Russia-Ukraine War Spotlights Centralised Crypto Exchange’s Weakness and Shaky Future
Agitated by failed diplomatic efforts by Western countries to convince Kremlin to back down from invading Ukraine and an advancing Russian military that had begun attacking Ukrainian cities and villages, Ukraine’s Vice Prime Minister Mykhailo Fedorov pleaded with major cryptocurrency exchanges to freeze the addresses of Russian and Belarusian politicians and cut off ordinary users.
The request, for Ukraine, is an effort to rally global effort to hit back at Russia, but for cryptocurrency exchanges and devout supporters of decentralised finance, it’s an ideological challenge; one that unsettles the core of the values of virtual currency that they claim to uphold.
Already removed from SWIFT, a global payment system, due to sanctions imposed by world powers, a further shutting off of Russia from cryptocurrency services was thought by Fedorov to make the isolation of Russia and Belarus excruciating by denying the Oligarchs as well as residents of these countries the opportunity to escape financial sanctions.
While many multinational companies acceded to the Ukrainian government’s request to withdraw services to Russia on grounds of solidarity with the Ukrainian people and compliance with government sanctions, major cryptocurrency exchanges committed to freezing the addresses of persons and entities in Russia who are on sanction lists but rejected cutting off the entire country from using cryptocurrency services.
Major centralised exchanges rejected Ukraine’s request in what appears to be a coordinated response. Restricting access to cryptocurrency services has wider implications for ordinary Russians, many of whom could do nothing to prevail on their authoritarian government, they said. They will have to be legally compelled to implement the request.
“It’s a pretty extreme measure… Once you go to freeze someone’s financial account, they’re no longer able to pay rent, pay their debts, buy food and support their family,” Jesse Powell, Kraken’s CEO and co-founder said in an interview with CNBC. Coinbase’s CEO Brian Armstrong tweeted that “we believe everyone deserves access to basic financial services unless the law says otherwise”. Binance’s spokesperson said the platform would not freeze “innocent users” accounts because “crypto is meant to provide greater financial freedom for people across the globe.”
“For instance, asking Coinbase to block the cryptocurrency account used by an older Russian couple already suffering from the rouble’s hyperinflation is not going to change the tide of the war,” Christian Lind, a decentralised finance advocate, told Arweave News.
Bitcoin and other digital assets have been used by both sides of the war. As the war escalates with devastating implications, cryptocurrency could be a lifeline. A surge in cryptocurrency transactions on exchanges in Russia and Ukraine shortly before the war began and days into the onslaught, reflects the perception by many that cryptocurrency could help them escape financial inconveniences.
Arweave News already reported on how Ukrainians turned to Bitcoin when the country’s central bank restricted financial services in the country following a martial law declaration. The government of Ukraine received $100 million in cryptocurrency donations to fund the war. For Russia where 12 percent of the population own cryptocurrency valued at $200 billion, Cryptocurrency could save many in the face of declining value of the Ruble and impending war-induced contraction of the economy.
“Bitcoin was created because freedom was at risk. Its creators saw what would happen with electronic money, that it would come under total control of corporations and states. It was born out of a struggle and it will always be a struggle,” Alex Gladstein, chief strategy officer, Human Rights Foundation (HRF), told Arweave News.
For now, many exchanges stand by the libertarian value of cryptocurrency, even though they will have to give in to pressures by the European Union and the British government if cryptocurrencies are included in sanctions against Russia. With just $2 trillion liquidity in the entire cryptocurrency ecosystem, experts say there is not enough liquidity in virtual currency space to keep Russia’s economy afloat if the country decides to evade sanctions through cryptocurrency and the oligarchs who are also targets of international sanctions are not likely to carry out large transactions in cryptocurrency as they would raise suspicion when they appear on the decentralised ledger. This makes ordinary Russians recipients of the sanctions.
Observers told Arweave News that calls for cryptocurrency sanctions against Russia as a result of the escalating war and Bitcoin seizure in Canada are opportunities for virtual currency holders to adopt non-custodial cryptocurrency wallet technology and centralised exchanges have more to lose.
“All these efforts to apply strategies that work in the fiat system to crypto will only lead to the world having a better understanding of the importance of self-custody in bitcoin being a seizure-proof financial asset,” Lind said. “If exchanges start exhibiting the same flaws as banks, they might not have a sustainable future in the crypto marketplace.”