The war in Ukraine could accelerate the growth of the crypto sector

The Ukrainian government announced on social media last month that it would accept global donations in Bitcoin, Ethereum and Tether to support its army.

It may have seemed like a publicity stunt. Not like that. According to Brittany Kaiser, a crypto entrepreneur (and former whistleblower at Cambridge Analytica), about $106 million in crypto donations came in when all initiatives across different platforms are added up. She is part of a tech network that helps Mikhail Fedorov, The Ukrainian Minister of Digital Transformation to organize this.

For context, this pot exceeds the initial €90 million in humanitarian aid to Ukraine announced by the EU (though Brussels is now increasing this) and will almost certainly grow as Fedorov's network struggles to tap every crypto strain.

For example, Gavin Wood, the co-founder of Ethereum, tweeted that he would “personally contribute $5 million” if Polkadot, the token he created, was accepted alongside the others. Coders responded and the central bank now accepts numerous assets, including non-fungible tokens. “The innovation is amazing,” says Kaiser. “We haven’t seen anything like this before.”

What should the broader financial world think? Many traditionalists may scoff. Some regulators may also wince as American and European regulators struggle to stop Russian companies and citizens from using crypto to circumvent Western sanctions. But it would be foolish for any investor – or policymaker – to ignore this $106 million pot. On the one hand, it shows that we now live in a world that is characterized by networks, not just by hierarchical institutions.

It's also symbolic of a larger point: the war in Ukraine could be an accelerant for the crypto sector. “Russia’s invasion of Ukraine is the first major event where cryptocurrencies are part of the equation,” hedge fund Bridgewater told clients this week. “These near-term dynamics occur alongside structural changes in cryptocurrency markets that we believe are self-reinforcing as adoption by key institutional investors increases and the surrounding ecosystem deepens.”

Or as Michelle Ritter, CEO of Silicon Valley tech company Steel Perlot, noted: "Social media's pivotal moment came in 2011, when videos, tweets and other posts from Libya, Egypt, Yemen, Syria and Bahrain sparked the Arab Spring. . . now . . . we find ourselves at a similar inflection point [with cryptocurrency]."

There are two factors that contribute to such predictions. One is that the invasion took place in a place that has been a hotbed of crypto activity and technical talent in recent years. For example, the research group Chainalysis calculates that Ukraine had the world's highest crypto usage per capita in 2020 and the fourth highest in 2021.

This has laid the foundation for a tech-savvy network ready to innovate. That doesn't mean cryptocurrencies have been particularly useful as a means of payment in wartime, as traditional channels have dried up except for donations. While some Western tech companies have tried to pay their employees in Ukraine in crypto, they tell me they've struggled with it.

Crypto wasn't a particularly good short-term store of value either; In recent weeks, Bitcoin's price performance has significantly underperformed gold, the traditional wartime store of wealth, Bridgewater notes. But, it adds, the “rising Russian and Ukrainian flows into crypto during this war demonstrate how cryptocurrencies are being seen and used as alternatives to fiat currencies”; Innovation is likely to accelerate.

The second factor is that Western sanctions against the Russian central bank have raised fears that non-Western countries will avoid the dollar in the future. This is unlikely to topple the greenback's status as a major reserve currency in the short to medium term - or at least not in a world where the European Central Bank works closely with the US, the Chinese currency is not yet freely convertible and the entire cryptocurrency world is only $2 trillion in size.

However, the intensification of the debate is increasing pressure on the US government to respond, especially given that China recently launched its own digital currency. So on Wednesday, President Joe Biden took a break from the White House's frenetic diplomacy over Ukraine - and efforts to curb spiraling oil prices - to announce the launch of America's first federal policy initiative on digital assets. The details are vague but include support for the Federal Reserve's nascent efforts to develop a digital dollar.

It is highly unlikely that a digital dollar will become a reality any time soon, or that the Securities and Exchange Commission will suddenly embrace stablecoins or Bitcoin funds. But the key point that investors need to understand is that Washington increasingly wants innovation in this area to happen within its regulatory tent, not outside - or offshore.

While this may horrify some libertarians, the crypto industry's larger players appear eager to engage with the establishment - and are trying to burnish their image to make a good impression. In this sense, the explosion of crypto philanthropy is symbolic for Ukraine in every way. Consider it another example of how war can have unexpected side effects, not just in geopolitics but also in finance.

gillian.tett@ft.com

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