Cryptocurrencies to the rescue of the Ukrainian economy

The Ukrainian parliament, the Rada, has just definitively adopted a bill legalizing and regulating the use of cryptocurrencies, and more broadly of "virtual assets". The main aim of this bill, in the current context, is to enable donations in cryptocurrencies to support the country's economy.

Ukrainian government launches appeal for cryptocurrency donations

Prior to the adoption of this bill, cryptocurrency exchange platforms were subject to a legal vacuum in Ukraine: the notion of a virtual asset was not clearly defined, and it was not legal to own and exchange cryptocurrencies, which also prevented the authorities from combating fraud.

From now on, the use of cryptocurrencies is authorized and regulated, with a specific short-term objective: to enable donations in cryptocurrencies, notably bitcoin and ether, aimed at supporting the Ukrainian economy in times of war.

Until now, only Ukrainian NGOs have collected donations in cryptocurrencies, taking advantage of the legal vacuum surrounding them. The NGO Come Back Alive collected $6.8 million in bitcoins, and the decentralized autonomous organization Ukraine DAO, set up by one of the founders of Pussy Riot, among others, benefited from $3 million in bitcoin donations.

Now, the Ukrainian government itself can launch appeals for donations in cryptocurrencies, which it has been doing since Saturday February 26 via Twitter, providing 3 addresses for transfers in ether, bitcoin and USDT (Tether).



Cryptocurrencies, a support for the economy in the short and medium term

While crypto-currencies have the disadvantage of not being stable, they allow money to be transferred without having to account to the various governments. This is a much-appreciated feature in this context, when the Ukrainian central bank, since the introduction of martial law, has limited withdrawals from bank accounts to 100,000 hrivnas per day, which represents just under 3,000 euros.

Further proof that cryptocurrencies enable freedom from government tutelage, Ukrainian Deputy Prime Minister Mykhailo Fedorov's call for cryptocurrency platforms to block the accounts of Russian residents in Ukraine was rejected by the largest of them, based in the Cayman Islands, Binance.

One of its spokesmen said that such a decision " would go against the reason crypto exists ", namely "to offer greater financial freedom to people around the world ".

According to the Ukrainian government, the recently passed bill should also helpattract foreign fintechs and investors in the longer term. To this end, Ukraine has chosen to limit the tax rate to around 5% on profits, and to allow cryptocurrency companies to escape value-added tax.

The government also plans to revitalize the country's economy by participating in the "mining" of crypto-currencies, an energy-intensive computer process that, among other things, enables transactions to be validated. Ukraine has several nuclear power plants, including Zaporijjia, Europe's most powerful, and the government intends to make surplus energy from these plants available to a number of European companies.

Cryptocurrencies, fraud and corruption

In just a few years, Ukraine has risen to 4th place in the ranking of countries that use cryptocurrencies the most, behind Vietnam, India and Pakistan. 5.5 million Ukrainians use them, i.e. 12.7% of the national population, for an average transaction volume of 150 to 200 million dollars a day, i.e. more than interbank transactions in fiat currency.

This widespread use of cryptocurrencies by the population is explained by a lack of trust in the financial system, linked in particular to corruption. However, the anonymity made possible by cryptocurrencies has led to fears of an explosion in corruption following the passage of the bill legalizing their use.

1.4% of cryptocurrency transactions carried out between July 2019 and June 2020 in Eastern European countries are believed to have been used to fund illegal activities, according to a report by Chainalysis, ranking Eastern Europe just behind Latin America as the second most affected region in the world for cryptocurrency funding of illegal entities.

While Volodymyr Zelensky, the President of Ukraine, has acknowledged the extent of cryptocurrency fraud in the country, he believes that the recent legislation will help to remedy it, thanks to stricter supervision and the growth of a " legal and innovative market ".

For some experts, cryptocurrency regulation must not take second place to the fight against corruption, or risk seeing the latter increase.