Background
Since the U.S. and European allies responded to Russia’s invasion of Ukraine with sanctions targeting Russian financial institutions and elites. In the last 12 months, a large proportion of the country’s foreign reserves have been frozen. Even Russia’s government debt is facing sanctions, but the war in Ukraine is becoming the world’s first crypto funded conflict.
As a result, some Russian groups impacted by the sanctions or charged with executing the war in Ukraine are turning to cryptocurrencies to evade sanctions on a smaller scale.
The crypto ecosystem is not mature enough to prop up a government with mounting losses in an ever more expensive war effort. With a total market cap of about $1 trillion, cryptocurrencies cannot provide relief to the embattled Russian state.
Cryptocurrencies are being used by some small pro-Russian groups to avoid sanctions. However, the amount of money raised through cryptocurrencies shows that they depend on donations to fund the war. Other ways of raising funds to support the war have been blocked. It’s also difficult to turn large amounts of cryptocurrency into fiat currency.
Actors in Crypto Funded Conflict
Research and the OFAC sanction lists show that there are agencies and groups from both the side. For Russia, four main groups raising money for the crypto funded conflict. Romanov Light, Taskfoce Rusich, Moo Veche, and NACC are the names of these groups.
Task Force Rusich, is a paramilitary squad that has been collecting hundreds of thousands of dollars in cryptocurrency donations since the start of the war. The group is not alone in using cryptocurrencies for fundraising. Romanov Light, A simple telegram channel raised donations and spent on military equipment like weapon accessories, flashlights, and armor plates.
The pro-Russian Novorossia Aid Coordinating Center (NACC) is one of four organizations in Russia that collectively raised cryptocurrency donations to supply the struggling Russian army in Ukraine with ammunition, armor, surveillance drones, optical devices, vehicles, and warm clothing.
Several military groups in the Donetsk People’s Republic are getting financial help from the MOO Veche. These groups include the International Brigade, the 1st Slavyansk Brigade, and the Kalimus Brigades, as well as many other battalions, brigades, and regiments under the People’s Militia of the DPR.
The Ukraine Side
Ukraine has raised more than $100 million to continue the crypto funded conflicts. Ukraine has collected over $100 million to fund the war through cryptocurrencies. They have raised more money than Russia. Ukraine used a systematic approach to collect donations, whereas Russia relied on groups that were under sanctions. One group called Ukraine DAO sold an NFT of the Ukrainian flag and raised $6.75 million in ETH. Most of the money raised through these donations has gone to Ukraine Government.
Preventing crypto funded conflict
Sanctions on Russia have made it difficult for them to raise money even in the crypto world. It’s not easy to stop cryptocurrency from supporting Russia’s attack on Ukraine, even though it’s possible to track the money. Some exchanges can stop or freeze cryptocurrency when it’s changed into regular money, but most of the money that the groups have raised has been cashed out through Russian exchanges that are risky and don’t do enough to prevent criminal activity.
The Russian illicit finance ecosystem has, for years, incubated non-compliant cryptocurrency businesses as a way to launder ransomware and darknet market proceeds. And those exchanges – SUEX, Chatex, Garantex, and Bitzlato for example – have all been the target of U.S. sanctions, seizures, and criminal prosecutions.
While law enforcement focus and international cooperation can limit these money conduits, Russian groups with ties to the government have added crypto to their money laundering arsenals along with more traditional vehicles such as high-value art, real estate, and shell companies.
But unlike art or real estate, Ukraine’s allies don’t need to physically deploy troops in Russia to seize these assets. Blacklisting illicit crypto wallets, with the click of a button, can be as effective as conquering a warlord’s compound. In fact, Ukraine supporters – from Twitter sleuths to the Ukrainian government itself – are looking for possible war funding wallets. That fact, combined with the fact that Ukrainian crypto fundraising efforts have raised well over $100 million, shows that using cryptocurrency for an illegal invasion will continue to be an uphill battle at best.
Conclusion
While cryptocurrencies cannot provide relief to the embattled Russian state, Russian groups are attempting to use them to fund war efforts on a smaller scale. These groups impacted by sanctions or charged with executing the war in Ukraine are using cryptocurrencies to evade sanctions.
Stopping the flow of money through crypto can be limited by law enforcement and cooperation between countries. This makes it clear that using cryptocurrency for an illegal invasion will continue to be an uphill battle.