The two sides of crypto in Ukraine war

Hello and welcome to the latest edition of the FT’s Cryptofinance newsletter. One year on from Russia’s invasion of Ukraine, we’re looking at the role crypto has played in the conflict

Crypto’s impact on geopolitical issues does not often make for uplifting reading. The US, for example, fears digital assets can offer actors under sanctions a fresh means of skirting the financial system.

But the war in Ukraine has showed that the use of crypto in international affairs is far more nuanced and complicated. Blockchain data analytics company Elliptic shared data with the FT showing private crypto fundraising for pro-Ukrainian causes has outpaced Russian equivalents by a rate of 44 to one in the last year.

In total, more than $200mn worth of crypto has made its way to what have been described as pro-Ukraine causes. Over $80mn worth of these funds was sent directly to the Ukrainian government.

Just weeks after the invasion, a Ukrainian politician said crypto had helped supply its armed forces with supplies including bulletproof vests, helmets and walkie talkies. Other funds turned to humanitarian causes, and even journalism and intelligence efforts.

Not only do these funds eclipse the less than $5mn sent to pro-Russian entities, it represents at least one-fifth of overall non-state-mandated aid to Ukraine, marking the first time in history crypto has played a significant role in a major conflict.

“Ukraine bet big on crypto by offering donation addresses literally hours after the invasion, and it did pay off,” said an Elliptic analyst who spoke to me on the condition of anonymity. “Twenty per cent of grassroots funds coming from crypto is no small feat,” they added.

If you have subscribed to this newsletter for some time, you’ll recall only a few weeks ago I questioned crypto’s utility as a force for good, as hard-to-spend crypto tokens poured into Turkey and Syria in the days after the region’s tragic earthquake. But in Ukraine, crypto has shown to have some social utility.

So can crypto claim to be a force for legitimate good? Possibly but as crypto fans also say, the technology is neutral and can be used in a multitude of ways.

Of the near-$5mn worth of crypto donated to pro-Russian entities, more than half of those funds were dedicated to military fundraising, and most originated from exchanges and mixing services — a particular slice of crypto technology to have raised the ire of western governments in recent months.

These groups often provide spending reports on messaging platform Telegram. Elliptic estimates that MOO “Veche” — a military fundraising group active in the Donbas — has received roughly $1.8mn in bitcoin, which would make it the wealthiest pro-Russian fundraising group by crypto holdings.

Elliptic’s research also highlights one “particularly brutal” use for cryptocurrency that traces to Rusich, a paramilitary fighting group known for neo-Nazi symbolism. The organisation — also linked to the Wagner Group — has been involved in military campaigns in Syria and Ukraine.

In Rusich-affiliated Telegram channels, wallet addresses have been shared widely soliciting crypto donations. Those wallets have had sanctions imposed by the US Office of Foreign Assets Control, but in addition the paramilitary group has tried to extort the families of lost loved ones by promising co-ordinates of their dead relatives in exchange for bitcoin.

“If you can’t identify the bodies of those killed, don’t just give them away. Take the coordinates of the exact burial place . . . and offer relatives the details for $2,000 — $5,000. Money can be transferred to your bitcoin wallet.”

Another caveat that might subdue crypto’s evangelists is that while Ukrainian donations have far outpaced those of Russian fundraising, the pace of donations has slowed markedly.

Elliptic estimates that much of the $200mn-plus donated to Ukraine was sent in the immediate aftermath of Russia’s invasion. After March 2022, the rate of Ukrainian donations declined. In contrast, Russian crypto fundraising shows no signs of subsiding.

“That’s why a lot of virtual asset services can’t afford to be complacent about this, because while Ukraine funds have fallen, Russia is much more stable in terms of funds flowing in,” the Elliptic analyst added.

Before Christmas, one Ukrainian politician told me Russian use of crypto was set to become a “huge issue”. If Russian crypto fundraising doesn’t slow down in the coming months, he might be right.

What’s your take on crypto’s role on a global scale? As always, send me your thoughts at scott.chipolina@ft.com. 

Weekly highlights:

• The Federal Reserve issued a joint statement with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency highlighting liquidity risks to banks from some sources of funding in crypto markets. It is the latest slice of evidence that US agencies are leaning heavily on US banks to divorce themselves from crypto, a lesson some banks such as Silvergate have learned the hard way.

• Life got worse for Sam Bankman-Fried this week when US prosecutors widened their criminal case against the former FTX chief. Thursday’s updated indictment added charges including securities fraud and conspiracy to commit bank fraud, bringing an already long charge sheet to 12. SBF’s political donations also came under the spotlight, described as being “made in the names of others in order to obscure the true source of the money and evade federal election law”.

• Hong Kong put more detail on its plan to attract more crypto business into the territory by letting retail investors trade coins.

• The Securities and Exchange Commission issued a fresh bid to oppose Binance US’s proposed $1bn acquisition of the assets belonging to Voyager Digital, the collapsed crypto lender from last summer. The SEC said the rescue package may violate securities law. I teamed up with my editor Philip Stafford for the story, which you can read here.

Soundbite of the week: Crypto’s lost battle

Agustín Carstens, head of the Bank for International Settlements, said it was time for crypto to admit defeat over one of its deepest-held beliefs: that it is a viable medium of exchange that rivals fiat currencies.

“A few years ago crypto assets and cryptocurrencies were in a way put as an alternative to fiat money, I think that battle has been won, technology doesn’t make for trusted money.”

Mike Novogratz — a man who has a tattoo of failed stablecoin Luna — thought he would try to school the BIS head. Read his response here.

Data mining: Tether’s dominance grows

Tether’s stablecoin has long been established as the largest on the crypto market, but scrutiny over its reserves and the growth of rival tokens undermined its dominance in recent months.

New York’s recent action against BUSD — the third-biggest stablecoin and thus a chief Tether rival — has reshaped the market again.

Since regulators in the state ordered Paxos to stop issuing fresh BUSD tokens, the Binance-branded coin has lost billions in market share.

By contrast Tether’s USDT is now more than half of the market and has its highest share since October 2021, data provider CryptoCompare found.