Ukraine’s crypto dream derailed by currency controls

A year ago the burgeoning crypto industry in Ukraine was raking in massive instant donations to help the nation cope with Russia’s invasion.

Today, crypto markets are on the outs. The reason? New restrictions from the National Bank of Ukraine have closed the on-ramps for converting the hryvnia into digital tokens.

Little choice

In March, the central bank made the move to prevent an outflow of wealth from the embattled nation. Bank officials say they had little choice.

“The use of virtual assets to circumvent currency restrictions, including as a channel for unproductive capital outflows from the country, poses a threat to macrofinancial stability,” a spokesperson for the NBU said in a statement to DL News.

And crypto founders didn’t take it lightly. “The NBU can go take a hike,” Michael Chobanian, founder and CEO of KUNA Exchange, said over Telegram.

NOW READ: Lebanon’s crypto brokers dodge turmoil and masked gunmen to serve clients

The eight-year-old KUNA does about $750,000 in daily trading volume, according to CoinGecko. The firm has left Ukraine, Chobanian announced publicly.

The Ukrainian central bank’s move echoes a decision made by its counterpart in Lebanon to stop depositors from converting their fiat holdings into cryptocurrencies. In both instances, central bankers are trying to stop capital flight. Yet their actions undermine a core innovation of Bitcoin and its ilk — enabling borderless finance across the internet.

‘The use of virtual assets to circumvent currency restrictions, including as a channel for unproductive capital outflows from the country, poses a threat to macrofinancial stability.’

—  National Bank of Ukraine

Before the war, Ukraine and Russia were the most crypto-saturated countries in Europe, according to Chainalysis. Ukraine’s crypto industry played a headlining role in the first days of the invasion.

Between February and May 2022, donors gave $125 million worth of cryptocurrencies to Ukrainian organisations, according to Crystal Blockchain.

Since last May, however, the donations have wilted, with only $9 million coming in between September and February. Binance stopped supporting the hryvnia on March 20.

Crypto’s finest hour

Not every crypto firm has left. “We stay in Ukraine as before,” says Oleg Samoilov, CMO of Everstake, a staking provider.

Ukraine-linked or based crypto exchanges like WhiteBIT and Exmo still actively tout hryvnia trading pairs. As of January, WhiteBIT is the official sponsor of the Ukrainian national soccer team.

Still, the central bank’s actions are a setback for Ukrainian crypto firms. Plus, they tarnish one of crypto’s finest hours.

In the first weeks of the war, donations to the Ukrainian government and aid programs like “Повернись живим” — Come Back Alive — poured in, topping $187 million in aggregate, according to analytics firm Crystal Blockchain’s accounting.

NOW READ: Ethereum’s Shapella upgrade to unlock $34bn in staked ETH

“Everyone was saying that crypto is useless. And now you see that this is the application. It’s actually saving lives,” said Alexander Bornyakov, deputy minister of the Ministry of Digital Transformation, which helped set up the initial donation platform.

Chobanian’s KUNA exchange played a central role in converting and managing those donations on behalf of the Ukrainian government, alongside Everstake and FTX, the now-bankrupt exchange run by Sam Bankman-Fried, who is being prosecuted on fraud charges in the US.

In addition to switching off hryvnia accounts for exchanges, the National Bank of Ukraine has also backpedalled on the legal status of cryptocurrencies.

The Ukrainian government launched United24 in May 2022, which replaced the state’s crypto portal with a more traditional aid platform. United24 has received more than $300 million, by its own account — but that’s in fiat.

A representative for United24 confirmed that the organisation does not offer any means of donating crypto. Instead, it touts auditing by Deloitte and a stable of celebrity ambassadors ranging from actor Mark Hamill to singer Barbra Streisand.

Legal status

In addition to switching off hryvnia accounts for exchanges, the National Bank of Ukraine has also backpedalled on the legal status of cryptocurrencies. Before the Russian invasion, the Ukrainian Rada, its parliament, passed a law legalising digital asset markets.

President Volodymyr Zelensky went on to sign the law on March 16, as Kyiv was under siege, seemingly enshrining both crypto’s legal status and its priority to the administration.

But it remains up to the central bank and the securities commission to implement most of those regulations. After a year of crypto collapses, their appetite seems to have waned.

NOW READ: The rise and fall of Terra founder Do Kwon

The NBU has quietly shelved the regulations, critics say. The NBU points to the Rada, saying the legislative body needs to update the tax code.

“Ukrainian regulators do not consider our industry as important and crucial for the country’s development, so here we are,” says Alex Momot, founder and CEO of Remme, a public key protocol project whose valuation has flatlined. Momot, for his part, says he left Ukraine in January 2022.

Bank officials say that these are wartime measures. “The relevant administrative restrictions are temporary,” a representative wrote in an email.