How the Russian invasion drastically changed Ukraine’s blockchain strategy to focus on war

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Cryptocurrencies were supposed to be Ukraine’s stepping stone into the future. Instead it is proving to be a necessary lifeline in a war-torn country. Since the Russian invasion on February 24, Ukraine has raised over $ 56 million in donations spread across assets such as bitcoin, ether, polkadot, solana, dogecoin, tether, and more. These funds went to help aid agencies distribute aid across the country, procure supplies for soldiers such as food, uniforms and body armor.

They are also being used to aid Ukraine’s growing ranks of cyber warriors, who have reportedly defaced Russian government websites, provided information, and brought down military systems.

However, this was never the plan.

Ukrainian Deputy Minister for Digital Transformation Alexander Bornyakov says digital assets and blockchain technology were meant to help revitalize the Ukrainian economy and bring all government processes online. He notes that the mission of the ministry, founded two years ago, is “to move 100% of government services online and build a digital state to make all government services transparent, easy to use and convenient for Ukrainian citizens.”

Blockchain initiatives such as the creation of a central bank digital currency, the e-hryvnia, began when the minister of digital transformation and his team helped create a law a year and a half ago to legalize digital assets in the country and making Ukraine one of the most crypto-friendly countries in the world. Bornyakov says the e-hryvnia should have been introduced towards the end of 2022 in cooperation with the central bank, the National Bank of Ukraine.

However, all those plans went out the window with the Russian invasion.

Instead, the Ukrainian government has been looking for ways to use its knowledge in cryptocurrencies and digital assets to support the war effort. Bornyakov says that within a couple of days of the hostilities they decided to solicit cryptocurrency donations. “It was the second or third day we decided we needed the money to get in [to the country] because there was a problem with bank liquidity “.

Bornyakov also says he received a call from his boss, Digital Transformation Minister Mykhail Fedorov, who said he needed to help the cash-strapped military and asked if they could provide people with a way to donate crypto assets. . “We decided to create wallets and build this infrastructure to get money and send money [crypto] to different suppliers, so you can buy all the things the military needs. “

However, it wasn’t that simple. With ongoing concerns about cryptocurrency theft, $ 14 billion worth of cryptocurrencies was taken by scammers last year according to crypto analysis firm Chainalysis last year, the government needed to be sure its funds would remain safe. He also wanted to have the ability to convert assets into fiat currency. They turned to the largest stock exchange in the country, Kuna. “There is a lot of complexity when it comes to security, because if you don’t protect your infrastructure, someone can hack you and steal all your cryptocurrencies … but it’s not just a question of security, it’s also the ability to convert holdings into different types of fiat currencies.

The campaign was hugely successful. Crypto analytics firm Elliptic noted that as of March 2, the bitcoin, ethereum, tron, polkadot, dogecoin and solana addresses listed in the government tweets have received over 96,000 cryptocurrency donations, worth a total of 46.7 million. dollars went directly to the government. Adding NGOs, over $ 54 million has been donated to the country.

However, while cryptocurrency donations can be an accelerator for fundraising, the spotlight on the industry has also revealed some pain points of friction and ethical hurdles that plague this field.

For example, to build on the momentum, Fedorov announced via Twitter Wednesday that the government would conduct a giveaway token, known as an “airdrop” in cryptographic parlance, to all crypto benefactors who have donated within a certain time frame. While this seemed like a reasonable idea at first glance, the government may not have expected that such a program would also bring out scammers and profiteers trying to take advantage of it. For example, a token called Peaceful World was created that tried to be a government imposter and there was a dramatic wave of tiny donations that were clearly intended only to qualify donors for the airdrop.

The expected giveaway was canceled less than 24 hours after the announcement.

Bornyakov suggests that the government did not foresee the complexity of conducting the airdrop and certainly did not want people to make money from what would otherwise be a noble cause. “At the moment we didn’t have the technical skills to make it happen. But then we also realized that this was a way for people to profit from donations to a suffering country, which is not fair. “

Instead the government announced plans to sell NFTs as a way to help the military, but Bornyakov says these sales will more likely be used after the war as part of a museum or a way to preserve the memory and history of the conflict. instead of something designed to help soldiers now.

Perhaps the biggest problem is how Ukraine is trying to take advantage of cryptocurrencies while at the same time isolating Russia from the industry. There are growing fears among governments and regulators across the Western Hemisphere that Russians are also turning to cryptocurrencies as a way to evade sanctions that have cut its economy from the rest of the financial world.

On February 27, Fedorov launched an open appeal to the heads of major exchanges around the world such as Coinbase, Kraken, Binance and others to immediately stop serving all Russian clients and traders, not just those on sanctions lists. Many traditional companies like Apple and Samsung have stopped selling goods and services in the country, while others like PayPal have stopped accepting new customers, and fintechs like Wise and Remitly are stopping transfers to and from Russia.

However, the leaders of these exchanges have largely rejected these demands, saying it was somehow immoral, disproportionate and against the ethics of cryptocurrencies to target entire populations. Most said they would comply if legally required. Jesse Powell, CEO of US-based Kraken, was the first to respond publicly.

Asked about the ethics and fairness of that request, Bornyakov says it’s important for ordinary Russians to feel some semblance of the pain and suffering they experienced in Ukraine. “The more we produce them [Russian citizens] hearing how we feel will make him change his mind and stop supporting him [President Vladimir Putin] about his terrible decision to invade Ukraine … We must show every Russian citizen that you cannot just start working and be safe in your country. ”

In the midst of this roller coaster, donations continued to arrive in the country, albeit at a much slower pace than before the airdrop was canceled. Cryptocurrency prices have also stalled. Bitcoin and ether both hit two-week highs amidst the hustle and bustle, but each fell nearly 10% over the next few days.

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