How the Ukraine conflict affects Fintech - and the role of Bitcoin
Ukraine bans e-money but crypto donations to the Ukrainians are soaring. The experts: “German FinTech sector will feel the hit”.
Following Russia’s troops entering into two separatist regions of Eastern Ukraine, markets displayed all the predictable reactions while the oil prices soared.
The United States and European Union already rolled out a new sanctions package due to hit the Russian economy.
In the meanwhile cryptocurrencies exchanges are growing while the European fintech sector is starting to feel the hit by the crisis. Let’s see in depth what’s going on.
A test of crypto’s mainstream adoption. Ukraine Central Bank bans e-money
Even in a war-zone, crypto has become more mainstream. Since banks had shut down due to cyberattacks, some Ukraine-based tech companies made contingency plans by looking to crypto to pay salaries.
After 2014, the global market for cryptocurrencies and other digital assets has ballooned. “That is bad news for enforcers of sanctions and good news for Russia”, quoted the New York Times. Due to avoiding sanctions, Russia has multiple cryptocurrency-related tools at its disposal, experts said.
All it needs is to find ways to trade without touching the dollar. In 2020, the Russian government is developing its own central bank digital currency, a so-called digital ruble that it hopes to use to trade directly with other countries willing to accept it without first converting it into dollars. Like the Chinese digital yuan.
Moreover, “hacking techniques like ransomware could help Russian actors steal digital currencies and make up revenue lost to sanctions”, added the NYT.
According to a Feb. 14 report by blockchain-tracking firm Chainalysis, Russia is home of the one biggest growing ransomware industry around the globe. Last year, about 74% of global ransomware revenue, or more than $400 million worth of cryptocurrency, went to entities that are probably affiliated with Russia in some way.
Thus, the lessening of Western democracies sanctions power we are facing today, comes from a system where these nation states are able to do transactions without going through the global banking system.
Bitcoin falls after Russia invades Ukraine but crypto donations to the Ukrainians are soaring
The cryptocurrency fundraising is rocketing after the military escalation. According to Reuters, the bitcoin slumped to its lowest in a month on Thursday after Russian forces fired missiles at several cities in Ukraine and landed troops on its coast, sparking a sell-off of riskier assets.
However, new data from blockchain analytics firm Elliptic shows that over a 12-hour window Thursday, nearly $400,000 in bitcoin was donated to Come Back Alive, a Ukrainian nongovernmental organization providing support to the armed forces and organizations. Another group, the Ukrainian Cyber Alliance, has received close to $100,000 in bitcoin, litecoin, ether and a mix of stablecoins over the last year. Since 2016, Alliance activists have engaged in cyberattacks against Russian targets, noticed Elliptic.
On the other side, pro-Russian separatists have been raising funds in bitcoin too since the early days of the conflict. Moreover the same Russian institutions hitted by the sanctions will use crypto-money to bypass the sanctions against them, cutting their exposure to Western markets.
Russia’s invasion puts Ukraine’s Fintech industry in a war footing
As stated by the media, Ukraine's central bank banned the issuance of electronic money and the replenishment of electronic wallets following the invasion by Russia.
The National Bank of Ukraine announced a range of resolutions on Thursday in connection with martial law now throughout the country.
Among them, the bank ordered "to suspend e-money issuers, replenish e-wallets with e-money, and distribute e-money to e-money issuing banks". It is unclear whether this extends to crypto or other digital currencies.
Last year, the Ukraine central bank was granted permission to issue a central bank digital currency. with the aim of modernizing the country's payment market.
However, Russia’s invasion puts Ukraine's fintech industry in a war footing and the war could render all those plans moot. The Germany-based journalist and fintech expert Christian Kichner pointed out how “the war in Ukraine will hit the fintech industry too”.
Which European Fintechs are most likely to feel the hit? Germany first
The Solarisbank team in Kiev has been directly affected by the war in Ukraine. The Berlin-based fintech, which opened a tech hub in Kiev last year, announced a few days ago that "even if we did not expect such an escalation, we were prepared for such a scenario and immediately activated our action and evacuation plan for our colleagues on site".
Solarisbank is just an example of the ties between the German fintech scene and Ukraine. In the workforce of German fintechs there are many programmers who come from former Soviet republics.
According to data, Ukrainians and Russians make up nearly 10% of the whole sector’s workforce. And even if it should be a little less, it's noticeable.
It is also known that some German fintechs have - or at least had - strong ownership links with Russian investors.
In 2019 the Russian tech investor Oleg Boyko owned around 25% of the Frankfurt-based credit fintech Cashcape through the "Tirona Limited '', an investment company which is linked to his family.
Well known are also the connections between the Berlin-based NeoBank Vivid Money and the Russian challenger bank Tinkoff - which is listed on the London Stock Exchange under the name TCS and whose shares lost 59% in value a few days ago.
Till now Western democracies rolled out sanctions against Russia, while cutting off the country from SWIFT access has been deemed a step too far. Despite Western allies being deeply divided on this matter, private companies are taking actions too.
The Lithuania-based fintech firm Paysera and the UK-based Wise, have both halted transfers to and from Russia in a show of solidarity with Ukraine. Even China was surprised by the invasion, inviting both parties to the “moderation” with Chinese tech-giants worried about regional instability.
The question is: What might happen next? Nobody knows and, Unfortunately, nobody is immune from the conflict's consequences.