How The Russian Invasion Dramatically Changed Ukraine’s Blockchain Strategy To Focus On The War

Crypto was supposed to be Ukraine’s launchpad into the future. Instead it is proving to be a necessary lifeline in a country ravaged by war. Since Russia’s invasion on February 24th, Ukraine has raised more than $56 million in donations spread across assets such as bitcoin, ether, polkadot, solana, dogecoin, tether and more. These funds have gone to help humanitarian agencies distributing aid in the country, procure necessary supplies for soldiers such as food, uniforms, and bullet-proof vests.

They are also being used to help Ukraine’s growing ranks of cyber warriors, which has reportedly defaced Russian government websites, provided intelligence, and taken down military systems.

However, this was never the plan.

Ukraine’s deputy minister for digital transformation Alexander Bornyakov says that digital assets and blockchain technology were meant to help revitalize the Ukrainian economy and bring all government processes online. He notes that the ministry’s mission, founded two years ago, is “to move 100% of government services online and build a digital state to make all the government services transparent, easy to use, and convenient for citizens of Ukraine.”

Blockchain initiatives such as the creation of a central bank digital currency, the e-hryvnia, started when the minister of digital transformation and his team helped create a law a year and a half ago to legalize digital assets in the country and make Ukraine one of the most crypto-friendly countries in the world. Bornyakov says that the e-hryvnia was supposed to be introduced near the end of 2022 in conjunction with the central bank, the National Bank of Ukraine.

However, all of those plans went out the window with the Russian invasion.

Instead, the Ukrainian government looked for ways to use its knowledge in crypto and digital assets to support the war effort. Bornykov says that within a couple of days of hostilities they decided to solicit crypto donations. “It was the second or third day that we decided that we needed money to go in [to the country] because there was a problem with banking liquidity.”

Bornykov also says that he got a call from his boss, the minister for digital transformation Mykhail Fedorov, who mentioned that they needed to help the cash-strapped army and asked if they could provide a way for people to donate crypto assets. “We decided to go and create wallets and build this infrastructure to get money and send money [crypto] to different suppliers, so that we could buy all of the things that the army needs.”

However, it was not quite that simple. With ongoing concerns about the crypto theft, according to crypto analytics firm Chainalysis $14 billion of crypto was taken by scammers last year, the government needed to be sure that its funds would remain secure. It also wanted to have the ability to convert the assets into fiat currency. They turned to the largest exchange in the country, Kuna. “There’s a lot of complexity when it comes to security, because if you do not protect your infrastructure, someone can hack you and steal all of your crypto…but it’s not only a matter of security, it’s also the ability to convert holdings into different types of fiat currencies.

The campaign was wildly successful. Crypto analytics firm Elliptic noted that as of March 2nd that the bitcoin, ethereum, tron, polkadot, dogecoin and solana addresses listed in government tweets have received over 96,000 cryptocurrency donations, with a total value of $46.7 million going directly to the government. Adding NGOs, over $54 million has been donated to the country.

However, while crypto donations can be an accelerant to fundraising, the spotlight cast on the industry also revealed some critical points of friction and ethical hurdles plaguing this field.

For instance, as a way to build on the momentum, on Wednesday Fedorov announced via Twitter that the government was going to conduct a token giveaway, known as an ‘airdrop’ in crypto parlance, to all crypto benefactors that donated within a certain time frame. While at face value this seemed like a reasonable idea, the government may not have expected that such a program would also bring out fraudsters and profiteers looking to take advantage. For instance, there was a token created called Peaceful World that tried to be an imposter of the government and there was a dramatic surge of minuscule donations that were clearly intended to just qualify the donors for the airdrop.

The planned giveaway was canceled less than 24 hours after it was announced.

Bornykov suggests that the government did not anticipate the complexity of conducting the airdrop, and it certainly did not want people making money off of what would otherwise be a noble cause. “We didn’t have technical capabilities at the moment to make this happen. But then we also realized that this was a way for people to profit by donating to a country that is suffering, which is not right.”

Instead the government announced plans to sell NFTs as a way to help the army, but Bornykov says that these sales will more likely be used after the war as part of a museum or way to preserve the memory and history of the conflict as opposed to something designed to help soldiers now.

Perhaps the bigger issue is how Ukraine is trying to benefit from crypto but isolate Russia from the industry at the same time. There are growing fears among governments and regulators across the western hemisphere that Russians will also turn to crypto as a way to sidestep sanctions that have cut off its economy from the rest of the financial world.

On February 27th Fedorov issued an open plea to the heads of major exchanges around the world such as Coinbase, Kraken, Binance, and others to immediately stop serving all Russian clients and traders, not just those on sanctions lists. Many traditional companies such as Apple and Samsung, have stopped selling goods and services in the country, while others like PayPal have stopped accepting new customers, and fintechs such as Wise and Remitly are cutting off transfers to and from Russia.

However, the heads of these exchanges largely rejected these requests, saying that it was in some ways unethical, disproportionate, and against the ethos of crypto to target entire populations. Most said they would comply if legally required to do so. Jesse Powell, CEO of U.S.-based Kraken was the first to publicly respond.

When asked about the ethics and fairness of such a request, Bornykov says that it is important for ordinary Russians to feel a semblance of the pain and suffering being experienced in Ukraine. “The more we make them [Russian citizens] feel the way we feel, it’s going to make them change their minds and stop supporting him [President Vladimir Putin] on his terrible decision to invade Ukraine…We need to show to every Russian citizen that you can’t just start at work and be safe in your country.”

In the midst of this roller coaster, donations have continued to come into the country, albeit at a much slower pace than before the airdrop was canceled. Crypto prices have also stalled. Bitcoin and ether both reached two-week highs amid the hoopla, but each is down almost 10% in the days since.