Banking & Crypto: seen through Ukraine’s lens

Ukraine’s Traditional Banks

In Ukraine, there have been many fears that the economy would collapse due to the war, however the economy has remained somewhat functioning several months in. Many have called this a miracle. It is reported that a high percentage of Ukraine’s main banks and cashless ATMs are working while the rest cannot due to their proximity to the conflict. Let’s step into the crux of the issue. At this time only a handful of the institutions are facing liquidity, however it’s universally understood if the war persists, at some point, the banks will close. This is where Defi and decentralized models have stepped in to support.

Fortunately for Ukraine, they have already taken steps towards digitalization and remote work thanks to the COVID 19 pandemic. The Ukraine bank, on Feb 24th, froze the exchange rate at 29.25 hryvnias to one U.S. dollar. It also banned the online purchase and sale of foreign currency by banks to individuals. This prohibits all foreign exchange earnings to come into Ukraine. On April 14th, this was eased to allow banks to sell foreign cash to individuals. Each bank also had a list of essential workers that could not participate in the physical war itself. Their solution was to move closer to the cloud technologies, however the fragility of the situation reaches far deeper.

As businesses continue to plummet, banks can no longer support or give out any loans. Agriculture for example has no money access to loans for seeds and the military no access to defense materials. Banks at the present moment are reluctant to react in any hastily manner and mostly focused on their own investments. Therein, the country has been divided into color coded sectors and different colors have different privileges, which again will only aggregate as the war continues. At the end of the day, a healthy banking sector is necessary for any country to recover.


Crypto in the Ukraine

Initially, Ukraine banned the purchase of crypto, as it still seeks to preserve the health of its national currency. Individuals may purchase crypto, but only through foreign exchange. Ukraine is not new to crypto; they are one of the leading countries in blockchain software technologies. Though less common on the government and state institution level, there are several dozen private software companies and thousands of qualified programmers. Blockchain is also working to unfreeze these limitations further.

At the moment, the popular bitcoin is Tether or USDT. It is backed by the US dollar at a 1:1 ratio. Ukraine’s largest use of crypto during the war are two currencies: the local hryvnia and crypto. Currently there is lots of skepticism across the entire market, but Ukraine has always ranked among the top 5 users if not listed as number one. Why is this? Because the banking system in the Ukraine was never great to start with.

If you are to take a step back and get a good look at the spread, developing countries are in similar situations. You cannot send money abroad in most cases, cannot take out money. Cannot even put money into a bank. If something happens the government claims your money and there you are, back to a zero. When this happens several times you definitely don’t trust the banks or the governments and therefore no one trusts anyone. In this way crypto is extremely helpful because you don’t have to trust the banking system or the government.

Crypto doesn’t require you to trust any one person. It belongs to everyone. And no one at the same time. You have the choice to be 100 percent decentralized or partially. At the end of the day, the consensus is that there will be a fight with the present banking system and many believe the traditional system has no chance. Ukraine is well on its way to full digitalization of international travel including passports, drivers’ licenses, and other needed documents through an app, so banks are the natural next step.

There are two major strongholds in a country and this has to do with the relationship that the infrastructure has with its government. Compared to before the war, crypto has certainly seen a downfall in Ukraine. A lot of businesses worked in the gray area to avoid buying the US dollar and SWIFT codes. In crypto, no one asks you any questions. However, since the war many of these huge markets were destroyed and therefore there is no import and furthermore no demand. On the other hand, it is proving to be vital to the backbone of the existing moment. What is bitcoin being used for in Ukraine? The first is humanitarian war aid such as bullet proof vests; things that are impossible to pay for outside of the Ukraine.

Because the foreign exchange is closed to very specific companies, if you are not in the food or petrol business (or a government required supply) you cannot buy US dollars so you cannot import anything. The only solution is to buy crypto outside of Ukraine. The second use described is savings. It’s safer and lighter to carry than cash. Cash is very heavy and people can easily take it from you. Many people in the Ukraine do not use the banks because the bad guys steal it, same as developing countries. So, they store in crypto or buy houses in big cities, but in times of war this is also a poor option. There is no stock market in Ukraine, there is crypto. So, it is up to you, you can physically store it or you can use crypto to transfer it.

There is a strong inevitable move to crypto, so the focus should be on how to create the architecture properly to support it. The reputation of the coin must be strong so that it holds value. This is valid. But in the Ukraine, people are even selling houses in crypto; there is no other option. You cannot transfer dollars to buy a home, but you can use crypto. At the moment crypto is mostly being used for purchases above 1,000 US dollars. For the rest they use their native currency because of the unstable nature of its worth. 

Banking systems in the US versus the Ukraine are vastly different. Crypto here is really the best avenue to take. While their most widely used mobile coin is not truly crypto, it is more of a one to one ratio US dollar, people do have the opportunity to invest in crypto for the long term. There is freedom here to be without a physical bank account. Just as developing countries, people are beginning to think of the long-term structural changes that could happen including placing government service funds on blockchain just as an example. As everyone seeks to build this space, there are not very many answers, but in Ukraine and many other places around the world, this is; experiment with the architecture and seek to build something new.

(most of the information in this text was taken from an interview with Michael Chobanian – President of Blockchain Association of Ukraine, The Verge, May 24, ‘22)


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