Crypto's role in the Russia-Ukraine war is complicated

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Any debate over whether a new technology is inherently good or bad usually arrives at the same conclusion: it can be both, depending on how it's used.

As Russian troops march on in their invasion of Ukraine, publications reporting on the war have looked at bitcoin and its ilk as both savior and sin.

From cryptocurrencies supporting more than $35 million in direct donations to Ukraine and its people, to possibly helping Russians avoid sanctions, crypto as a technology has flexed its might as an alternative to an old financial system. So is it a net good or bad?

The Good

For Ukranians fleeing their country, many mentioned on Twitter how they were skipping the long bank lines to withdraw money by instead leaning on wealth stored in crypto wallets. For Ukranians staying behind to fight, millions of dollars in donations quickly flowed into the addresses posted by the official Ukranian Twitter account. Since posting on February 26, the country has raised more than $38 million in crypto donations, according to a tally from analytics company Elliptic.

KYIV, UKRAINE - People line up to withdrawal cash from an ATM on February 24 as Russia's invasion of Ukraine intensifies. (Getty Images)

Most of those donations have come in the form of bitcoin or ethereum. Supporters of other cryptocurrencies quickly lobbied the country to open accepting donations on other crypto chains.

For his part, Gavin Wood, the co-founder of Ethereum competitor Polkadot, promised he would donate more than $5 million if Ukraine were to add support for his chain. Those critical of Wood's stipulation were quick to point out it appeared to be a strangely self-serving request. I'll only give you support if you first support my blockchain. Nonetheless, Wood followed through after Ukraine added support for $DOT donations with a personal $5.8 million donation.

The country has now also promised an airdrop for those who donated. (An airdrop is usually a free gift provided to certain identifiable wallets.) Speculation has grown over why the Ukranian government would be airdropping anything to charitable donors.

That prompted an even more cringeworthy kerfuffle when another crypto founder took to Twitter to voice his displeasure with Ukraine's plans. Billionaire founder of cryptocurrency Tron, Justin Sun, criticized Ukraine's plans to exclude airdropping anything back to donors who contibuted using the Tron blockchain.

"TRON community has donated over $1.2M in USDT (TRC20), but now the airdrop just ignores them completely. It is just UNFAIR. We need to fix it!" Sun tweeted. Others were quick to call that take out as tone deaf (at best) given the other things Ukraine's government is currently dealing with.

That brings us to the bad.

The Bad

The pressure to hit Russia with more than just financial sanctions was swift. That's fitting, given that SWIFT (Society for Worldwide Interbank Financial Telecommunication) is also the name for the global interbank payments system used by banks to settle payments across borders. When Russia annexed Crimea in 2014, the international banking powers felt a similar pressure to boot Russia from SWIFT. The country's former finance minister estimated a move would dent Russia's gross domestic product by 5% within a year. Ultimately, nothing happened. This time could be different.

Just as back then, Western banks are weighing the pros and cons of such a drastic move. Harking back to the self-serving thinking a few paragraphs ago, Western banks know full well that taking Russian banks off SWIFT could also directly hurt their own self interests -- either through direct investments or the ability to recoup investments in Russian energy companies. While Reuters first reported that seven Russian banks were targeted to be removed from SWIFT in the coming weeks, Russia's largest lender was not on the list due its exposure to oil and gas:

Sberbank, Russia's largest lender, and Gazprombank were not included because they are the main channels for payments for Russian oil and gas, which EU countries are still buying despite the conflict in Ukraine... Officials have been concerned about disrupting energy flows to Europe and the official said it was not possible simply to allow energy-related transactions and exclude others as SWIFT was unable to differentiate between types of payments.

Pushing Russia off SWIFT also opens a much larger problem. While SWIFT is Brussels-based and very much an international behemoth, the U.S. plays a central part in policing the flow of dollars. As recently detailed in a Bloomberg write up, "the actual policing often comes out of New York, where 95% of the world’s dollar payments are irrevocably settled."

So where might we be pushing Russia by taking them off SWIFT and away from the all-mighty dollar? Well ... right into the hands of China.

In fact, China has been preparing its own SWIFT alternative for a while. It was almost prepared to spring it into action the last time Russia was flirting with getting booted off SWIFT. Except this time, it's ready with its own central bank-backed digital yuan (e-CNY.) It's like China's own cryptocurrency. That suddenly makes its alternate system much more nimble in being built out to scale up and make it easier for China or other international actors to not need SWIFT at all. As Bloomberg notes:

If a Chinese company or individual were to face the threat of not being able to send money overseas because ... SWIFT won’t carry the instructions, an intermediary in a friendly country could always be persuaded to accept e-CNY, and forward a dollar stablecoin payment to the Chinese buyer’s overseas counterparty.

So, that could be the long game and it could wind up as a "W" for China and Russia, if they both parlay a system to degrade the dollar's importance. As long as the status quo remains, and 40% of the world's international payments are still in dollars, and just 3% goes through China's competing settlement system, we have the lead. But given that China has beaten the U.S. to a central bank-backed digital currency, that could change (even more quickly if Russia leans into the chance to help grow the technology.)

The More Obvious Bad

More pressing in the short-term is what crypto unlocks when it comes to Russians avoiding sanctions all-together. Perhaps not surprisingly, when the Russian rouble was collapsing to a new all-time low, rouble-linked crypto trading volume was surging. In fact, as the rouble's collapse happened in lock-step with the first days of the invasion, bitcoin trading denominated in the Russian rouble spiked 259% from a day earlier, according to data from CryptoCompare.

Now, that's not to say all of that was coming from Russians who are now under sanctions, but the worry is that any of it is. To prevent that, Ukraine's Vice Prime Minister Mykhailo Fedorov called on major exchanges to block the addresses of Russian users. Bloomberg reported that the White House’s National Security Council and the Treasury Department have both asked crypto exchanges to help block any attempts by those under sanctions to side-step them.