Cryptocurrency’s Role in the Russia-Ukraine Crisis

Finance typically plays a major role in wars, but the Russia-Ukraine war is the first major conflict with a prominent role for cryptocurrencies. Since Russian forces invaded Ukraine on February 24, the United States and its partners have levied an unprecedented series of sanctions on Russia. These efforts have raised questions, including in Congress, about whether cryptocurrencies can be used by Russian actors to bypass sanctions. More broadly, the Russia-Ukraine crisis comes at a time when policymakers are trying to decide how to regulate digital assets. This month, President Biden signed an executive order calling for a whole-of-government strategy on digital assets, including to mitigate national security risks and illicit finance. The European Parliament is debating whether to impose energy-use standards on cryptocurrencies that could limit certain types. The prominence of crypto in this conflict could influence global perceptions of the technology, including among governments considering new regulations. 

Q1: How has the Ukraine-Russia crisis intersected with conversations around crypto?

A1: Since the emergence of crypto, proponents have argued that decentralized digitized assets will be a democratizing force in global finance. In the context of Russia’s invasion of Ukraine, crypto proponents argue that crypto helps undermine Moscow’s authoritarian regime by providing an alternative to the Russian ruble, facilitating capital flight from Russia. Proponents argue that crypto provides average Russians and Ukrainians a store of value and medium of exchange that could reduce the humanitarian costs of the sanctions and war. They also highlight crypto as an important medium for donations to the Ukrainian government that complements Western aid. However, some skeptics view the decentralized and underregulated nature of crypto as a vehicle for illicit transactions, including as a means for Russian individuals and entities to bypass sanctions.

Within the crypto community, the crisis has highlighted ideological tensions between the purely libertarian and actively anti-authoritarian sides, particularly regarding the degree to which crypto exchanges should comply with sanctions on Russian entities. Major exchanges appear to be strictly adhering to the sanctions, but they are resisting calls—including from the Ukrainian government—to proactively suspend crypto trading for everyone in Russia.

Q2: Can Russia use crypto to evade sanctions?

A2: In theory, crypto can be leveraged for illicit purposes such as evading sanctions, but in practice, technological barriers, market structures, and limited liquidity will make it difficult for the sanctioned Russian actors to evade sanctions at scale using crypto. While the U.S. Treasury Department is monitoring whether crypto is being used to evade sanctions, a National Security Council official reportedly said that crypto is an ineffective tool for sanctions evasion.

  • Technological Barriers: Cryptocurrencies rely on blockchain technology, digital public ledgers that are transparent and permanent. Because all transactions are logged on the blockchain, cryptocurrencies are the digital equivalent of “marked bills” in the realm of physical cash. Bitcoin and many other crypto assets are pseudonymous, not anonymous, meaning that their transactions and wallets can be traced. If a wallet can be linked to an entity or person, the actor can be identified. Law enforcement agencies already employ such methods. Private firms like Chainalysis assist in these efforts by using creative analytics to identify and quantify illicit uses of crypto. That firm, for example, estimates that last year 0.15 percent of all crypto transactions by volume were used for illicit purposes, primarily scams.
  • Market Structures: Most crypto is transacted on centralized exchanges such as Binance and Coinbase because they offer convenient platforms and custodial services for crypto wallets. These exchanges must abide by know your customer, anti-money laundering, and countering the financing of terrorism (KYC/AML/CFT) laws in the United States and other major jurisdictions. This means that authorities can identify who holds the crypto assets and can order the accounts of certain entities to be suspended or frozen.

    Russia’s crypto exchange rules are more relaxed. Consequently, it might not be clear which entities hold crypto assets in Russia. Although crypto exchanges have not outright banned transactions from Russia, they are tightening enforcement on sanctioned individuals and entities. Coinbase, for example, has reaffirmed that it will follow applicable U.S. sanctions laws to screen customers on sanctions lists and block transactions from IP addresses that might be tied to sanctioned individuals or entities. As of March 6, Coinbase had blocked over 25,000 IP addresses it believes are related to sanctioned individuals or entities.

    The alternatives to centralized exchanges with hosted wallets are decentralized exchanges or direct peer-to-peer (P2P) transactions, both using non-custodial wallets. Decentralized exchanges are distributed applications that use “smart contracts” to manage pools of liquidity. They are rapidly growing in use but as of late last year supported only about 5 percent of the volume of centralized exchanges. Unhosted wallets are controlled by individuals and stored on their electronic devices. They are risky for crypto owners because if the owner loses their digital keys or physical access to the device on which the crypto is stored, they can lose the assets entirely. These alternative methods of trading and holding crypto are more likely to be used for illicit transactions.

  • Limited Liquidity: Crypto trading volumes between rubles and the two most liquid cryptocurrencies—bitcoin and tether—have more than doubled since February 24. However, the value of these transactions remains in the tens of millions of dollars per day. In the second half of 2021, Russia’s imports averaged more than $900 million per day. The relatively small volume of crypto being purchased using rubles suggests that ordinary Russians are trying to get rid of their rubles. Total crypto trading volumes on all exchanges worldwide averaged about $24 billion in February, compared to the $5 trillion per day in transactions over SWIFT, the financial messaging system from which major Russian banks are now banned.

To trade with foreign entities in crypto, foreign counterparties would need to be willing to accept crypto as payment. The jurisdictions most permissive of crypto and with large exchanges are generally those that are leading the sanctions on Russia. Many emerging market countries, on the other hand, have implicitly or explicitly banned crypto, most notably China.

Q3: How is Ukraine using crypto during this crisis?

A3: Since the war began, the Ukrainian government has used crypto to facilitate donations and for military and other purchases. Kyiv was relatively well positioned to take advantage of crypto networks. Last year, a market consultancy ranked Ukraine fourth globally for crypto adoption. In September 2021, Ukraine formally legalized crypto.

On February 26, the Ukrainian government began publicly soliciting crypto donations online. After initially accepting only bitcoin and tether, the Ukrainian government has expanded its capacity to now accept over 70 forms of crypto. Ukraine’s largest crypto exchange, Kuna, helped organize this effort. Though some institutions have donated to Ukraine using crypto, most donations come from individuals around the world. As of March 9, the Ukrainian government claimed to have raised nearly $100 million from crypto donations. The crypto donations allow Kyiv to obtain funding instantly and are faster than soliciting donations settled through traditional financial channels.

Digital art commoditized as non-fungible tokens (NFTs), an emerging medium for cross-border financial flows discussed in a prior CSIS Economics Program piece, has also become a significant donation source for the Ukrainian government. The Ukrainian government had received hundreds of NFT donations as of March 5, including a CryptoPunk valued at over $200,000. The Ukrainian government and external organizations have also started minting and selling NFTs to raise funds, with a recent Ukrainian flag NFT sold for $6.5 million in ether. However, these crypto donations to Ukraine are relatively small compared to the billions of dollars in international military and humanitarian aid flowing to Ukraine from partner governments.

The Ukrainian government has used its crypto donations for several purposes. None of the NFTs donated to Ukraine had been sold as of March 3, with a Ukrainian official conceding that NFT donations, though valuable, are not as helpful in the short term given that they are illiquid assets and difficult to sell. Cryptocurrencies are far more liquid, and the Ukrainian government has so far converted less popular cryptocurrencies into dollars and euros while holding bitcoin and ether in reserve. Some $15 million of these crypto reserves have already been used to purchase non-lethal military gear such as bulletproof vests, night-vision goggles, and battlefield medical supplies—with approximately 40 percent of suppliers willing to transact directly in crypto as of March 5.

Aidan Arasasingham is a program coordinator and research assistant with the Economics Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Gerard DiPippo is a senior fellow with the CSIS Economics Program.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s). 

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Aidan Arasasingham

Aidan Arasasingham

Former Research Associate, Economics Program
Gerard DiPippo

Gerard DiPippo

Former Senior Fellow, Economics Program