How cryptocurrency is being used to funnel money to Ukraine

Often maligned as a tool for illicit activities, Bitcoin, Ethereum and other cryptocurrencies have become something of a lifeline to Ukrainians as donors have been using the digital tokens to fund various war-related causes.

More than 120,000 cryptoasset donations totaling more than $63.8 million have been funneled to Ukraine since the start of the Russian invasion, according to according to Elliptic, a blockchain analysis company.

“That’s going to top $100 million, soon. It’s a serious amount of money. As of the other week, it’s more than what the UN had given,” said Alex Gladstein, chief strategy officer at The Human Rights Foundation.

Cryptocurrency donations accomplish several objectives: they avoid heavier fees charged by traditional financial networks, transfers are nearly instantaneous, and the digital tokens are mobile — they can be given by anyone and accessed by the owner regardless of their location.

“There are close to two million Ukrainians [that] have fled into Europe and other countries and they had to do so quite rapidly,” Gladstein said. “Think about a middle-class family. You probably have some stocks and own a house or part of a house. You can’t bring any of that with you. Ukraine is the fourth most crypto-friendly country in the world in terms of per-capita ownership, so those who fled probably were able to take advantage of an asset that could just go with them.

“Ukraine also is a huge technology center and a country where local currency has history of devaluation and collapsing,” Gladstein continued. “The other reason is the government wants to use crypto to raise money for war against Russia. Traditionally, that has been done through bond schemes or government-to-government transfers. Now, through bitcoin, anyone from anywhere can donate to the Ukrainian cause.”

Gladstein called Ukraine's population “IT savvy and mobile friendly.” Because of its tech acumen and embrace of crypocurrency, it's playing a big role in funneling funds across borders, Gladstein said.

“Never before in history have we had an asset like that. It’s like gold. You can have your savings in something where you just have to memorize or write down on paper the private key, and that’s really powerful,” Gladstein said. “I’ve interviewed lots of people from Argentina and Afghanistan who’ve left their country with their value because of the power of bitcoin. It’s a tremendous humanitarian tool.”

In fact, with the growth of legitimate cryptocurrency usage far outpacing the growth of criminal use, illicit activity’s share of cryptocurrency transaction volume has never been lower, according to Chainanalysis, a blockchain data, services and research provider.

Transactions involving illicit addresses represented just 0.15% of all crypto transactions, according to Chainanalysis.

The cryptocurrency donations being made to Ukraine go directly the government, non-government organizations (NGOs), charities, or citizens, and that saves 30% in overhead charges and an additional 15% on reconciliation fees normally charge by traditional financial networks and charties, said Avivah Litan, a distinguished analyst and vice president at research firm Gartner.

“I think it’s important to dispel this notion held by some that blockchain is just for criminals and illicit activity,” Litan said.

Donating to the digital wallet of an organization or Ukrainian citizen can also be vastly simpler than that of a traditional bank account, Litan noted. For example, if a Ukrainian citizen or organization wanted to, they could simply display a QR code on a placard or sign.

“If you took picture of it, you’d have a blockchain address to send money to,” Litan said. “That potential is here for Ukraine.”

The Human Rights Foundation has posted a list of legitimate organizations to whom donors can send cryptocurrencies.

Like its populace, the Ukrainian government is also one of the most cryptocurrency friendly organizations on earth. It ranks fourth in the world for cryptocurrency use, according to Chainanalysis. For example, the government keeps its national records on decentralized blockchains, the basis for cryptocurrencies. As an immutable system of record, or unchangeable electronic ledger, blockchain ensures the documentation of war crimes by Russia cannot be deleted or changed.

The Ukrainian government is accepting donations of Bitcoin, Ethereum, Tether and Dogecoin.

On Tuesday, Aid for Ukraine launched its initiative to raise funds from the crypto community to fund humanitarian needs and aid Ukraine’s military. The organization is supported by the Ministry of Digital Transformation of Ukraine, crypto exchange FTX, and Everstake, a Ukraine-based proof-of-stake provider.

Cryptocurrency exchange Binance announced that it has donated more than $10 million to its Ukrainian Emergency Relief Fund. Binance has also launched a crypto-first crowdfunding site, called Ukraine Emergency Relief Fund to allow people to donate crypto to provide emergency relief to refugees and children and to support logistics on the ground such as food, fuel, and supplies for refugees.

The top digital coins being used for Ukrainian donations are Ethereum (33.7%), Bitcoin (31.2%), and Stablecoins (17%). Stablecoins are digital currency backed by cash, and therefore they’re more stable than typical cryptocurrencies.

Litan said it’s significant that Ethereum, a less popular crypto coin than Bitcoin, is more popular for the donations to Ukraine. For one, Ethereum is used more often to buy and sell non-fungible tokens (NFTs). NFTs are digital tokens representing data, media, or valuable assets, such as real estate or memorabilia.

The popularity of NFTs has soared in recent years. Last year, NFTs reached $44 billion in sales.

Ethereum also recently moved to a proof of stake (PoS) consensus algorithm that is vastly more efficient and computationally less taxing than Proof of Work (PoW), which Bitcoin continues to use. Unlike PoS, PoW algorithms require massive amounts of electricity from supercomputers and computer farms to solve complex computational equations.

“That’s why proof of work is bad for [the] environment,” Litan said. “The EU parliament was going to ban PoW. And Bitcoin miners are always looking for the cheapest electricity.”

The average crypto donation to Ukraine is $95, but there have also been some notable transactions. For example, one donation of $1.86 million appeared to come from the proceeds of the sale of NFTs created by Julian Assange and the digital artist Pak, according to Elliptic. A CryptoPunk NFT worth about $200,000 was also donated to the Ukrainian government's Ethereum account.

The drive for crypto donations began Feb. 26 when the Ukrainian government, NGOs, and volunteer groups began posting pleas for cryptoasset donations. To date, Bitcoin, Ethereum, TRON, Polkadot, Dogecoin and Solana addresses listed in the tweets have accounted for donations worth $54.4 million, Elliptic stated.

Cryptoasset fundraising campaigns to support the Ukrainian military are also being organized outside of Ukraine. UkraineDAO is a decentralized autonomous organization, which aims to raise Ether to be donated to Come Back Alive, according to Elliptic.

Cryptocurrencies, of course, can be volatile and subject to wild value swings — as anyone who has invested in bitcoin or Ethereum know. So, if money is converted to Bitcoin or another digital currency, it could lose value before it can be spent. (It can also gain value.)

Scammers also appear to be taking advantage of the current situation by tricking unsuspecting users wishing to donate to Ukrainian causes. Elliptic has identified a number of fraudulent crypto fundraising scams now in play.

Scammers are using the “on and off ramps” to cryptocurrency exchanges to pretend to be Ukrainian humanitarian organizations, and are instead stealing from unwitting donors. “It’s like phishing attacks,” Litan explained.

Cryptocurrency exchanges, such as Coinbase and Gemini, act as cryptocurrency banks, storing digital tokens for owners and enabling users to access trading networks.

Cryptocurrency is also likely being used by Russia to thwart widespread financial sanctions by ferrying rubles across borders.

“We do believe it is very likely that Russian companies and nationals are trying to use crypto assets like Bitcoin or the US Dollar-pegged stablecoin, such as Tether (USDT), to circumvent the economic sanctions,” said Josh Olszewicz, head of research at Valkyrie Funds, a digital asset investment manager.

US and European nations want cryptocurrency exchanges to block the Russian government, oligarchs, and others from using their systems to move money across borders. But it's a difficult task, at best, given that decentralized networks thrive on anonymity.