The week of May 9 marked a dark period for crypto investors. After hovering around $40,000 for much of May, Bitcoin plunged more than 25% on Monday to settle below $30,000, its lowest level in 16 months.
Other cryptocurrencies followed suit, with Ethereum, Terra, and Solana all shedding market cap.
The massive cryptocurrency sell-off erased more than $200 billion from the market in a single day, and the price action has led many to dub this period as a "crypto winter," similar to the one that occurred in 2014.
Amidst all the panic, volatility, and dire predictions of the last week, a single bright spot in the crypto model has emerged. While certain experts have decried crypto's worthlessness, the country of Ukraine is quietly providing a model for how digital tokens can be used to hedge against war and disasters, as well as support a country when financial institutions have failed.
Ukraine's Shaky Institutions
Even before the Russian invasion of Ukraine, the lack of faith in the country's markets and financial infrastructure made it an ideal case for the introduction of cryptocurrency, whose strength lies in eliminating the need for third-parties to verify transactions.
According to Transparency International's 2021 Corruption Perceptions Index, which ranks the world's most corrupt countries, Ukraine was found to be the second most corrupt nation in Europe, only beating out its neighbor Russia.
Russia's invasion only exacerbated the problem, with many citizens fearing that money stored in savings accounts would be lost forever.
The fears of bank runs, which occurs when people withdraw money en masse because they worry banks will cease to function, led to long lines outside of banks and ATMs in the first weeks of the war.
The fears were partly justified - foreign currency cash withdrawals are now prohibited in Ukraine and the government has limited withdrawals to 100,000 Ukrainian hryvnia per day, equal to roughly $3,339.
Michael Chobanian, the founder of popular Ukrainian crypto exchange Kuna, spoke for many Ukranians when he said, "We don’t trust the government. We don’t trust the banking system. We don’t trust the local currency. The majority of people have nothing else to choose apart from crypto.”
The Creation of the Fund
With the threat of banks being destroyed, as well as the corruption rife in Ukranian society, it's not surprising that aid initiatives in the early months of the war have gravitated towards crypto as a medium of exchange.
A number of cryptocurrency funds have sprung up in the form of decentralized autonomous organizations, an entity whose trustworthiness can be verified by the blockchain, a digital ledger which keeps an unchangeable record of all transactions.
Sergey Vasylchuk, CEO of Ukranian-based blockchain company Everstake, and Michael Chobanian worked with Ukraine's Ministry of Digital Transformation in the first weeks of the war create a system for the government to accept crypto directly from donors.
While two funds were set up initially, one for humanitarian purposes and the other to support the Ukrainian military, the accounts have since merged to focus on the Ukranian military.
So far the fund has been a massive success, taking in more than $100 million (this fluctuates based on crypto prices). Donations can currently be made in ETH, BTC, DOT, SOL, USD, and USDC.
In April, Deputy Prime Minister and Minister of Digital Transformation Mykhailo Fedorov announced that the country would also be accepting NFT donations, which would be sold to give added funds to the war effort.
So far, donations have included a Bored Ape Yacht Club NFT, and the government also recently unveiled a charity NFT collection created by digital artists that would raise additional money.
In the last couple weeks, Ukraine has sought to streamline its donation process by creating an integrated platform that accepts all types of donations, including both crypto and fiat currency.
While traditional payment methods are available, including bank wire, credit card, and Paypal, those who wish to donate in crypto can send funds in BTC, BCH, USDT, DOGE.
The platform is powered by Whitepay, a provider of a point-of-sale (POS) solution for cryptocurrency payments.
Those who donate have the option to choose between three target areas: Defense, Medical aid, and Rebuilding Ukraine.
How Has Ukraine Used the Money?
Netherlands-based blockchain investigative tool Crystal Blockchain announced that as of May 12, 2022, Ukraine had taken in more than $125 million in crypto donations.
According to Crystal’s data, 52% of the donations made so far have gone towards the Ukrainian army, with the rest being directed toward humanitarian groups.
Much of Ukraine's crypto holdings have been put toward strengthening its beleaguered army.
In the first weeks of March, the Ukranian government revealed it had purchased the following items for its troops:
- 5,500 bulletproof jackets
- 410,000 packed lunches
- 500 ballistic plates for bulletproof vests
- 3,125 thermal imagers and optics
- 500 helmets
- 3,427 medicines
- 60 walkie-talkies
More recently Federov said that the crypto funds had been used to buy 5,000 gas masks, as well as 5,000 optical and thermal imaging devices.
And on Friday, Federov posted a tweet revealing that Ukraine had bought five all-terrain vehicles that “will come in handy for a challenging environment.”
Advantages of Crypto Donations
The overwhelming success of Ukraine's crypto effort have led many to question why cash is making way for digital currencies. The following reasons demonstrate crypto's edge over fiat money when it comes to foreign aid:
Cryptocurrency transactions take minutes to complete, while wire transfers take 2-3 days. This speed can be crucial in a war setting, where the situation on the ground changes rapidly and banks receiving wire transfers may be bombed or destroyed before the transaction is completed.
Crypto funds accept donations anonymously, which means that individuals who live in countries such as Russia and Belarus, and who wish to donate, will not be found out and punished by their governments.
3.) Ease of Access
For Ukranians who have fled the country and don't have cash or access to their bank accounts, their crypto holdings may be their last source of wealth as these funds can be accessed from anywhere on the planet.
4.) Exchange Rates
Ukraine's shaky banking system and weak national currency mean that many Ukranian citizens receiving Bitcoin aren't interested in making the exchange into Hryvnia because the national currency is worth less and unstable.
As cryptocurrency donations continue to pour in, the Ukranian legal system has raced to keep pace with this new type of money.
President Volodymyr Zelenskyy recently legalized crypto in the country, signing a law which would set Ukraine's National Commission on Securities and the Stock Market as a regulator of the country's virtual assets.
Under the new rules, crypto exchanges will be able to operate legally, and banks will open accounts for them, the digital ministry said in a tweet.
While it's worth noting that fiat currency donations, which include a $14 billion U.S. aid package, still dwarf crypto donations to Ukraine, the success of Ukraine's cryptocurrency initiatives has caused many in the financial world to sit up and take notice.
BlackRock’s CEO, Larry Fink, commented in a March 24 letter to shareholders "We’ve never seen a sovereign nation fund their defense efforts in crypto before. It does prove out a lot of the crypto argument."