How the War in Ukraine Shaped the Future of Cryptocurrencies

How the War in Ukraine Shaped the Future of Cryptocurrencies

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The war in Ukraine has led to major changes in the cryptocurrency market. Cryptocurrency has become one of the ways for countries to carry out financial transactions smoothly, despite inter-state financial restrictions.

Russia has paved the way for the introduction of cryptocurrency as a regular payment method since the beginning of the war, i.e. since the value of bitcoin jumped, a far greater inflow of financial resources into crypto flows, than there was before the beginning of the war in Ukraine.

Now that trend is used by companies that are participants in the financial market, and simply by acting as a broker, they can balance the input and output of financial flows.

It is a very important change because the adaptation of the crypt is increasingly visible. Crypto adaptation is gaining momentum, and both ordinary people and companies now see that cryptocurrencies are something that is definitely the future. Something that will be able to provide us with certain financial freedoms, regardless of the pressures from all sides, which are political.

Many expert economists believe that cryptocurrencies are the future and that underdeveloped countries should follow this trend of investing in crypto, and the war in Ukraine is an example of this.

Armed uprisings in 2014 started a de facto civil war in Ukraine. In parts of Donetsk and Luhansk, pro-Russian separatist forces took over, and the entire country fell into a crisis, which also took on economic dimensions.

A year later, the currency has already lost 70% of its value, and many businesses have gone bankrupt. In these conditions, a Ukrainian programmer from one of the breakaway territories, known on Twitter under the pseudonym GucciXBT, lost his job and found himself stuck in the middle of civil war and the destruction it brings. He realized he had to go.

However, the way out was not simple. Rebel patrols checked entry and exit from the breakaway territories. You needed a good reason to get out of the newly proclaimed self-government and if you wanted to leave with a larger amount of money, savings or gold – it would be almost impossible.

The border patrol of the separatist forces asked him where he was going. He replied that he was going to visit relatives living outside the breakaway territory and that he planned to return. The border guards didn’t suspect anything, because he wasn’t carrying anything of great value with him, nor did he look like someone who was planning to move.

But those 12 words that he carried in his head changed his life in the following years. Bitcoin has increased hundreds of times in the meantime. But even if it didn’t, it allowed him to safely carry his savings with him, escaping civil war, poverty and repression.

Seven years after GucciXBT left the war zone with 12 memorized words in his head, this scenario has become a reality for tens, possibly hundreds of thousands of people from Ukraine fleeing war, as well as citizens of Russia fleeing repression and economic collapse in their country.

The story that this Ukrainian developer shared on Twitter is actually not rare. Bitcoin, as well as other cryptocurrencies, have been a lifeline for vulnerable people around the world for years. Refugees, dissidents, human rights activists, as well as economic migrants rely on cryptocurrencies in their daily lives and work.

The war in Ukraine is just one example where the vulnerable are using cryptocurrencies as a financial lifeline. In recent years, examples abound in relatively peaceful environments, authoritarian systems around the world, or countries with unstable currencies.

The reasons for the increasing popularity of Bitcoin and cryptocurrencies among human rights activists, refugees or victims of repression are clear if one understands the basic principles on which cryptocurrencies are based, as well as the basic principles of state control and mechanisms of authoritarian regimes.

State repression and state control of society are primarily based on state control of the economy. And the state control of the economy is largely based on the control of the monetary system – that is, the issuance of money, its storage and circulation.

Why cryptocurrency will not save Russia from sanctions?

According to Radio Free Europe, already in the first days of Russia’s invasion of Ukraine, on February 24, there were warnings that Russia would use cryptocurrencies to try to circumvent the sanctions imposed on that country by the United States of America (USA), the European Union (EU) and others.

American lawmakers from the ranks of Democrats asked the Ministry of Finance in early March to ensure that Russia could not use cryptocurrencies to avoid sanctions, Reuters reported.

The President of the European Central Bank (ECB), Christine Lagarde recently, on March 22, warned that Russian individuals and corporations are converting their rubles into cryptocurrencies. The volume of the Russian currency, Lagarde said, being converted into cryptocurrencies is currently at its highest level since May 2021.

However, the cryptocurrency trading platform Coinbase announced on its site’s blog at the beginning of March that it had blocked 25,000 addresses of digital wallets linked to Russia, which raises the question of how much the cryptocurrency market can compensate for the severe sanctions and the current isolation of Russia concerning international financial flows.

A digital wallet (wallet) is a virtual space where cryptocurrency traders store their account keys. In the cryptocurrency sphere, a user’s account key is a long string of numbers. If the key is lost, that is it, the numbers are forgotten, and the money is irretrievably lost as well. The world’s most famous platform for storing keys (wallets) is Coinbase.

Crypto forensics firm Elliptic announced on March 16 that it had passed on information to authorities about a digital wallet that could be linked to sanctioned Russian officials and oligarchs.

Since the start of the war in Ukraine, ruble spending on Bitcoin, the largest cryptocurrency, has skyrocketed.

Many experts believe that macroeconomics can never be compensated.

Also, even if some transactions go unnoticed, they cannot be offset by sanctions. It is certainly possible if it is a smaller transaction or a lower value. An individual can exchange rubles for some cryptocurrency and then that cryptocurrency for dollars or euros, that is certainly technically possible, but it is not possible in cases of a large number of money transactions or at the level of macroeconomic policy of the state, according to experts.

In other words, the Russian government cannot count on Bitcoin to escape sanctions. After all, payments for international transactions still need to be settled in real money like dollars or euros. ECB President Christine Lagarde said on March 22 that “steps have been taken to signal to anyone who exchanges, transacts or offers crypto services (to sanctioned Russians) that they are complicit in circumventing sanctions.”

Coinbase has already blocked certain addresses precisely because they link to sanctioned ones from Russia.

Pressure on cryptocurrency companies to ban access to users from Russia is coming from all over.

The US government has asked crypto platforms to ensure that Russian oligarchs cannot use virtual currencies to avoid sanctions.

However, as the BBC reminds us, many are resisting pressure from the Ukrainian government, American and European politicians to go one step further and completely block access to all Russian users.

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Written by

Alexander Sterling

Alexander Sterling

Alexander Sterling is a renowned financial writer with over 10 years in the finance sector. With a strong economics background, he simplifies complex financial topics for a wide audience. Alexander contributes to top financial platforms and is working on his first book to promote financial independence.

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Judith

Judith

Judith Harvey is a seasoned finance editor with over two decades of experience in the financial journalism industry. Her analytical skills and keen insight into market trends quickly made her a sought-after expert in financial reporting.