the project has been radical in its own way for a humanitarian system known for its often cumbersome bureaucracy.
The project was incubated for 10 months before launching in December, far faster than backers expected, according to Denelle Dixon, executive director of the Stellar Development Foundation. In addition to the usual red tape, the job of convincing stakeholders about the technology was made more difficult by the implosion of crypto exchange FTX in November, which triggered a crisis of confidence in the sector. “But I think most of that is behind us now,” says Dixon.
The goal is not to replace traditional cash-based intervention, say UNHCR and its partners, but to arm humanitarian organizations with alternative rails to deploy aid that support the full range of scenarios refugees may find themselves in. “The real breakthroughs here are more evolutionary than revolutionary, says Disparte. “It’s about expanding the physical banking system beyond its many limitations.”
It’s also important to avoid scenarios where crypto is used for problems that don’t exist, says Dixon. “You never want crypto to be a square peg in a round hole. This is just another option — another tool in the toolbox.”
Regardless of the small scale of the first pilot, the partners in the UNHCR scheme believe that projects like their own, as well as the $78 million in crypto donated to Ukrainian causes since the start of the war, suggest a permanent change in the way humanitarian aid will be distributed .
UNHCR is investigating the potential for the same system to help those displaced by the economic crises in Venezuela and Argentina, says Hett. And Holmes points to potential applications in Turkey and Syria.
“Having portable access to money, wherever it is, gives people the ability to move forward in life,” says Hett. “The question now is, how can we do more of this? Because we know it works.”