Ukraine wants to fund its post-war future with crypto

In the first weeks after the start of Russia’s full-scale invasion last February, crypto donations were “critically useful for Ukraine,” Mykhailo Fedorov, Ukraine’s minister of digital transformation, told reporters at the World Economic Forum in January. Contributions from around the world poured into Ukraine’s coffers, just at the moment when its future as an independent nation seemed most doubtful. By March 3, 2022, just one week after citizens awoke to wailing air raid sirens and the telltale thump and roar of missile strikes, crypto asset donations to Ukraine totaled an estimated $54.7 million.

Moreover, crypto turned out to be a very fast and easy-to-use financial tool, says Alex Bornyakov, Ukraine’s Deputy Minister of Digital Transformation. Many of the initial donations to the war effort were channeled into bulletproof vests, helmets and walkie-talkies for front-line soldiers. Bornyakov admits that even he – a long-time crypto campaigner – was surprised by the vendors’ willingness to trade in Bitcoin. Now, Fedorov and Bornyakov are seeking to use crypto to secure Ukraine’s post-war future. Amid a broader push for digitization across the economy, Kyiv, Fedorov told the WEF, will strive to become “the best crypto jurisdiction in the world.”

How much it will help rebuild Ukraine is open to debate. While Bornyakov is optimistic about all things crypto – the sector, he says, “has enormous potential to encourage economic growth and increase employment” – donations have slowed significantly since the war’s opening days. That’s largely thanks to a “crypto winter” that has frozen the flow of venture capital into the sector and triggered a cascade of market failures. Ukraine may therefore be in the odd position of becoming the most crypto-friendly jurisdiction in the world – but without a market to serve once they win the war.

Behind Ukraine’s Crypto Ambitions

Andrei Kirilenko remains optimistic. Kirilenko, who was born in Mariupol and is currently a professor of finance at Cambridge’s Judge Business School, recently led an executive education program in partnership with the National Bank of Ukraine that focused on rebuilding Ukraine’s financial sector. During the eight-week program, Kirilenko taught a section on blockchain and crypto assets, which he believes should be an important part of Ukraine’s post-war economy.

It is important to note, Kirilenko explains, that Ukraine was not a prosperous country before Russia’s full-scale invasion: in December 2021, its GDP was $200 billion, or about $5,000 per capita. “That’s the bottom line,” he says. “Private money didn’t really flow into the economy. The banks did not increase credit to private companies in real terms. The economy didn’t really grow.” Crypto therefore already played a bigger role in Ukraine than in the rest of Europe, he says, because banks and markets – even if they were stable – “couldn’t necessarily offer the services that were needed”.

Russia’s brutal attack has only worsened the country’s economic situation, with its GDP falling by more than 30% in 2022 and unemployment rising to about a quarter of the population by the end of the year. An estimated 8 million people – mostly women and children – have fled the country and “nothing economically is happening,” Kirilenko explains, in large parts of the territory due to ongoing occupation or active fighting. “No companies are being created, no people are being hired,” says the economist. “The soldiers are paid, but they can’t even spend their money there.”

As such, Kirilenko argues, the Ukrainian economy is effectively on life support. Based on this low base, crypto will not be a cure, he says. Still, it should “definitely play a role in the collective effort” to reconstruct Ukraine’s physical infrastructure and shattered economy, Kirilenko says — especially since the country’s traditional banks and markets may not be up to the task.

That is not to say that Ukraine’s mining can be fully funded through crypto. A recent World Bank report estimates that Ukraine will need at least $411 billion over the next decade to rebuild, which is more than a third of the value of all existing cryptocurrencies, according to CoinMarketCap. Nevertheless, Kirilenko believes it is important for Ukraine to pursue non-traditional financing options. “The banks and markets did not lend to the private sector before the war and did not invest in companies before the war,” he says. “How are they going to do it after the war?”

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A kind of crypto crisis

The crypto community, unlike the governments of many countries in Europe, “believed in Ukraine from day one,” says Bornyakov. That’s partly because the country was already deeply rooted in it. Ukrainians held senior positions in global crypto companies and exchanges, and Kiev had set its sights on becoming a world center for decentralized currency even before rising hostilities from Russia in early 2022 threatened to spook investors.

But has crypto’s role in bolstering Ukrainian defenses in the opening days of the war been overstated? Donations – especially after the first weeks of chaos – pale in comparison to contributions from international allies. In total, more than $200 million in cryptocurrency and NFT donations have made their way to what have been described as pro-Ukrainian causes, including more than $80 million that went directly to the Ukrainian government, according to data provided by analytics firm Elliptic to Financial Times. Meanwhile, European Commission President Ursula Von der Leyen announced last October that Brussels aims to contribute €1.5 billion every month in 2023, bringing the total to €18 billion by 2023. The UK alone also contributed 2.3 billion in military aid to Ukraine in 2022 and has already committed to the same level of aid in 2023.

Nevertheless, crypto has continued to play a positive role in the margins of conflict, especially when it comes to facilitating humanitarian aid. More than 13 million people have been displaced from their homes since Russia’s full-scale invasion of Ukraine last February, facing human suffering and hardship “beyond comprehension,” according to UNHCR’s regional director for Europe. Access to money is essential to their survival, but cash can be slow and difficult to move around in the traditional banking system, especially for people who have lost their documentation.

Aiming to tackle this dilemma, UNHCR launched a pilot blockchain-based initiative last December in partnership with the non-profit organization Stellar Development Foundation, money transfer company MoneyGram and Circle Internet Financial, which issues USDC stablecoins. Under the system, UNHCR delivers USDC – a stable coin that is locked to a value of $1 – into a digital wallet that can be accessed using a smartphone. The recipient then exchanges their coins for local currency at any MoneyGram facility, of which there are over 4,500 locations in Ukraine.

Crypto has, perhaps perversely for some proponents, also improved access to fiat currency among Ukrainian refugees. At the beginning of the war, the Central Bank of Ukraine imposed capital controls in an attempt to preserve the local economy, meaning that refugees who had fled the country faced limited access to funds in their own bank accounts. Krypto was a lifeline, says Kirilenko, because it is geography agnostic and can therefore easily be exchanged between family members spread across national borders. People fled with “a backpack, two children and a dog,” he adds. “They needed money to live.”

These cross-border benefits of cryptocurrency will not lose their relevance after the war, says Kirilenko. “It’s unlikely that the Ukrainian economy will be able to support the pre-war population,” he says, so “millions of people are going to make a decision — a rational decision — to stay outside of Ukraine.”

Not everyone is equally positive. Author and crypto-skeptic David Gerard warns that decentralized currencies have often been used by bad actors to skirt rational rules – and says that none of Ukraine’s cross-border crypto donations and transactions were “strictly necessary”, given the country’s proximity to Europe. Gerard is also nervous about crypto’s potential instability – which could be particularly brutal for a country already embroiled in a full-scale war: “I think they’ve panicked enough,” he says.

Still, Gerard understands Ukraine’s immediate reaction “They’re at war, so they think anything that helps is good,” he says. “It’s not wrong.” Gerard also hopes that Ukraine may be well positioned to implement the kind of strict regulation he believes is necessary to prevent a crypto crisis.

“The Ukrainians are not stupid,” says Gerard. “They know that such things are risks.” Crypto is difficult to handle, he adds, but Ukraine probably handles it as well as anyone else because there are many crypto enthusiasts there, especially in the Ministry of Digital Transformation.

Ukraine’s crypto future

Bornyakov does not share Gerard’s pessimism, although he acknowledges that strict rules are essential. Right now, Ukraine’s crypto jurisdiction is a “work in progress” that he says will need constant research to respond to upcoming challenges. Kirilenko agrees, saying Ukraine’s independent regulator urgently needs to “build capacity” to handle the surge of crypto he believes will help secure Ukraine’s future.

As Ukraine seeks membership in the European Union, the country must rationalize its laws with Europe’s long-awaited Markets in Crypto Assets (MiCA) regulations. It’s “actually a very complicated process,” says Bornyakov. He told Tech Monitor that Ukraine’s Ministry of Digital Transformation is actively working to balance its crypto-friendly proposals with the EU’s upcoming regulations to enable Ukraine to fulfill both dreams – to become both an EU member state and a crypto hub.

If all goes according to plan, Bornyakov hopes that future crypto-friendly legislation could encourage a number of new crypto companies and tech start-ups to establish themselves in Ukraine, creating jobs and bringing in much-needed tax revenue. Even companies specializing in decentralized finance will have to connect with the local banks, Bornyakov says, so this could also “add liquidity to the banking system in Ukraine, which we badly need.”

Transparency will also be crucial to securing Ukraine’s post-war future – something both Bornyakov and Kirilenko believe crypto can provide in a country that has historically suffered from high levels of corruption within its ruling elite. “You can just imagine something appearing in the press like ‘UK taxpayers are paying for the reconstruction of Ukraine and an adviser has just bought a luxury car,'” says Kirilenko. He believes that crypto, if well regulated, can bring this transparency by letting donors know exactly where their money is, at all times, and who is in charge of it.

It’s not just about crypto. Ukraine is pursuing a number of digital initiatives in an effort to secure its future, a path it began following even before Russia’s brutal invasion. In 2021, Ukraine became the first country where digital ID documents, including driver’s licenses and passports, were considered legally equivalent to physical ones. When Volodymyr Zelenskyy was elected president of Ukraine in 2019, he promised to fight corruption. Digitization – either through crypto or automated bureaucratic platforms – can also support this ambition, says Bornyakov. After all, says the deputy minister, “a machine cannot take bribes.”

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