Russia's crypto volumes are stalling across major exchanges, Ukraine sets up multiple crypto wallets

The Russians-are-evading-sanctions-via-crypto narrative looks off the mark. As the world's largest digital currency rallied 12 per cent Monday, expectations of surging demand from Russia-based investors was cited by some in the industry as the proximate cause.

But recent blockchain data suggest residents in the sanction-hit nation have been in no hurry to trade crypto on major exchanges. Ruble-denominated crypto activity was just $34.1 million on March 3, according to Chainalysis. That's down significantly from a recent peak at $70.7 million on February 24 - and the $158 million record back in May 20, 2021.

"This is a fraction of the volume that was seen during the all-time highs of Russian crypto trading volume reached May 2021," said Madeleine Kennedy, senior director of communications at Chainalysis.

Citigroup Inc. also estimates actual Bitcoin buying from the nation was just 210 BTC on average per day in the past week, versus a total daily volume that tends to range between $20 billion and $40 billion.

Russia's crypto volumes stall

While Russians may still be trading on a peer-to-peer basis, large volumes should still be visible on the blockchain. That suggests the Bitcoin rally over the past week to above $45,000, as Moscow stepped up its invasion of Ukraine, has little to do with the nation's buying power in practice.

"Russian volumes have been relatively small so far, suggesting that the price action is more due to investors positioning for an expected uptick in demand from Russia, rather than Russian demand itself," according to Citi analysts including Alexander Saunders in a Wednesday report. "It will take meaningful capital flight to move the needle."

Regulated exchanges can still provide services to Russia-based users outside the ever-expanding list of sanctioned entities. "As if yet, we haven't seen evidence of large-scale sanctions evasion by sanctioned Russian entities," Chainalysis' Kennedy said. "If the do attempt to use crypto, it would be very difficult for them to do this undetected at scale." Bitcoin was 4.6 per cent lower in Thursday at $42,065.

Ukraine seeks crypto donations

Meanwhile, donations to the Ukrainian government and associated charitable organisations are skyrocketing as the fighting has intensified against invading Russian forces. Cryptocurrencies have figured conspicuously in the effort, billed as a new and welcome resource for the country in a time of crisis. But Ukraine's journey into the cryptoverse has had its bumps, serving as much of a cautionary tale as an inspiration.

The Ukrainian government has established multiple digital wallets to receive donations in a variety of cryptocurrencies from Bitcoin to Dogecoin, while other non-governmental bodies also have their own wallets to procure donations for the country's armed forces.

The process of tracking just how much has been donated is tough, though, despite crypto's professed transparent nature. Bloomberg verified more than $28.5 million in donations to Ukraine's government as of Thursday morning, but other sources such as blockchain analytics firm Elliptic puts the total closer to $43 million. The amount is but a drop in the ocean, however, with Ukraine's 2021 defense budget estimated at $4 billion.

Ukraine sets up crypto wallets

To those on the ground, assistance is vital no matter what form it comes in. For some Ukrainians abroad, crypto is where they feel they can contribute the most to aid the fight in their homeland. And Ukraine's success in raising money and commanding the attention of crypto's masses has been nothing to sniff at. But the process hasn't been without snarls: Ministers and donors alike have had to navigate a range of pitfalls including a failed project, a lack of spending power and rampant scams.

Some of its ideas have been good in theory, if not a little unorthodox. A promise by the Ukrainian government on Wednesday to reward crypto donors with a so-called "airdrop" - a process where early backers are given free tokens to help jump start a project - saw donations to its affiliated crypto addresses soar. People rushed to part with their tokens ahead of a cutoff point at which a record would be taken of the donations made so far, effectively gamifying the humanitarian push by inviting in those who could make a quick buck off the resulting rewards.

But the airdrop was canceled a day later, following a spoof scam in which the government's Ethereum address appeared to be distributing reward tokens to individual crypto addresses hours ahead of schedule. Jess Symington, research lead at Elliptic, said the hacker had sent 7 billion newly minted tokens to Ukraine's Ethereum address that contained a permission allowing them to control the tokens from whichever wallet received them - meaning that any tokens then sent from the Ukraine address would convincingly appear to have been transferred by the government itself.

Scammers target crypto potential

The airdrop incident is only one example of how the state's use of cryptocurrencies has resulted in an uptick in scams during the fundraising process, as incredibly adept digital attackers target people's goodwill in seeking to do what they can to help the cause.

"The major peril that we're seeing is just an unbelievable number of scams," Symington said in an interview. "We're seeing people screenshot Ukrainian government tweets with the addresses and just photoshop on their own addresses. We're seeing people say, 'I'm raising money, here's my address', and it's obviously their personal address. We're just seeing a huge number of scams."

Aside from the figures, information about how the Ukrainian government spends the crypto it has received has been extremely limited, their hands tied by the restricted number of ways it can utilise the tokens for aid. Donations received to its Ethereum address have largely been transferred to a local crypto exchange for conversion into fiat currency, while non-governmental crypto organizations established to garner additional funds are sitting on piles of tokens with few ways to redistribute them.

Aid for Ukraine, a Ukrainian government-affiliated decentralised autonomous organisation set up by local web3 firm Everstake and Solana co-founder Anatoly Yakovenko, said it has partnered with crypto exchange FTX in a bid to ease the process of disseminating crypto donations. Everstake Chief Executive Sergey Vasylchuk said the project is also working with the Ukrainian central bank to develop a bridge that would allow the bank to directly convert cryptoassets raised by the DAO for government use.

Not all are willing to deal with crypto

"Not everyone is willing to or can deal with crypto," Vasylchuk said in an interview on Wednesday. "Buying like two or ten night-vision goggles is nothing, but in order to do something serious costs serious money. That's why we need to build this unlimited gateway to help."

Of course, some of these issues are a luxury that only those not living in a war zone have time to contemplate. Vasylchuk flew to Florida two days before Russia's full-scale invasion began, but his parents and siblings remain in Ukraine. In a tearful conversation, he highlighted what might be the most important thing for outsiders to remember: At the end of the day, glitches and a lack of clarity around crypto donations and how they might be used is unimportant in the context of warfare, bombed homes and families squatting in underground bunkers.

"You cannot be so calm, you cannot think about the transparency or about the proper use of these funds. Right now we need to resist," he said. "It is just a question of survival."

For sure, the Ukrainian state's approach has been a masterclass in what a digital-first, crypto-native strategy can do for a country in its time of need. But it's also a lesson in what problems the crypto ecosystem still has to solve before it can become the global payments savior its adherents say it is destined to be.