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How Ukraine Adopted Cryptocurrencies in Response to the War

It was a plan hatched in haste on the second day of the invasion. Ukraine’s digital transformation minister, Mykhailo Fedorov, approached his deputy and instructed him to set up official government wallets that could accept cryptocurrency payments.

When queues formed outside ATMs and supermarkets in Kyiv, Alex Bornyakov knew he had to act quickly.

“Our banks were limited, there were restrictions on the use of fiat currency and we were running out of supplies quickly,” he said. “Even if you manage to pay with fiat, a transfer takes a few days to reach the recipient. In the crypto world, it takes minutes.”

Ukraine had already started accepting crypto before its war with Russia. The country was ranked fourth for cryptocurrency adoption among its citizens in a global index by Chainalysis, the crypto research group, last year.

But the conflict has acted as a catalyst for that government ambitions build an innovative, blockchain-friendly economy, led by a young team of techno-natives in government: Fedorov is 31, Bornyakov, 40, and President Volodymyr Zelensky, 44.

Customers queue to use an ATM in front of a bank in Lviv, Ukraine

Ukraine ranked fourth for cryptocurrency adoption in a global index last year © Kobi Wolf/Bloomberg

The government has raised more than $100 million in cryptocurrency donations since the war began. Though that compares to the billions in aid from Western governments and the IMF, Bornyakov said crypto has become an essential tool of war, allowing for flexibility and speed.

“It is a great achievement of the government that we have young leaders, we are more enthusiastic and willing to embrace change,” Bornyakov said, an attitude he believes was instrumental in the implementation of this crypto policy.

The country’s pro-crypto push continued this week, with the government putting in place legal structures to boost the industry.

Crypto exchanges are now allowed to operate in the country, consumers are protected from fraud, and the National Bank of Ukraine and the National Securities and Exchange Commission have been appointed regulators. According to those behind the new legislation, the National Bank could eventually launch its own digital currency.

The Ukrainian government has already spent half of its crypto donations on thousands of bulletproof vests, food rations, helmets, and medical supplies — making a conscious decision to spend the funds on non-lethal gear so as not to deter future donors.

Some of the funds have also been spent on what Bornyakov calls a “war of digital diplomacy” in an attempt to reach out to Russians on the ground who “live in a bubble fed with propaganda,” through Media campaigns on social networks.

Meanwhile, the government has also acted quickly to strike new deals with military suppliers to accept cryptocurrency payments for the first time.

Michael Chobanian, founder of cryptocurrency exchange Kuna and president of the Blockchain Association of Ukraine, has worked with the government to scale its crypto efforts alongside exchange FTX and Ukrainian staking platform Everstake.

“We are the parallel banking system for the country,” Chobanian said. “We don’t care who’s backing us right now — hackers, crypto criminals — as long as they’re sending us money,” he added.

As the war rages on, the government has refined its approach. This week, she launched an official Aid for Ukraine website that accepts donations in nine cryptocurrencies, including Bitcoin, Ether, Tether, Solana, and Dogecoin. Previously, it only promoted its official crypto wallet addresses on Twitter.

But social media and messaging platforms like Telegram are also populated by an influx of cryptocurrency scams pretending to raise funds for Ukraine.

“We’ve seen an increase in accounts dealing with Ukraine since the invasion,” said Brittany Allen, trust and security architect at fraud prevention firm Sift. Telegram did not respond to a request for comment.

Lisa Cameron, a UK MP and leader of the UK’s all-party parliamentary group on crypto and digital assets, said the war showed “how crypto can be a force for good at this terrible moment in history.”

“But there are still real concerns about how unregulated the industry is and how Russians might use it to evade sanctions,” she added.

Global crypto exchanges, including Binance and FTX, have drawn criticism for this Refusal to cut off Russian users Completely. The companies argue that a blanket ban would unfairly target ordinary citizens and have pledged to vigorously enforce sanctions.

There were also some missteps along the way as the Ukrainian government worked out the best ways to use digital assets in such an unusual situation.

Earlier this month, the government announced that it would give those who donated to their crypto wallets a “air drop“: when NFTs or other tokens are awarded to investors in a project, often to encourage more signups. Hours later, however, Fedorov canceled those plans “after careful consideration” — a sign of how frenetic the digital strategy can be.

Taking to social media, the crypto community joked that this was “the best carpet ever,” a term used to describe when someone cancels a hyped NFT project after investors signed up to carpet them under them off his feet and ran away with the money.

The next step by the Ukrainian government will see it become the first developed country to issue its own collection of NFTs — collectible tokens that are fixed on the blockchain and therefore cannot be replicated.

There are plans to launch a series of NFTs under the working title of Metahistory: War Museum. The collection will contain a token from each day of the conflict, with artwork corresponding to a news story.

Bornyakov said the tokens would provide an immutable record on the blockchain to document and reflect on the conflict while raising money to support the country’s struggle.

“This is the first time the power of crypto has been harnessed in this way,” said Everstake founder Sergey Vasylchuk, who fled his home and headquarters in Kyiv. “Mass adoption is now inevitable.”

https://www.ft.com/content/f3778d00-4c9b-40bb-b91c-84b60dd09698 How Ukraine Adopted Cryptocurrencies in Response to the War

Adam Bradshaw

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