Just days before the Russian invasion of Ukraine, thousands of people in Canada joined a protest movement of truckers called the “freedom convoy” to oppose government health measures.
To support the protest movement, the organizers launched a fundraising campaign on the GoFundMe platform. However, the social finance platform has seized the approximately $10 million in donations that have been raised, alleging that the movement has failed to ban the promotion of violence and harassment and meet sanctions imposed by authorities. Canadian.
Organizers reacted quickly by turning to the world of cryptocurrency to evade foreclosures and continue funding their movement. They raised almost a million dollars in a few days.
This Canadian story is a perfect example of how cryptocurrency can play a dual role of social support, but can also be used to evade sanctions.
At the same time, in Ukraine, the Kyiv government showed enthusiasm for the use of cryptocurrency, which allowed the country to obtain significant financial support for its defense very quickly.
Our work examining the digital transformation of the accountancy profession has led us to delve into the world of cryptocurrency to explore how it works and how it is regulated. As the armed conflict between Ukraine and Russia rages on, countries’ interest in regulating cryptocurrency has never been more urgent.
The conflict between Ukraine and Russia is not just a war of bombs and bullets. It is also a digital war of which cryptocurrency is only one of many components.
Ukraine’s Ministry of Digital Transformation is getting a lot of press for the resourceful way it supports the country’s resistance to the Russian invasion. This is done through sophisticated use of social media to promote Ukrainian interests to the world at hackathons, where hackers are rewarded with US$100,000 for successfully attacking Russian systems.
Funds available quickly
After a Ukrainian government official tweeted that the country would now accept international aid via cryptocurrency, more than 100 million US dollars have been raised. Two funds were initially created: one for humanitarian purposes and the other for military purposes. However, as the violence escalated, the funds were merged and devoted entirely to supporting the Ukrainian military, where they were used to purchase body armor, night vision goggles, helmets, medicine and food for frontline fighters.
The government said that although the amount received in cryptocurrency was small compared to the total funds granted by international agencies, it was able to receive these funds much faster due to the absence of intermediaries.
Bank transfers can indeed take several days to reach Ukrainian government accounts. The cryptocurrency was deposited within minutes.
This demonstrates the undeniable usefulness of cryptocurrency – the way it currently operates and is regulated – in supporting, in particular, the financial and economic systems of struggling countries.
Using cryptocurrency to evade international sanctions
However, if the digital war can benefit some on a human and military level, in particular by overcoming the slowness of traditional financial systems, it can allow others to circumvent the international sanctions imposed on them. In this regard, it should be noted that, according to some sources, cryptocurrency also serves as a safe haven for many ordinary Russian citizens who are trying to keep their savings in a banking system with many restrictions and vulnerabilities, because the value of the ruble collapses.
Economic sanctions against Russia are not new. A number have been put in place since the country annexed Crimea in 2014. The current Russian invasion of Ukraine has resulted in new financial and economic sanctions that penalize Russian organizations and individuals, including oligarchs. As a result, the value of the Russian ruble is falling to the point that several Russian subsidiaries of European banks are on the verge of bankruptcy.
However, again, traversing the loosely regulated world of cryptocurrencies could help Russian organizations, governments, and oligarchs evade sanctions and continue their financial activities. Since the beginning of the war, the conversion of Russian rubles into cryptocurrency has literally exploded.
Cryptocurrency leaves traces
But is it really an effective and definitive means of dodging sanctions? Probably not, especially when it comes to the very large sums held by Russian oligarchs and large organizations. It is very unlikely that these sums can be fully absorbed by the different types of cryptocurrencies currently in circulation.
Additionally, the usefulness of cryptocurrency for these types of transactions is temporary. The sums used to obtain the cryptocurrency actually become traceable – and therefore subject to penalties – as soon as they land in traditional bank accounts. Cryptocurrency is also becoming less and less untraceable thanks to the growing expertise of law enforcement.
The war will speed up regulation
From this perspective, the current digital war between Ukraine and Russia will likely serve as a catalyst to accelerate the regulatory takeover of the anarchic cryptocurrency world. It will then be up to each country to find the mechanisms that will allow it to regulate virtual currencies – hoping that the whole process will acquire a certain cohesion, internationally.
In this sense, it seems essential that the legislators of the different countries consider creating a balanced framework. The objective must be to minimize the possibilities of the cryptocurrency universe being used as a means of illegal escape without taking away the efficiency offered by cryptocurrency, in particular the speed it offers for processing transactions. Finding this balance will not be easy.
This article by Simon Dermarkar, Associate Professor, HEC Montréal and Mouna Hazgui, Associate Professor, Financial Accounting and IFRS, HEC Montréal, is republished from The Conversation under a Creative Commons license. Read the original article.