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Two sides to every coin: Crypto as a weapon in the fight for Ukraine

Cryptocurrency is being used both to fund Ukraine’s defense and prevent Russia’s ability to skirt sanctions in what may become a pivotal moment for the industry.

As Russia’s war in Ukraine enters its third week, the broadest-ever economic blockade against a major nation is still gaining momentum, and cryptocurrency has been sucked into the fight, dispelling skeptics’ concerns that cryptos might be effectively used to dodge sanctions. 

Coinbase, the largest crypto exchange in the U.S., has blocked more than 25,000 addresses linked to Russian individuals, and other major exchanges have taken similar steps. For the first time in its brief existence, crypto is playing a very public role in a war with an outsized economic dimension.

Illia Polosukhin, co-founder of decentralized application platform NEAR Protocol, sees cryptocurrencies as offering a helping hand to Ukrainians. Born in Ukraine, Polosukhin is also one of the founders of the Unchain Fund, a blockchain-based project that has raised more than US$4 million to support Ukraine with humanitarian aid since the war began.

“If we think about donations that usually happen through wire transfers, it can take, like, two weeks to actually get money from one country to another. And especially if we’re talking about something like money transfers into … or from Ukraine … that’s not manageable,” Polosukhin told Forkast in a video interview. “We can transfer money (almost instantly). We can create some kind of decision-making processes like DAOs (decentralized autonomous organizations) to decide on how funds are allocated. We are able to help people react fast.”

The funding potential of crypto has also been recognized by the Ukrainian government, which has raised more than US$60 million in digital asset donations. According to Alex Bornyakov, the country’s deputy minister of digital transformation, some 40% of suppliers of military equipment are willing to take crypto for goods ranging from vests to night-vision equipment.

“Banks, and especially ATMs, are not working pretty fast in the case of Ukraine, but major Ukrainian crypto exchanges continue working and are able to actually exchange to local currency and crypto,” Polosukhin said. “That has actually allowed the financial system to continue working, and some kind of major online banking … It’s surprising for a country at war.”

Russia, by contrast, is facing sanctions in the crypto space, with oligarchs and ordinary users alike blocked from crypto exchanges. According to Michael Greenwald, a former U.S. Treasury attaché to Qatar and Kuwait, cryptocurrencies are unlikely to help Russia evade sanctions.

“I think when we talk about sanction evasion, to a large extent, digital assets will not be an off-ramp for oligarchs, or for Russians who are trying to move around sanctions,” Greenwald told Forkast. “Because that amount of reserves, or that amount of money, would be way too obvious and a clear sign that there was illicit activity moving.”

For crypto exchanges and other businesses in the digital asset space, the conflict in Ukraine has brought both tough decisions and unexpected opportunities.

“This is digital assets’ first war, and first true conflict where they’re really having to choose sides, and they’re having to operate in a whole new environment,” Greenwald said. “(But) digital asset exchanges have an opportunity to show regulators that they want to be part of the future of money, and I think that this is a key opportunity for them to step up.”

Watch this special edition of Word on the Block, in which Forkast Editor-in-Chief Angie Lau hosts both Polosukhin and Greenwald, to learn more about the roles crypto is playing in this fast-moving and multi-faceted war.

Highlights

Help when it’s needed (Polosukhin): “Because of this global nature of crypto, especially for newer protocols, it’s becoming almost instant. We can transfer money. We can create some kind of decision-making processes like DAOs to decide on how funds are allocated. We are able to help people react fast. If we think about donations that usually happen through wire transfers, it can take, like, two weeks to actually get money from one country to another. And especially if we’re talking about something like money transfers into … or from Ukraine … that’s not manageable.”

Kiev’s crypto funding (Polosukhin): “At the government level, they have opened up crypto accounts and they see that their suppliers are also willing to take crypto like the deputy minister of digital transformation, Alex Bornyakov, has mentioned — that 40% of (military equipment) suppliers they’re working with are accepting crypto now. And so it’s becoming like a fully sustainable system, because it actually offers faster and it’s more, I would say, resilient to any eventual issues that are happening when there is stress on the system.”

Squeezing Moscow (Greenwald): “What we’re witnessing right now … is a completely new era of financial warfare, a completely new financial order … and it’s almost akin to a Section 311 of the Patriot Act, which makes an institution or a jurisdiction a primary money-laundering concern. No one wants to touch a Russian financial institution right now. Companies, like never before, are disconnecting. The financial plumbing of the Russian financial system is disconnected from the world, except for China and some others.”

Ruble trouble (Greenwald): “I think that oligarchs are trying to look at all options on the table, and that includes gold, and that includes ways where it’s very difficult to trace. But I think it’s not appropriate to say that digital assets will be the only tool, and I just don’t think that there’s a large enough swath of the sector to actually move that amount of money. There have been reports that Russia is developing a digital ruble … but that’s in the very early stages. It’s in a very early pilot stage and, as we know, most central banks have disconnected from Russia. So the digital ruble is not a pathway for oligarchs right now.”

The weaponization of CBDCs (Greenwald): “Disconnecting Russia from (SWIFT) has been something that Russia has been preparing for years, as well as China … they’re trying to ‘de-dollarize,’ go around the dollar every turn … I think that what we’re going to see is a complete weaponization of central banks and central bank digital currencies utilized by China, Russia, Iran … and that’s going to be the axis of central banks using CBDCs, while the rest of the world … in their pilot programs, will likely prioritize equity — making sure there’s privacy built in, and financial inclusion.”

Scope for stablecoins (Greenwald): “You’re going to see stablecoins take up the theme that part of the future of winning the digital currency race and prioritizing the dollar is going to be done by companies like Circle and Paxos, and I think regulators really regard them as the best right now. And I think the theme that they’re going to build upon is that this is the next iteration of dollar innovation, and that is really coming out of stablecoins. And yes, you’re seeing an increase, and they’re going to play right into that narrative.”

Transcript

Angie Lau: The war in Eastern Europe shows no signs of de-escalation, and the human cost mounts. Ordinary people across the globe are trying to make a difference, whether it’s showing support by booking stays in Ukrainian homes on Airbnb which they don’t intend to utilize — but it does put money in the pockets of ordinary folks — or even donating time and money.

Welcome to Word on the Block, the series that takes a deeper dive into blockchain and all the emerging technologies that shape our world at the intersection of business, politics and economy. And there is no bigger story than right now. It’s what we cover right here on Forkast. I’m Editor-in-Chief Angie Lau.

Today we’re having conversations in two parts, from the digital frontline to global foreign policy analysis, to further understand the role that crypto is playing in this Ukrainian crisis. First up, we’re very honored and privileged to be speaking with Illia Polosukhin, co-founder of NEAR Protocol, who grew up in Ukraine. And Illia, thank you so much for joining us. We cannot even imagine what it must be like right now.

Illia Polosukhin: Thank you for inviting me. Yeah, it’s been a very tough past two weeks, but hopefully this can quickly get resolved, although we’re still unclear what’s the timeline on it.

Lau: And time is of the essence, and as each moment passes, there really are just scenes of devastation and enormous stress. So, when this conflict started, where were you, and what were your immediate thoughts?

Polosukhin: I was in New York, actually, and we got messages from some people who are in Ukraine, where there were explosions. Obviously, some thoughts were, like, calling my family, who were still there at the time, and making sure that they’re OK, trying to understand what’s happening and what can be done. But yeah, I’d say shock was definitely the first reaction, because being from eastern Ukraine, especially — which I would say for a long time had a very loose border with Russia, including lots of people that have family in Russia — it seems kind of unreal to have something like this happening.

Lau: And so there you are. And you’re doing your thing, you’re creating a protocol, you’re leading the vision at NEAR Protocol. What was your next thought? What did you think to yourself, of what you could do, despite being thousands of miles away?

Polosukhin: The first few thoughts were how we could help on a few fronts. And so one front is helping people to get out of harm’s way — both direct people who work in the NEAR ecosystem, on your protocol, as well as people who I know, family and friends. And then beyond that, is this going to continue? It was not super-clear on the first day, but it was kind of clear on the second day. What can we do to help people out, together with some other crypto entrepreneurs, some of whom are actually in Ukraine, still in Ukraine? (We) started a crypto-specific donation fund called the Unchain Fund to really start gathering and distributing funds for humanitarian needs.

At the same time, the Ukrainian government launched support as well, and they launched crypto wallets … And so, helping fundraise for them, as well, through interviews as well as through spreading the word, connecting to people in the West who are able to donate. And beyond that, we’re starting to think about what else we can do, because now it’s clear this is a long-term (situation), and we’ll need a lot more long-term solutions, as well.

Lau: The short-term needs were almost immediate. When you think about how you’re applying the technology of cryptocurrency and blockchain, it really is proving to be even more versatile in a crisis than we ever imagined. We’ve seen some great initiatives from the global crypto community … We’ve heard of Ukraine DAO … other humanitarian projects financing Ukraine’s resistance.

I want to take a step back with you and talk about the role of crypto. From your perspective as a Ukrainian — as a person who grew up there with family there, with friends there. This is your country, and here you are in leading roles in the industry of technology of blockchain and crypto. How do these two worlds marry together? From your very specific perspective, how do you regard the role of crypto here?

Polosukhin: For me, crypto always was about removing barriers and creating a larger community. Our mission at NEAR is to crystallize people owning their data, their assets and their power of governance. And so, in a way, war is taking all of those things out. The war is actually literally against this vision.

At the same time, because of this global nature of crypto, especially for newer protocols, it’s becoming almost instant. We can transfer money. We can create some kind of decision-making processes like DAOs to decide on how funds are allocated. We are able to help people react fast. If we think about donations that usually happen through wire transfers, it can take, like, two weeks to actually get money from one country to another. And especially if we’re talking about something like money transfers into Ukraine right now, or from Ukraine, because they need to buy something in other countries to bring it to Ukraine, that’s not manageable. We’re talking, here, about in seconds … actually being able to deploy capital while they go into a store and then buying it there and then delivering it to people in need, for example, of food or some other things.

Really, it’s the ability to get it in people’s hands fast … and then we see, similarly, even at the government level, they have opened up crypto accounts and they see that their suppliers are also willing to take crypto like the deputy minister of digital transformation, Alex Bornyakov, has mentioned — that 40% of (military equipment) suppliers they’re working with are accepting crypto now. And so it’s becoming like a fully sustainable system, because it actually offers faster and it’s more, I would say, resilient to any eventual issues that are happening when there is stress on the system.

And so, yeah, we’ve been obviously fortunate to collect over US$4 million already through the Unchain Fund. The government actually has collected over US$50 million of crypto, as well. And so there’s a lot of ability to deploy that capital fast and buy goods across Europe right now, for example, and deliver them to the people in need.

Lau: Well, if you think about it, it’s saving lives. And why do I say that? Obviously, the obvious things of saving lives and being able to put money in the hands of people who need it immediately… and imagine if you had to line up at a bank or line up somewhere to get access to something that may or may not be available to you in order to get food or resources or something else. This is what, in our modern age, finance and money and liquidity actually mean, and in a time of crisis, to have that reduced to a split second so that you don’t have to worry about resources, so you can be on the move to safety, that’s an incredible thing for crypto.

Polosukhin: Yeah, definitely. Banks, and especially ATMs, are not working pretty fast in the case of Ukraine, but major Ukrainian crypto exchanges continue working and are able to actually exchange to local currency and crypto in general. That has actually allowed the financial system to continue working, and some kind of major online banking. So, yeah, it’s surprising for a country at war, that the infrastructure is able to continue functioning to be able to get people to safety or, just at least maintain their state, as we hope it will do.

Lau: I’m curious how you feel about the sanctions, as well. You talk about the Ukrainian and Russian border being very fluid. These are borders defined by others, when it comes to the reality of that region. It’s very intermingled. It’s Russians … Ukrainians… and, suddenly, launched into conflict. How do you feel about the sanctions that are specifically placed on individuals, on Russians themselves?

Polosukhin: Yeah, it’s definitely a complex topic, because the Russian Federation, as a government — it’s definitely clear that that government needs to be both held accountable and stopped first … It’s still not stopped. Actually at this point, there hasn’t been much indication that they are going to stop the assault that they continue doing, and there’s people dying every day, so there’s a clear need for any methods that are able to stop that government.

At the same time, it’s clear that people who are in the country will suffer from all of this greatly, and it’s already starting to happen. Overall, we talk about crypto networks. The networks themselves are neutral. They just function like any network will. But the parties on the sides of this network, the exchanges, a lot of the players in the ecosystem, they are not, and they’re following both the regulations that are there, as well as, potentially, some other form of clearly not wanting to deal with the country of the aggressor.

And so, generally, even if they think about exchanges, for example, doing the exchange to rubles right now is actually a very losing economic proposition, outside of sanctions. And there are clear reasons to limit how much individuals will have access to this. And so, I think it’s an interesting trade-off where protocols will continue working, but Russian individuals will be cut out from more and more things. Again, the need is to stop the government at this point — and so hopefully this will end up in stopping the government — and then work to rebuild from there. But right now, that’s the priority.

Lau: There are casualties, for sure, and ultimately, huge human tolls. Do you think that Russia is going to start using cryptocurrencies to avoid sanctions?

Polosukhin: As I mentioned, I think the reality of this is that it’s not about cryptocurrency, or (whether) people can use cash … use cryptocurrency … whatever, write a piece of paper and send it between. That’s just a tool. The question is whether the people on the other side of the trade are doing it. So people inside a country, like inside Russia, can be using cryptocurrency between each other, or using fiat, or using whatever else — that mostly doesn’t matter. What matters is what people outside are doing, and the people outside are then deciding if they will follow sanctions …  So this is about either official sanctions or community decisions on if they want to block some types of activity with Russia. And again, the need is to stop the government right now. So, at this point, at least from my perspective, whatever makes sense to stop the government should be done. First the government has to be stopped from the assault, from invasion and (waging) the war, and then, after that’s done, then we can start working out — depending on where that lands up — what the next steps are.

Lau: I want to ask you, as you’re really active on the digital frontlines, what do you think of this moment, really this first conflict in the age of crypto? Is this a catalyst for the world to understand the power of cryptocurrency and the impact and effectiveness of blockchain?

Polosukhin: For sure. I think it actually has more sides … I think a really few important pieces that have come out is a lack of reputation, a lack of understanding when somebody provides information, what their reputation has behind it. There’s a lot of misinformation, especially on the Russian side. But even beyond that, what the Russian Federation is right now doing by isolating themselves, banning themselves, the media… they actually right now are maybe doing more to get themselves isolated than sanctions have been (and are) really leading to, I would say, showcasing the need for independent, decentralized types of media and social networks that are able to withstand something like Russia cutting the cable to the internet for people. Because if that doesn’t happen, the Russian people will actually have literally zero outside information, and there would only be Saturday’s propaganda (regarding the war), which is actually very dangerous for the world in general.

I think this shows that the financial system will work even in times of crisis, but beyond that, Web 3.0 is actually the tool we need, and we need to build it out more to really deliver trustworthy information with a reputation and understanding of who people are, how it works, beyond normal social media and also beyond censorship by large governments.

Lau: Everything that we’re seeing in real time right now is truly setting the stage up for a future, and I hope that future is of peace, and I hope that peace comes quickly. Illia, thank you so much for joining us, and really our best to you and your family in this global community.

Polosukhin: Thank you.

Lau: All right, time for a quick break. On the other side, we’re going to talk Russia, regulators and sanctions with Michael Greenwald.

Lau: Welcome back to this special edition of Word on the Block.

As Russian forces began moving into Ukraine, global powers united to blanket the Kremlin with financial sanctions in hopes of crippling its economy. In a recent opinion piece for Forkast, former U.S. Treasury Attaché to Qatar and Kuwait Michael Greenwald writes, ‘Warmongering Russia is finding itself increasingly isolated. What if the rogue state tries to regain its financial footing via cryptocurrency?’ It was a great piece in Forkast, and let’s ask that question in person right now to Michael Greenwald, who joins us.

Michael, it’s good to see you again. We really appreciate it.

Michael Greenwald: Great to be here, Angie. Thanks for having me.

Lau: Well, we’ve talked about it, and through your vast personal experience — and this is the capacity in which you speak to us right now — when we talk about decentralization or the lack of a central authority, it’s really one of crypto’s most sought-out features. Yet, the U.S. has recently asked crypto exchanges to prevent Russians from using digital assets to avoid the sanctions of the traditional financial system. If you think about it, despite the ethos of decentralization, should exchanges comply and ban Russian users in such extreme circumstances? What’s your view?

Greenwald: Well, I think it’s going to be a delicate balancing act for digital asset exchanges. I mean, this is their first war. This is digital assets’ first war, and first true conflict where they’re really having to choose sides, and they’re having to operate in a whole new environment. So I think that digital asset exchanges are doing the most they can right now. I think you’ve seen some very good reporting from TRM Labs and from Chainalysis and others about what the level of illicit activity is, and how much money in reserves can actually go onto these exchanges without being obvious. So, I think, though, digital asset exchanges have an opportunity to show regulators that they want to be part of the future of money, and I think that this is a key opportunity for them to step up.

Lau: Well, let’s talk about the effectiveness of sanctions in the old world, and now in the digital world. Why sanctions? Just theoretically, in the foreign policy school of thought, why would sanctions work? Why is this a move right now?

Greenwald: So, I think that sanctions are meant to be really a force of deterrence, and to either prevent bad behavior or to have an end of a conflict or an off-ramp without military force. I think we saw that part of the original Iran (uranium enrichment) deal — enough pressure on Iran brought Iran to the table. Obviously, we’re going through a whole thing right now with the Iran deal as we speak. I think with regards to post-9/11 sanctions, and going after Al Qaeda and its affiliates and ISIS, and Hezbollah and others, individual sanctions only really are effective if there are exposures to U.S. assets, the U.S. financial sector or the European financial sector.

What we’re witnessing right now, Angie, is a completely new era of financial warfare, a completely new financial order. And what’s happened against Russia in the past week has been a financial blanket of kryptonite against the entire jurisdiction. And it’s almost akin to a Section 311 of the Patriot Act, which makes an institution or a jurisdiction a primary money-laundering concern. No one wants to touch a Russian financial institution right now. Companies, like never before, are disconnecting. The financial plumbing of the Russian financial system is disconnected from the world, except for China and some others, which I’m sure we’ll talk about.

Lau: Well, and that potentially includes crypto right now. Some analysts believe that Bitcoin’s bullish movement is a sign of Russian investors shifting their money from the ruble to the No.1 cryptocurrency. Our Russian oligarchs, the ones driving the Bitcoin price recovery — is Bitcoin a way for them to evade the recent financial sanctions?

Greenwald: I think when we talk about sanction evasion, to a large extent, digital assets will not be an off-ramp for oligarchs, or for Russians who are trying to move around sanctions, because that amount of reserves, or that amount of money, would be way too obvious and a clear sign that there was illicit activity moving. I’m sure there are oligarchs and intermediaries and others using decentralized financial systems to move money outside, whether through different jurisdictions or another, and that will always be the case. As in all fields — whether it’s jewelry, real estate, art, NFTs (non-fungible tokens), the traditional art market — that are unregulated, you’re going to see movements of money.

So, I think that oligarchs are trying to look at all options on the table, and that includes gold, and that includes ways where it’s very difficult to trace. But I think it’s not appropriate to say that digital assets will be the only tool, and I just don’t think that there’s a large enough swath of the sector to actually move that amount of money. There have been reports that Russia is developing a digital ruble, a central bank digital currency (CBDC), as you’ve reported on Forkast, but that’s in the very early stages. It’s in a very early pilot stage and, as we know, most central banks have disconnected from Russia. So the digital ruble is not a pathway for oligarchs right now.

Lau: At the end of the day, you see that sanctions are piling up for Russia in both the traditional financial system and the crypto ecosystem. We’ve seen the EU banning seven Russian banks from the SWIFT network, and I want to talk to you a little bit about that. What other sanctions can we expect to see? What measures do you think are required to have a significant impact on Russia’s military budget and economy? Are we already seeing that? And then the role of SWIFT?

Greenwald: We’ve never seen the United States and the EU in such a quick fashion, along with the G7, actually go after a G20 country, the 11th largest country in the world, with US$400 billion-plus financial reserves, that’s unheard of. And so I think that’s more significant, in my opinion, than the actions against SWIFT. SWIFT is very important, obviously, as the financial messaging system, and disconnecting Russia from that has been something that Russia has been preparing for years, as well as China. As you and I have discussed, they’re trying to ‘de-dollarize,’ go around the dollar every turn. I don’t think Russia — its military and its whole apparatus — anticipated that the EU and other like-minded countries would freeze their reserves… what they’ve been piling up for years. And the fact of the matter is that China holds around 13% to 17%, depending on estimates, of Russian reserves, and they have around US$140 billion in gold left. 

And so really, this is going to require Russia to have a closer economic relationship with China. We’ve seen that increase, but let’s remember that’s going to come at a cost to Russia. That’s going to come (with) a bad negotiating stance for Russia, and so I really think that the (Biden) administration is going to look at additional options on the escalation ladder — a new escalation ladder.

When I was back at the Treasury in 2014, there was an escalation ladder, and now we’re in a completely different new financial order. And so, obviously, oil and gas are the next major arsenals on the table, and I anticipate that the U.S. is looking for a targeted way to go after the oil and gas sector, and studying what it can do to make sure that it has the least amount of impact here in the United States. Given where oil is going today, some estimates say that it’s going to go to US$180 or US$200 a barrel. That’s quite alarming for the U.S., but I think that that’s something that you’re going to see definitely on the table. Likely the Europeans will resist it, but I think the United States may be going towards unilateral action to show that that is the next step on the escalation ladder.

Lau: So you’re going to see a lot of different, even, energy policies likely coming out of the U.S. as a result of this. You bring up a really important point — the relationship with China. Does this accelerate China’s efforts in e-CNY?

Greenwald: Well, they’ve been prioritizing their digital yuan efforts for a while, and they’ve been out in front on this issue. The Olympics was one inflection point for them. I’m not sure that all the data is successful for China that came out of the Olympics, but certainly it was an important laboratory for them to study how the rest of the world would either use digital yuan or not. I think that what we’re going to see is a complete weaponization of central banks and central bank digital currencies utilized by China, Russia, Iran … and that’s going to be the axis of central banks using CBDCs, while the rest of the world … in their pilot programs, will likely prioritize equity — making sure there’s privacy built in, and financial inclusion.

And so, really, that’s the new digital asset foreign policy lines that are going to be drawn, and one of the major things that’s going to come out of this conflict. But yes, I expect that China will speed up their efforts, because they need to operate in a new financial order.

Lau: And, finally, what about the role of stablecoins? We’re seeing the daily trading volume of stablecoins surging 75% on the day of Ukraine’s invasion. Is this a sign of investors recognizing stablecoins’ role as a safer digital asset vehicle? And, also, how can war-torn regions benefit from using stablecoins? What’s happening in Ukraine?

Greenwald: I think with regards to what’s happening there, you’re going to see stablecoins take up the theme that part of the future of winning the digital currency race and prioritizing the dollar is going to be done by companies like Circle and Paxos, and I think regulators really regard them as the best right now. And I think the theme that they’re going to build upon is that this is the next iteration of dollar innovation, and that is really coming out of stablecoins. And yes, you’re seeing an increase, and they’re going to play right into that narrative.

Lau: Digital assets, the new front. Michael Greenwald, a pleasure, and thank you so much for your insights.

Greenwald: Thank you so much for having me.

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