Russia’s difficult relationship with cryptocurrency has grown yet more complicated during the country’s aggressive invasion of Ukraine. Russia kicked off 2022 with a proposed ban on using or mining cryptocurrencies in the country before fully pivoting in February to suggest that regulation may be a better route than outright prohibition. The country’s lurching dance with crypto shows how this new technology both empowers and threatens prevailing government interests. While cryptocurrencies are nearly as popular as gold among Russian investors, according to recent surveys, Russians’ affinity for investing in digital currencies also introduces risks to the financial system that the Kremlin is reluctant to tolerate.
However, recent events may paint the most compelling use case for cryptocurrency in Russian political affairs: as a new tool in conventional warfare. Since initiating its brazen invasion of Ukraine on Thursday, challenging decades of international sovereignty norms, cryptocurrency has played a significant role for both parties in the conflict, and even for nonparticipants. While the war has been waged primarily through conventional technologies—tanks, missiles, and combatants on the ground—cryptocurrency has played an increasingly pivotal, nonviolent role in the war. Cryptocurrency has served as a new countermeasure to the Ukrainian defense, as an escape hatch for Russia as it navigates crushing sanctions from the West, and even as a tool for nonparticipants to support Ukraine in the conflict. However, these new intersections between money and war are likely temporary.
First, digital currencies have provided new ways for Russia to sidestep the world’s primary response to its attack: sanctions. Many commentators argue that the country has likely been developing such a strategy in the years since it invaded Crimea. Individuals and businesses targeted by sanctions can simply move their funds through crypto networks, which remain harder to monitor and control by governments, particularly across borders. However, it is worth noting that this seemingly simple strategy remains rife with difficulties. In fact, Russia may be far better off continuing its efforts to develop an alternate financial network that circumvents SWIFT (which is the global interbank financial network used to enforce sanctions). Still, given the sheer scope of Russian wealth held in cryptocurrencies, digital money will likely play a role in future sanctions against the country.
Beyond this, cryptocurrency provides new attack vectors for the Ukrainian defense to hit back at Russia. Recognizing the opportunity for Russians to evade sanctions via crypto, Ukrainian officials have publicly solicited information on Russian politicians’ crypto wallets in order to monitor, publicize, and potentially intercept these attempts at evading the West’s nonviolent interventions. Two days into the armed conflict, Vice Prime Minister Mykhailo Fedorov sent a tweet offering substantial rewards for any tips. The effort reflects not only the impressive capabilities of Ukraine’s still-growing “IT army,” but also the vulnerabilities that Russia still faces in its efforts to use this technology as a functional escape hatch from global punishment for its illegitimate actions.
However, Ukraine’s cryptocurrency defense strategy doesn’t stop with a call to hackers’ arms. The country has also requested that major cryptocurrency exchanges freeze every digital currency wallet associated with Russian users. Fedorov even claimed it crucial to “freeze not only the addresses linked to Russian and Belarusian politicians, but also to sabotage ordinary users,” a suggestion eliciting mixed responses among crypto exchanges. Crypto exchange operators are now in positions of significant power over the role of digital money in today’s war. While a wide swath of these exchanges have begun freezing Russian cryptocurrency wallets on their networks, some have been reluctant to comply and have limited their efforts to the minimum necessary compliance with sanctions. This development may be one of the most significant points of uncertainty around crypto’s use case in war, as it highlights the extremely young—and underregulated—nature of the digital currency market, and the enormous power that these circumstances place on a small set of large business owners.
Finally, digital money has also provided a new avenue for people outside of the armed conflict to support Ukraine. In the early days of the war, small corners of the cryptocurrency community began organizing to send digital currency donations in support of Ukraine’s defense. Since the country’s president openly solicited crypto donations with a publicly listed wallet address, the fundraising effort has amassed more than $22 million in financial support for the defense in a matter of days. While these figures pale in comparison with the billions of dollars in Ukraine’s defense budget, and the magnitudes larger funding that Russia has at its disposal, the rapid accumulation of financial support for defense has provided a compelling use case for crypto’s role as a nonviolent intervention in conventional wars by non-participants.
While crypto has helped both sides in today’s conflict, the Ukrainian defense has arguably benefited more from digital money’s new role in war than Russia, at least for now. These developments are due to two unique causes which shape the lessons we can learn from today’s examples. On one hand, the unique technology of cryptocurrency has paved the way for these new and creative applications of digital money in interstate conflict, especially the rapid settlement of payments that are more difficult for governments to monitor and control. On the other hand, most of these developments are due to the extremely early nature of crypto markets. The technological promises of digital currency are only appreciating their time in the limelight because there are few to no binding rules on how money moves through cryptocurrency networks, and particularly how it crosses borders.
In this respect, the ability for digital money to make an impact in war is really a symptom of underregulation, a situation that is even less likely to continue after the use cases portrayed in today’s conflict. When the dust of this war finally settles, it is likely that we will see countries turn their focus toward regulating crypto more broadly. Especially as many governments are already working to develop their own central bank digital currencies, it is likely that we will approach an end to the Wild West phase of the cryptocurrency market, and usher in an age of digital currency conflict that may open new doors for crypto in global politics.
While the novel roles for digital money in conventional conflict are impressive, and even an exciting set of nonviolent measures, the future of this dynamic is highly uncertain. Some countries may appreciate, or even enjoy the weaponization of digital money for geopolitical goals. However, further integration of cryptocurrency in global conflict only jeopardizes the potential opportunities that digital money has to offer, and significantly expands the large risks associated with these instruments. In this respect, today’s intersection of crypto and war call for careful thinking about whether and how countries want to allow this relationship to proceed, a decision that will require global coordination. After a long period of shirking diplomatic leadership, the U.S. faces a unique opportunity to restore and update its economic diplomacy by leading on this issue—before others set more dangerous standards.
Future Tense is a partnership of Slate, New America, and Arizona State University that examines emerging technologies, public policy, and society.
