As the ruble gushed out of Russia via crypto, Binance capitalized

In 2018, Nikolai Mendiaev bought his first bitcoin using a peer-to-peer platform called LocalBitcoins. Mendiaev lived in Elista, a city of about 100,000 people in southern Russia, and he was wary of going through the know-your-customer process of a centralized exchange. As a software developer and (relatively) early adopter of cryptocurrency, Mendiaev sometimes had friends and family ask him how they could buy bitcoin.

“It was a rare case, but it happened,” says Mendiaev.

Then, in March, Russian President Vladimir Putin declared war on Ukraine. As Russian tanks crossed Ukraine’s vast eastern plains, Mendiaev moved to Tbilisi, Georgia. He also found several Russian people coming to him with questions about how to get into crypto. Most of them wanted to send money across the Russian border, says Mendiaev. Mendiaev sent most of them to Binance despite problems with centralized exchanges. He felt that the platform’s own peer-to-peer service would make it easy for his friends to transact across borders.

Russian traffic to crypto exchanges skyrocketed in the early days of the Ukraine invasion, as Russians traded billions of dollars worth of rubles for bitcoin and Tether in March and April. Volume has dropped in recent months, but Russia remains a huge market for any crypto exchange. It has also become a more complicated market, as sanctions and strict responses from payment providers have made it more difficult to buy crypto in Russia. The story follows a familiar framework, as residents of emerging countries flood into crypto in times of instability. But these buyers also face the challenges of living in a country whose weak currency can make it difficult to buy bitcoin, tether or other crypto.

“The most important quality for an exchange is just that it is accessible to Russians because it’s hard to find good exchanges now,” says Mendiaev.

Binance has dominated the field of cryptocurrency exchanges in Russia for years. But competition increased dramatically after the start of the war, and Binance has seen its market lead shrink. As of August 2021, Binance controlled 62% of the Russian traffic to crypto exchanges, according to SimilarWeb, a web analytics service. It fell to 33% just before the invasion, peaked at 44% in March, and has since fallen to a record low of 27%.

The Bitrue and Bybit exchanges are the only others that bring in at least 10% of online traffic, but it is unclear how much trading volume they control.

“Binance is No. 1, but then there are a bunch of these very small exchanges that probably only have very limited volumes,” says Clara Medalie, director of research at digital asset data provider Kaiko in Paris. On August 2, the bond/ruble trade volume reached $2.14 million on Binance, while BitGlobal had the second highest total, barely exceeding $400,000.

As Binance’s share of the Russian pie shrinks, so does its size. Trading volume between Tether and the ruble peaked in early March, reaching 4.3 billion rubles on March 7. Bitcoin/ruble volume reached over 2.1 billion on the same day. The volume has been much smaller since then, usually in the tens and hundreds of millions of rubles every day.

It is difficult to pin down the exact reason for this reduction, although the fallout from sanctions due to the Ukraine invasion is a logical place to look. The effects are largely indirect. Following several actions by the EU and the US Office of Foreign Assets Control (OFAC), around 1,200 Russian citizens have been sanctioned.

Some observers predicted that crypto would allow Russian oligarchs to avoid sanctions, but evidence to support that claim does not appear to have emerged. The surge in activity in March and April was mostly driven by individuals fleeing the falling ruble. Crypto exchanges can still operate legally in Russia as long as they do not help evade sanctions from any of the listed individuals.

“Exchanges, they will never go out of their way to restrict users. They are always going to follow the law, but if the law allows them to do it, they are going to do it, says Medalie.

“The crypto innovators are technology companies … Technology-oriented companies want to drive the market by being bold to be innovative,” said Chris DePow, senior policy advisor at blockchain research firm Elliptic. “They are willing to deal with more risk.”

Still, many risk-averse financial firms, especially those outside the crypto sector, shut down their Russia operations to avoid potential backlash, legal or otherwise. For example, Visa and Mastercard suspended most of their Russian operations in March, challenging local residents who used these companies’ cards to buy crypto on major exchanges. Banks and other financial institutions including Citigroup, Goldman Sachs, JPMorgan Chase and Deutsche Bank have also reduced services to varying degrees.

Those banks, payment providers and other financial institutions withdrawing from their country make it more difficult for ordinary Russians to access crypto markets.

“There needs to be a connection between crypto-oriented businesses and traditional banks, again, that cash-in, cash-out point,” says Daniel Tannebaum, global head of sanctions at Oliver Wyman, a management consultancy.

In the days following the sanctions in March and April, crypto exchanges launched a number of strategies to reduce the risk of their operations in Russia. Binance closed all Russian accounts worth more than 10,000 euros, giving account holders time to remove funds. Other exchanges had similar procedures, working with sanctioned individuals to withdraw their funds from their platforms.

Russia’s surge in interest may be surprising, but it follows a long-known trend of crypto flourishing in emerging markets. In a Chainalysis report on global crypto adoption, the US was the only country in the top 20 that was not considered an emerging market.

“People in emerging markets have always found ways to move their capital out of the country to seek a more stable currency,” says Sarah Krepps, professor of international relations and technology at Cornell University. While most cryptocurrencies haven’t been particularly stable in 2022 – bitcoin is down more than 50% so far this year – that hasn’t slowed the flow of money from rubles to them.

“In Russia, [people] also try to get their money out of the system to relatives and friends elsewhere, says Krepps. “People in these countries where the economy is unstable or unpredictable are trying to protect it from that volatility.”

Russians have primarily done this by moving their money into tether (USDT), a stablecoin. Russians favored bitcoin for much of 2021 as crypto purchases were fueled by price speculation. A similar movement occurred in Turkey over the past few years, as inflation wreaked havoc on the country’s economy. Turkey is the only country with a higher traffic volume to Binance than Russia.