David Kirichenko
Cryptocurrency may soon be used legally in Ukraine, once President Volodymyr Zelensky signs the legislation passed by Ukraine’s Parliament on September 8.
This law will protect owners of virtual assets and exchange platforms from fraud, and rumors abound that Ukraine is gearing up to transition to a fully digitized economy and deem Bitcoin as legal tender. The legislation will help to determine how Ukraine will regulate the cryptocurrency market in the future as well as officially allow Bitcoin businesses to operate within the country.
Since the creation of Bitcoin in 2009, cryptocurrencies have gone from being a fringe topic and a little-known technology to a prolific financial instrument that has galvanized the public and grown to play a larger role in reshaping our global economy. The cryptocurrency economy is the next trillion-dollar opportunity and is still in the beginning stages of innovation.
The Ukrainian government, or more so the Ukrainian public, understands this and is driving societal progress toward taking the necessary steps to partake in this economic growth with recent legislation. Ukrainian representatives have reportedly gone to El Salvador to meet with officials there to learn more about implementation after the Central American country made Bitcoin legal tender.
Cryptocurrency is a form of currency that is exchanged solely in the digital world and meant to be completely decentralized from the government. This allows users to oversee and approve transitions on the blockchain — a decentralized public ledger, which is a growing list of records that can’t be changed. These open online ledgers eliminate the need for a trusted intermediary (such as a bank).
Drafting pro-crypto legislation is an important step for the booming industry that reflects Ukraine’s public sentiment. Cryptocurrencies are popular in the country and it is estimated that over 5.5 million people, 12.7% of Ukraine’s total population, currently own some form of cryptocurrency, according to payment platform Triple A. The blockchain data firm Chainalysis ranked Ukrainians among the top adopters of cryptocurrency in the world in September 2020.
The cryptocurrency mining space has interesting implications for Ukraine’s energy sector as Ukraine produces almost half of its electricity through 15 nuclear reactors. Ukraine’s Ministry of Energy argued that “cryptocurrency mining is a contemporary and efficient way to use excess energy.” The Ministry of Energy has been looking for innovative solutions to tackle the issue of wasting energy and improving efficiency.
The Bitcoin mining industry makes it an ideal partner to employ surplus power from nuclear reactors by taking excess electricity and using it for cryptocurrency mining. This would help maintain the energy output requirements while helping to attract new investment funds for Ukraine’s nuclear power plants.
This opportunity positions the Ukrainian government as a strong support node for the whole mining network. It will help provide clean and sustainable Bitcoin mining as well as a free market solution to the inefficiencies of the energy sector.
The financial implications are vast. The state-run firm that operates the country’s nuclear power plants — NAEC Energoatom — posted losses of over $170 million USD in 2020. This gives Ukraine’s energy sector some life to emerge from a black hole. The project is already in play, as Energoatom “agreed on a deal that will see it supply energy to mining operators from Bitfury’s crypto mining division.” The Ukrainian government could mine bitcoin and hold it within its reserves, or take the mined bitcoin and deposit it into an account for every citizen, or sell the bitcoin to boost the national GDP.
In addition, Ukraine sent and received over $8 billion worth of cryptocurrency from July 2019 to June 2020. Ukraine is the birthplace of teams and organizations that built crypto startups like Weld Money, Hacken and Propy; the country has a robust industry of crypto and blockchain developers, as well. Ukraine already has well over 100 companies in the cryptocurrency sector.
Ukrainians earned around $400 million from Bitcoin investments in 2020, making Ukraine’s cryptocurrency investors some of the richest in the world. The cryptocurrency craze in Ukraine isn’t just limited to the public but has been embraced by Ukraine’s civil servants and large swaths of the government. Ukraine’s civil officials in early 2021 reported owning over $2.6 billion of bitcoin, and the report stated that “The largest number of owners of cryptocurrencies work in city councils, the Ministry of Defense and the National Police.”
According to the World Bank, almost 10% of Ukraine’s GDP in 2020 was from personal remittances being sent to Ukraine. Many Ukrainians have emigrated and continue to send money back home to their families and continue to pay exorbitant money transfer fees via traditional banking methods. However, cryptocurrency has changed everything: It allows Ukrainians a quicker and cheaper way to send money across borders without a bank or service operating as a middle man.
Before the days of Bitcoin, the bank or service would convert the money, transfer the funds into the recipient’s country and then convert the funds back into the local currency. However, a study by the World Bank found that fees average around 6.38% of the amount sent.
Even worse than the fees, the Ukrainian public has very little trust in the Ukrainian banking system due to severe corruption. Several large banks have collapsed, the Ukrainian government declared more than 90 banks insolvent, and many people lost money due to a constant flow of banking scandals. In 2016, the government stepped in to nationalize PrivatBank, which made up 20% of Ukraine’s banking sector, after the government discovered over $5 billion was missing from its ledgers. The banking sector is widely believed to be dysfunctional and dominated by corrupt oligarchs.
After Russia invaded Ukraine in 2014, Ukraine’s economy took a nosedive and Ukraine’s national currency, the Hryvnia, lost 70% of its value against the dollar. This further undermined the savings and spending power of the public. Now, the average person with smaller savings will often hide their money at home and won’t bother storing it at a bank.
Even before this pattern of nefarious behavior, the Ukrainian banking industry did not develop the same way as it did in the West after the collapse of the Soviet Union. The process of transferring funds was problematic due to a lack of infrastructure. Unscrupulous methods were then developed with financial instruments such as vouchers and exchanges that allowed for extensive money laundering schemes and questionable business practices.
With high degrees of corruption in the government, business and banking sectors; unlawful asset seizures by corrupt politicians; and the collapse of several of Ukraine’s prominent banks, it is only reasonable that the decentralized nature of Bitcoin appeals to the people. Ukrainians have turned to cryptocurrency to protect their assets and the young, innovative population eagerly looks to the future and to leave behind a scandalous and broken system. The desire for change is great, and the cryptocurrency prospects for Ukraine are enormous.
A government-supported framework will allow more companies to grow in the space, fund state taxes and drive further innovation as adoption of cryptocurrency will only increase. With high adoption rates and the state promoting cryptocurrency-friendly legislation, Ukraine has an opportunity to become one of the world’s leading hubs for cryptocurrency, and this opportunity should not be wasted.
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