#8 The Context 04.03.2022
Sanctions, donations, and decentralisation
Hi, hope you’re managing OK in these dark hours. It might seem irrelevant, misplaced even, to talk about DeFi and crypto right now, but we thought it might be worth looking at some aspects of crypto the conflict has highlighted, and try to place them in context.
As usual, a disclaimer: This newsletter collates the main headlines of the week in DeFi/crypto/metaverse/web3/NFT land and offers some context. It’s aimed at anyone who wants to keep an eye on the space but isn’t following it too closely, or is on the hunt for story ideas and angles. It’s put together by a team at YAP, and doesn’t contain any promotion of our clients. Your feedback is welcome, and if there’s anything we can help more on, don’t hesitate to ping us at thecontext@yapglobal.com
[tl;dr]
Is there such a thing as crypto sanctions? Should there be?
How useful is crypto in a war?
The Ukraine conflict through a decentralised lens
Beyond the shock of seeing warfare on European soil for the first time in more than two decades, the Russian invasion of Ukraine has prompted debate about the role of finance as a weapon, as charity and support, and of who or what has the power, or right, to wield these tools. Ethereum is neutral, said its Russian-born co-founder Vitalik Buterin, but I am not.
[Sanction or sanctify?]
On the one hand, governments opposing Russia’s invasion have imposed financial sanctions on Russia and key figures, cutting the country from access to SWIFT, the bank messaging system, and freezing (and possibly confiscating) funds and assets held overseas. This route has also led to financial institutions pulling the plug entirely, leaving many ordinary Russians stranded, and has prompted accusations the moves were too blunt an instrument.
But where does DeFi stand on all this? Is it morally or ethically bound to take similar action itself? If it’s asked to do so, is that different to taking unilateral action? And if it should, can it? And if it can, would it be useful, or useless, or even harmful? When Ukrainian vice prime minister Mykhailo Fedorov requested all major crypto exchanges to block addresses of Russian users, the reaction was mostly negative.
Indeed, this prompted debate about whether crypto is by its nature free from any such targeting, and won’t discriminate against anyone, regardless of their race, nationality, religion, politics, or actions. But others believe the opposite, saying the scary thing about crypto, Bitcoin included, is that sanctions would be 1000x simpler to implement, precise and impossible to evade."
[Usefulness]
The crisis has also turned the spotlight on another issue for crypto: how useful is it for ordinary people. Can cryptocurrencies fulfil their promise as a secure, immediate and institution-free way to transact, to receive, store and transfer value? This challenge has manifested itself in three ways:
As a method of donating funds to those cut off from normal channels (while maintaining anonymity),
Of being an alternative to bank accounts when the latter are inaccessible
And, for those under sanction, whether crypto could provide an alternative source of and mechanism for moving funds.
[Donations and DAOs]
There has been no shortage of ways to donate via crypto to the Ukrainian people. Here’s a list. The flexibility and rapid innovation of DeFi lends itself to fast-moving events, such as the invasion of Ukraine; Uniswap, for example, has added a tool to make it easier to donate. The government, which has already raised more than $30 million in crypto, had planned its own its own ‘airdrop’ of tokens to those who have contributed, but later canceled it.
Donating this way is not without its issues. What is the most effective way to give? And what or who, exactly, are you giving to? If it’s the government then which department and what are they going to do with it? Buy more weapons? In theory DeFi might be well suited to address these questions, ‘programming’ the funds to show how and where they’re being spent, and limiting their use to, say, humanitarian issues only. So far there’s no evidence that is happening.
Then there is the question of what kind of organisation should be set up to handle these donations, if not the government itself. A decentralised autonomous organisation, or DAO, appears to be tailor-made for this, but is it the most effective way? Do we really need a DAO for everything? And even if it helps pool money together, what’s the point of giving something in exchange for tokens? How useful are those going to be? In many cases DAOs are just a helpful framework for a crypto form of crowdfunding, although they can also help build an ad-hoc network quickly between those inside and outside the country, as well as raising $7 million in a few days.
Centrally-run platforms can in some instances make donating more easily: Etsy, for example, wrote off $4M of funds owed by Ukrainian sellers. But they also have limits: Patreon, for example, won’t allow funds to be raised to support violence or the purchasing of military equipment.
[An alternative bank account, and savings]
Indeed, these questions often circle back to the key one about crypto: how useful is a currency if you can’t do anything with it in the real world? Until shops, services, individuals and government departments are equipped to receive crypto in payment for something, there will always have to be some entity ready to swap crypto for fiat, and vice versa. While some have found that with the closure of ATMs and banks in Ukraine, the only money they have left is crypto, both as savings and a means of being paid (in this case for their NFT art), others have pointed to the need for a quick payment system to make crypto realistically useful.. This in part addresses last week’s question about whether crypto really was a safe haven in times of crisis – a ‘digital gold’. If your cash is not accessible, or unreliable because of inflation, then it could well be. It’s early days, but it’s notable that Bitcoin is well above $40,000 at the time of writing.
[A workaround for those under sanction]
Just as for individuals unable to access existing financial systems, crypto in theory provides an alternative to those finding themselves under sanctions. Elliptic Labs explores the potential of using crypto to work around sanctions and predicts countermoves from the West: “It is also very possible that the US and other countries may seek to pre-empt potential sanctions evasion activity via cryptossets. This could include sanctions on dealings with Russia-linked VASPs (virtual asset service providers), or placing additional sanctions targeting cybercriminal actors or others in Russia – such as oligarchs and their families – who use cryptoassets.”
Indeed, whatever happens in the coming months in this deepening crisis, it is clear that DeFi will greater attract attention, welcome and unwelcome, including from regulators. Elsewhere it is already evident: Israel has seized 30 crypto wallets allegedly used to fund Hamas, while China has outlawed crypto fundraising, threatening offenders with jail. For Chainalysis, a company which analyses crypto transactions, often for law enforcement, Crypto isn’t the sanctions haven some people think it is.
[The power of decentralisation]
The war is young, but it has already illustrated the power of decentralised systems. Are we seeing a confluence of different streams in the face of a war that combines the old-fashioned with the new?
The Ukraine government itself has sought to mobilise and channel citizens into reporting, organising and confounding the enemy (removing or defacing street signs, creating molotov cocktails, etc). The mysterious appearance of symbols on Ukraine buildings ‘as target clues for Russian invaders’ have led to crowdsourced efforts to find the markings and remove them, while Google Maps has paused edits after claims that edits were designed to make targets easier for Russian airstrikes.
Bellingcat, the open source investigations platform, is geolocating videos and sifting real events from staged/old ones, while at the same time collating evidence for “future accountability purposes”.
This and other evidence is being preserved by decentralized data storage solution Arweave on a blockchain.
Others are capitalising on Russian army use of insecure communications (often a cellphone) to monitor conversations and collate information, while civilians have jammed frequencies, according to ShadowBreak International, a decentralised geospatial intelligence group.
Most downloaded apps in the Ukraine are messaging apps, as well as ones that don’t require a communications network, such as Bridgefy and Briar. The most recent top app is something called Air Alarm put together by a Kyi-based home security company, Ajax, in a day.
And while its contribution is as yet unproven, Elon Musk has accelerated deployment of his satellite-based internet service Starlink to cover Ukraine and has swapped tips with vice-PM Mykhailo Fedorov about how to power – and disguise – Starlink dishes.
[Things we’re reading]
Bitcoin and crypto are helping both sides in the Russia-Ukraine conflict - Vox A good overview of how the Ukrainian conflict is crystallising lots of issues that mean that “crypto is a part of war now, like it or not.”
The Unlikely Fix to Crypto’s Privacy Failures: Government. Michael Casey argues that crypto may have to engage with governments to build a framework for future digital currencies – crypto and CBDCs – to better balance privacy and catching bad guys.
Why Gamers Shouldn’t Hate NFTs - Bankless A thoughtful look at whether or not gaming will be ruined by the pay-to-play, pay-to-win features of blockchain gaming.
This newsletter is pulled together by a team led by Jeremy Wagstaff, formerly of the WSJ, BBC and Reuters and Samantha Yap, founder of YAP Global. Other members: Farhan Musa, Rebecca Campbell and Ruby Wu. Many thanks to Joey Woo for production. Any views expressed here are not necessarily those of the writers, YAP Global or its clients.