As the digital asset donations to support Ukraine's defence against a Russian invasion began to mount, the country's President Volodymyr Zelenskyy legalised cryptocurrency in the country, signing into law a bill on digital assets.
This article explores how historic changes on both sides of the conflict may be changing the world's view on the legitimacy of cryptocurrency.
Ukraine's relationship with cryptocurrency
Whilst donations in crypto pale in comparison to the donations made in traditional currencies, the war in Ukraine has sparked a new way for normal members of the public to donate to an international cause. This was, in part, made possible by Ukraine's new law "On Virtual Assets".
The law determines the legal status, classification, ownership and regulators of virtual assets, as well as setting registration requirements for cryptocurrency services providers.
The market will be regulated by Ukraine's National Commission on Securities and the Stock Market. Exchanges will be able to operate legally, and banks will open for crypto companies.
The Ukrainian government previously announced that the state body would be responsible for "shaping and pursuing a policy in the field of virtual assets; determining the order of circulation of virtual assets; issuing permits to virtual asset service providers; and carrying out supervision and financial monitoring in this area."
As well as the large amounts of charitable donations, normal Ukrainians appear to also be turning to cryptocurrencies to avoid the issues with carrying large amounts of cash when fleeing their homes. It is reported that Ukrainian refugees are using crypto to allow for easy conversion into classic currency on their arrival in new countries.
The United States, European Union and United Kingdom continue to impose further sanctions on Russia. It was therefore a strong possibility that Russia would at some point consider the potential use of cryptocurrencies to attempt to circumvent restrictions.
In a translated report from Russian, news agency RBC confirmed that Russia is now open to accepting Bitcoin as payment for its oil. Pavel Zavalny, Chairman of the State Duma Committee on Energy, stated that Russia will allow any country which it considers an "ally" to purchase Russian energy resources with its local currencies or, "If there are bitcoins, we will trade bitcoins".
The effectiveness of using cryptocurrencies to avoid sanctions remains the subject of debate:
- On the one hand, Christine Lagarde (chief of the European Central Bank), has spoken of her concern at the number of Rubles being converted to cryptocurrencies and the need for new legislation.
- On the other hand, as argued by Changpeng Zhao (chief executive of Cryptocurrency exchange Binance), a fundamental characteristic of cryptocurrencies is that they store all transactions on publicly accessible blockchains. The potential traceability of illicit transactions may therefore pose a drawback for sanction evasion.
- Whilst there are tokens that have been specifically engineered to increase anonymity, it appears unlikely that these could be used in the amounts Russia would require to avoid the sanctions on a national scale.
Russia's openness to accepting bitcoin in international oil transactions may well have a knock on effect in the way other countries consider using digital currencies in the future.
Kristalina Georgieva (IMF Managing Director), in her 9 February 2022 speech, concluded, “The history of money is entering a new chapter.”
This viewpoint also seems to be reflected in the changing attitudes in the world of business. Black Rock CEO, Larry Fink, recently stated that he believed the war in Ukraine was accelerating the global adoption of cryptocurrencies. This appears to be in stark contrast to the previous views of many CEOs. The results from a survey taken by Deloitte in 2021 indicated that whilst 90% of CEOs foresaw growth in technology over the next 12 months; over 50% felt that cryptocurrencies were in no way relevant to their company's agenda.
Mr Fink's views are now likely to become more commonplace with CEOs than the previous poll would suggest and it will be interesting to see how many consider cryptocurrency to be of importance to their business in 2022. For example, will the perceived take up by the public lead to increased investment in cryptocurrency and cryptocurrency businesses, or lead more traditional businesses to start accepting payment for goods or services in cryptocurrencies?
It is also worth keeping in mind that with the increased interest in the use of cryptocurrencies likely comes the implementation of new regulations governing them. In the UK alone the FCA already requires certain UK cryptoasset businesses to be registered and to comply with the Money Laundering Regulations. Meanwhile, the Treasury is looking to regulate stablecoins used as a means of payment (broadly those pegged to a fiat currency), and new rules relating to the marketing of unregulated crypto assets are on the horizon.
In light of the new sanctions against Russia, the FCA sent a letter to its registered cryptoasset firms (and those holding temporary registration status) highlighting the application of sanctions on various entities and individuals. The UK financial regulatory authorities subsequently issued a joint statement to all UK financial services firms, including those in the cryptoasset sector, reminding them of the role they have to play in the prevention of sanctions evasion and, specifically, sanction evasion via cryptoassets. The FCA subsequently issued a notice to all regulated firms with exposure to cryptoassets, reminding those firms of the risks in relation to financial crime and money laundering in the crypto space.
Our corporate lawyers have experience advising on cryptocurrencies and their evolving regulations should you have any questions regarding their governance or how they could impact your business.