The Impacts of the War in Ukraine on the Crypto Markets

A Centralized Effort

As Russia continues its unprovoked warfare with Ukraine, the West unleashed a barrage of sanctions that are unparalleled by anything we’ve seen in the past. The Russian ruble has been the primary target of these sanctions, as financial institutions in the United States and across nations in Europe restricted access and business dealings with Russia. In fact, Switzerland, notoriously neutral, has also implemented sanctions of its own. The strategy aims to inflict catastrophic financial damage among the oligarchs, Russian economy, and Putin himself. It seems to have worked as the exchange rate of the USD/Ruble has plummeted to record lows. Putin likely anticipated such actions, hoping to rely instead on the assets of the central bank to hold over the economy while they conducted their military aggressions. Now, they must look for other ways to move around the sanctions. The situation has created a “crypto-sized hole” that the Russians can take advantage of.

Figure 1: Exchange rate of USD/RUB from 1996 to 2022 in USD, Source: Tradingeconomics.com

As shown here, the relative strength of the US dollar to the ruble has skyrocketed to new highs. This level of depressed currency has not been seen since the days of the Soviet Union. Nonetheless, targeting the reserves held by Russia’s central bank is potentially the most powerful weapon in the West’s financial arsenal, and takes aim at the heart of Russia’s financial system. The U.S., Europe and Canada pledged to prevent the Bank of Russia from deploying its $630 billion stockpile of international reserve “in ways that undermine the impact of our sanctions,” they said in a joint statement Saturday. The move directly targets the war chest that President Vladimir Putin has built up in recent years to help insulate Russia’s economy from outside pressures (1). Russia has spent years converting oil and gas revenue into a stockpile of bank deposits, securities, and most importantly, gold. These stockpiles are held overseas, often in government bonds of other nations and at accounts with commercial banks and other nation’s central banks. By restricting dealings with Russia’s central bank, these assets are essentially frozen. Sanctions have hit the country in the past, devaluating the ruble. Putin likely anticipated such actions, hoping to rely instead on the assets of the central bank to hold over the economy while they conducted their military aggressions. Now, they must look for other ways to move around the sanctions. The situation has created a “crypto-sized hole” that the Russians can take advantage of.

Rapidly evolving digital markets have created new ways to subvert heavy-duty penalties that were designed to cut off wealthy Russians and state-back institutions from the U.S. financial system in the aftermath of the invasion of Ukraine (2). Cryptocurrencies, such as Bitcoin, allow Putin, the oligarchs and others in Russia to securely store their wealth and use it as payments across international borders. In fact, this situation outlines the precise benefits that Bitcoin was created to have. The inability of international governments or other financial institutions to regulate, terminate, or delay payments allows those in Russia to not be completely cut off. However, since all transactions and balances are stored publicly on the blockchain with Bitcoin, there would be a noticeable increase in volume if Bitcoin is to be used.

Figure 2: BTC/RUB daily trading volume across exchanges tracked by Kaiko, Source: Kaiko

As a matter of fact, there is a noticeable increase in trading volume from exchanges. Head of Kaiko research, Clara Medalie, noted that Bitcoin’s overall trading volume also picked up during last week’s price swings, but the increased activity for BTC/UAH and BTC/RUB trading pairs was “magnitudes greater” than the BTC/USD pair. Volumes in Bitcoin crypto exchanges that trade the RUB/USD pair saw volumes rise by 121% week-on-week, according to CoinShares data (3).

Although the ability to regulate is currently out of anyone’s’ hands, governments can monitor blockchain activity to see whether large values are in transit. Treasury officials say they aren’t overly worried about crypto undermining the effort to choke off the Kremlin’s access to capital. Laundering large amounts of money through a dizzying array of digital wallets and exchanges is expensive, time-consuming and would likely be visible in the broader crypto market (4). At the same time, Ukraine asked Binance, the world’s largest exchange, as well as Coinbase, Huobi, KuCoin, Bybit, Gate.io, Whitebit, and Kuna to block the addresses of Russian users.

Binance stated that they will not unilaterally ban Russian users, noting that they will take“steps necessary to ensure we take action against those that have had sanctions levied against them, while minimizing impact to innocent users.”

Coinbase stated they won’t institute any blanket bans on transactions involving Russian addresses, but will likewise block sanctioned accounts.

Kraken followed the same path and stated they would not block any users unless legally required to do so.

KuCoin stated they will not block any users without a legal requirement.

Although a key policy decision throughout the industry, the exchanges only tell one side of the

story. When users buy Bitcoin through an exchange, that exchange creates a wallet for them and stores that purchased Bitcoin there. However, the user can also purchase a separate, “cold-storage” wallet that is decentralized and unassociated from any exchange. Once a user moves their Bitcoin to the cold wallet from the exchange, the exchange can no longer regulate those users or transactions, even if legally required to do so.

As per public blockchain data, we are able to observe the average transaction value, which has seen a slight increase over the past few days.

Figure 3: The total estimated value in USD of transactions on the blockchain. This does not include coins returned as change.

It’s near impossible to pinpoint exactly where the movement comes from. However, looking at data from exchanges as well as the blockchain, the contribution could be coming from Russian citizens looking for exit avenues from a crashing currency, as well as Ukrainian donations. Crypto not only serves Russia in this conflict, but allows quick, seamless support of Ukrainian defense. Ukraine has publicly asked for donations via Ether and Bitcoin, posting the address to their wallet on Twitter. In less than 24 hours, they raised over $2 million in Ether and nearly $4 million overall from crypto donations.

Although Russian royalty could be using other avenues to distribute and safeguard their wealth, Bitcoin has once again offered international asylum for the wealthy. Earlier last year, in a crumbling economy, El Salvador adopted Bitcoin as legal tender. Then again, earlier this year, in a disrupting situation in Canada, Bitcoin provided value that traditional currencies and commodities could not. As international relations continue to seesaw, currencies devalued and citizens subject to the whims of their leadership, Bitcoin has time and time again come up as a solution.

Figure 4: The total number of unique Blockchain.com wallets created

1) The WSJ, Sanctions on Russia’s Central Bank Deal Direct Blow to Country’s Financial Strength, February 27, 2022

2, 4) Politico, Russia’s Hidden Tool to Undermine Sanctions, February 25, 2022

3) Bloomberg, Bitcoin Volume Spikes in Russia and Ukraine as Sanctions Hit, February 28, 2022