Russia is losing the crypto war against Ukraine

As the Russian invasion of Ukraine enters its second year, there is one clear winner so far in the battle for crypto-based finance, and it’s not Russia.

Money flows to pro-Russian wallets on the blockchain — the decentralized ledger for cryptocurrency transactions — have totaled just under $5 million in the past year, compared to more than $212 million to pro-Ukraine accounts, according to new research.

That means pro-Ukraine accounts, from official government agencies to humanitarian aid groups, have raised 44 times the amount going to pro-Russian entities, which include groups that raise money for the Russian military and militias.

The report, published by blockchain analytics company Elliptic, shows that while over a tenth of crypto assets received by pro-Russian wallets stem from illegal activity – such as dark web markets or sanctioned exchanges – less than 2 percent of Ukraine’s donations come from illegal sources.

Cryptocurrency was originally proposed as a way for Russia to evade some of the sanctions placed on it by Western countries. According to compliance firm Castellum.AI, Russia is now the most sanctioned country in the world, with 2,695 in place before the invasion, and a further 11,458 sanctions on Russia or Russian entities since the invasion until the end of February.

An analyst at Elliptic pointed out that on top of the 10 percent from illicit sources, another third of pro-Russian crypto donations came from what is known as a “cryptomixer” — a service that mixes different streams of potentially identifiable cryptocurrency, which making the origin of the funds far more difficult to trace. (The analyst talked to Newsweek anonymous given the sensitive nature of the research.)

Other research from data provider Chainalysis shows that cryptocurrency flows to Russia peaked in June, after a slow start – which is consistent with the elliptical analysis. Russia has been more skeptical about adopting crypto, but is now catching up to some extent. Crypto still accounts for a very small proportion of the amount donated to pro-Russian causes, and the bulk of them are maintained mainly through fiat currency donations.

Andrew Fierman, head of sanctions strategy at Chainalysis, said Newsweek that the crypto funds do not flow directly to the Russian state, but are used to effectively crowdfund troops. “This isn’t going to buy tanks – it’s things like bulletproof vests and gloves for the winter for those on the front lines.”

The elliptical analyst described how a typical Russian militia Telegram account will ask for crypto donations, with a “shopping list” of items such as drones, clothing, radar sets, firearms, but also more mundane items such as clothing and food.

While crypto donations to pro-Russian accounts peaked in mid-2022, chain analysis figures showed that much of the pro-Ukraine funding was at the start of the invasion. “There was a lot of support early on,” Fierman said, with nearly $60 million in cryptocurrency donated in the first few weeks.

It also matches Elliptic’s analysis, which was that about $30 million was raised for pro-Ukrainian recipients in just the first four days after the invasion began.

In February 2022, official Ukrainian accounts were very quick to get started, immediately asking for crypto donations. According to the analyst at Elliptic, the initial wave of support was part of a “demonstration that crypto can be a force for good”.

“There was a sense that crypto could be a force for good in the world and, most importantly, was here to stay.”