Philanthropy in the sector is another symbol of its integration into established markets.
The Ukrainian government announced on social media last month that it would accept global donations made in bitcoin, ethereum, and tether to support its military.
It may have seemed like a publicity stunt. But it didn't. The country was flooded with donations worth about $106 million in cryptocurrency, if all the initiatives on the different platforms are counted, according to Brittany Kaiser, an e-currency entrepreneur (and former Cambridge Analytica whistleblower). She is part of a technology network that helps Mykhailo Fedorov, Ukraine's minister of digital transformation, organize the donation process.
This amount exceeds the initial €90 million in humanitarian aid to Ukraine announced by the EU (although Brussels is now increasing it) and is almost certain to increase as Fedorov's network has focused on tapping into all the cryptocurrency tribes.
Gavin Wood, for example, the cofounder of Ethereum, tweeted that he would "personally contribute $5 million" if polkadot, the token he created, was accepted into the mix. The developers responded and the central bank now accepts many assets, including non-fungible tokens. "The innovation is amazing," Kaiser said. "We haven't seen anything like it before."
What should the financial world at large do? Many traditionalists may scoff. It may also be uncomfortable for some regulators, as Americans and Europeans seek to prevent Russian companies and citizens from using cryptocurrencies to avoid Western sanctions. But it would be foolish for any investor - or policymaker - to ignore this $106 million fund. For one thing, it indicates that we now live in a world made of networks, not just hierarchical institutions.
It is also a symbol of a larger fact: the war in Ukraine could be an accelerator for the cryptocurrency sector. "The Russian invasion of Ukraine is the first major event where cryptocurrencies are part of the equation," hedge fund Bridgewater told clients this week. "These short-term dynamics are occurring alongside structural changes in cryptocurrency markets that we believe are becoming self-reinforcing as adoption by large institutional investors grows and the ecosystem around them deepens."
Or as Michelle Ritter, CEO of Silicon Valley tech firm Steel Perlot, noted, "The instant social media moment came in 2011, when videos, tweets and other postings from Libya, Egypt, Yemen, Syria and Bahrain sparked the Arab Spring...are at a similar inflection point [with cryptocurrencies]."
Two factors contribute to these predictions. One is that the hack occurred in a place that has been a hotbed of cryptocurrency activity and tech talent in recent years. The Chainalysis research group, for example, estimates that Ukraine had the highest level of cryptocurrency use per capita in the world in 2020 and the fourth highest in 2021.
This laid the foundation for a network that is technologically savvy and willing to innovate. This does not mean that cryptocurrencies have been especially useful as payment tools in the war, as conventional channels have been exhausted except for making donations. Although some Western tech companies have tried to pay their employees in Ukraine in cryptocurrency, they have told me that they have had difficulty doing so.
Cryptocurrencies have also not been a particularly good store of value in the short term; in recent weeks; Bitcoin's price performance is noticeably below gold, the traditional refuge of wealth in times of war, Bridgewater notes. However, he adds, "the increase in Russian and Ukrainian flows into cryptocurrencies during this war highlights how cryptocurrencies are being considered and used as alternatives to fiat currencies"; and innovation is likely to accelerate.
The second factor is that Western sanctions on the Russian central bank have raised fears that non-Western countries will avoid the dollar in the future. This is unlikely to reduce the dollar's status as the primary reserve currency in the short to medium term - or at least not in a world where the European Central Bank is cooperating closely with the US, the Chinese currency is not yet freely convertible, and the cryptocurrency market is barely $2 trillion (millions of millions) in size.
But the intensifying debate is putting pressure on the US government to respond, especially as China recently launched its own digital currency. That's why President Joe Biden took a break Wednesday from frenetic White House diplomacy over Ukraine - and efforts to stem spiraling oil prices - to announce the launch of the first policy initiative US federal law for digital assets. Details are sketchy, but include support for the US Federal Reserve's nascent efforts to develop a digital dollar.
It is highly unlikely that the digital dollar will become a reality anytime soon, or that the Securities and Exchange Commission (SEC) will suddenly accept stablecoin funds (tied to the dollar or another benchmark.) ) or bitcoin. But the crucial point for investors to understand is that Washington increasingly wants innovation in this sector to occur within its regulatory sphere, not outside - or overseas.
While this may horrify some libertarians, the major players in the cryptocurrency sector seem eager to engage with the establishment and are looking to clean up their image to make a good impression. From that point of view, therefore, the explosion of what we might call crypto-philanthropy for Ukraine is symbolic in every sense. Consider this as yet another example of how war can produce unexpected side effects, not only in geopolitics but also in the financial world.
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