Argument

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Ukraine Wants to Be Cryptocurrency Central

Kyiv’s big bet on digital money could backfire and make the country’s corruption problems worse.

By , a columnist for Foreign Policy and a fellow at the American Enterprise Institute.
Anti-corruption activists in Kyiv.
Anti-corruption activists protest outside the Constitutional Court building in Kyiv on Oct. 30, 2020. SERGEI SUPINSKY/AFP via Getty Images

Imagine you’re a country with a so-so economy, exporting mostly metals and agricultural products but without a great deal of foreign investment. How do you transform yourself into a hot destination for international money? Ukraine believes it has the answer: It’s betting big on cryptocurrencies. That could make the sorrow-stricken country a global hotbed of cutting-edge financiers. But the cryptocurrency moves could also spell trouble.

A plant for mining bitcoin, a process by which computing power is effectively exchanged for the cryptocurrency, will soon rise near Zaporizhzhia Nuclear Power Plant, not far from Ukraine’s border with Russia. Zaporizhzhia is Europe’s largest nuclear power plant, but the to-be-constructed cryptocurrency operation—signed by Ukraine’s government-owned nuclear plant operator Energoatom and a private firm called H2 last year and involving a $700 million investment—is focused on power consumption, not power generation. It will draw on Zaporizhzhia’s massive power output, giving the Ukrainian nuclear power industry—long associated with the Chernobyl disaster—a chance at redemption.

Imagine you’re a country with a so-so economy, exporting mostly metals and agricultural products but without a great deal of foreign investment. How do you transform yourself into a hot destination for international money? Ukraine believes it has the answer: It’s betting big on cryptocurrencies. That could make the sorrow-stricken country a global hotbed of cutting-edge financiers. But the cryptocurrency moves could also spell trouble.

A plant for mining bitcoin, a process by which computing power is effectively exchanged for the cryptocurrency, will soon rise near Zaporizhzhia Nuclear Power Plant, not far from Ukraine’s border with Russia. Zaporizhzhia is Europe’s largest nuclear power plant, but the to-be-constructed cryptocurrency operation—signed by Ukraine’s government-owned nuclear plant operator Energoatom and a private firm called H2 last year and involving a $700 million investment—is focused on power consumption, not power generation. It will draw on Zaporizhzhia’s massive power output, giving the Ukrainian nuclear power industry—long associated with the Chernobyl disaster—a chance at redemption.

Being located next to a massive nuclear plant is, in fact, ideal for the bitcoin-mining plant. And things get better. Another bitcoin-mining plant is being built next to the Rivne nuclear plant in western Ukraine, a three-way partnership between Energoatom, a regional authority, and Bitfury, a Dutch company that specializes in building Bitcoin infrastructure.

So far, Ukraine already has around 100 companies in the cryptocurrency sector.

Moneywise, the Zaporizhzhya center may be poised for a bumpy ride: The deal involves an investment firm called Yom Capital, which is based in Cyprus and has a minuscule corporate footprint. Yom and several related businesses are registered in Malta according to the International Consortium of Investigative Journalists’ Offshore Leaks Database. One, South East Trading Ltd., is located at a so-called letterbox address that hosts many firms and appears to have no business activity.

Questions about investors aside, Ukraine is betting big on cryptocurrencies. In a document called Virtual Assets in Ukraine, the Ministry of Digital Transformation lists how Ukraine plans to make itself a top destination for the cryptocurrency world. In addition to passing a new Virtual Assets Law (which had its first reading in the Ukrainian parliament last December), Ukraine plans to actively attract cryptocurrency business through highly competitive tax rates. Companies will pay 5 percent of profits and don’t have to charge value-added tax, while individuals will pay 5 percent with a grace period until the end of 2025. “We have a big talent pool and a strong blockchain developer community in Ukraine,” Deputy Minister of Digital Transformation Alex Bornyakov told me. “They picked up the cryptocurrency trend faster than people in many other countries and figured out how to build businesses around it.”

So far, Ukraine already has around 100 companies in the cryptocurrency sector, according to the government, even without the legislation having been fully passed. According to a new report by the cybersecurity firm Hacken and the Ukrainian Venture Capital and Private Equity Association, between July 2019 and June 2020 $8.2 billion worth of cryptocurrency went out of Ukraine, while $8 billion worth arrived in the country. The country’s average daily cryptocurrency transaction volume now corresponds to $150 million to $200 million.

“Once we pass the legislation, Ukraine will become one of the world’s very top destinations for cryptocurrencies,” Bornyakov said. “There are not that many countries that are crypto-friendly, so companies go to the ones that are.” When the legislation is in place, he estimates, Ukraine could become home to around 2,000 cryptocurrency firms.

The data-mining centers are meant to clinch the companies’ decisions to set up shop in Ukraine, because cryptocurrency collection is an oddly power-consuming business. Mining cryptocurrencies devours astronomical amounts of energy. That’s because these digital coins are mined—created—and traded using massive, and massively complex, digital ledgers known as blockchains. A virtually unlimited number of high-powered computers can connect with these blockchains.

As the Financial Times reported last month, “the latest calculation from Cambridge University’s Bitcoin Electricity Consumption index suggests that bitcoin mining consumes 133.68 terawatt hours a year of electricity. … That places it just above Sweden, at 131.8TWh of electricity usage in 2020, and just below Malaysia, at 147.21TWh.” This state of affairs has rattled even the early cryptocurrency adopter Elon Musk, who recently announced that Tesla will no longer accept bitcoin payments for its cars. It is a remarkable turn of events, considering that Tesla owns an estimated $1.5 billion in bitcoin. Musk’s exit caused the cryptocurrency market to plunge by nearly $370 billion.

With governments, academics, and even Musk deciding that cryptocurrencies are simply too dangerous for the planet, is structurally investing in them a good idea? The Swiss canton of Zug thinks so. As of this February, people and businesses in the canton can pay taxes in cryptocurrencies. The canton, known by the moniker Crypto Valley, has already made itself a hotbed of cryptocurrency business thanks to its cryptocurrency-friendly rules. As of last September, the small canton—with a population of 129,000—was home to a remarkable 439 cryptocurrency firms. “Attracting cryptocurrency firms is a smart move by Zug and Ukraine,” Katarzyna Ciupa, a cryptocurrency researcher and Ph.D. candidate in finance and blockchain technology at the Warsaw School of Economics, told me. “Crypto is the technology of the future, and it’s here to stay.”

Given Zug’s status, it is perhaps unsurprising that a local politician recently presented figures documenting the carbon footprint of the average bitcoin transaction: It releases about the same amount of carbon dioxide as 721,554 Visa transactions or the combined emissions of one U.S. household over 23 days. “Sure, being seen as Crypto Valley benefits Zug’s image, but you can’t care about the environment and promote bitcoins at the same time,” that politician—Social Democrat Jérôme Peter—told me. “People are saying bitcoins are getting cleaner, but are they really? And because the industry is so decentralized, there’s no Mr. Crypto who can decide they should get cleaner.”

Cryptocurrencies add even more risk of dirty transactions than do secret bank accounts. The fact that the transaction chain doesn’t need to include users’ real names has made virtual money criminals’ payment of choice.

At least Switzerland, ranked third on Transparency International’s Corruption Perception Index (where the first is the cleanest), has experience with anonymous pecuniary matters. Cryptocurrencies, though, add even more risk of dirty transactions than do secret bank accounts. While cryptocurrencies are legal, the fact that the transaction chain doesn’t need to include users’ real names has made such virtual money criminals’ payment of choice. The insurance broker Marsh reports, for example, that in the first half of 2020 average ransomware payments grew by 60 percent, with a whopping 98 percent of payments made in bitcoin.

While most cryptocurrencies don’t have such formidable links to organized crime, they operate in the shadow of the traditional economy—which invites abuse by those disinclined to obey the law. “Cryptocurrencies, broadly understood, are a fantastic opportunity for the global economy, and one that’s much needed,” Ciupa said. “But people are overusing it, for example for money laundering. Every country is trying to cut abuse of cryptocurrencies. But if we try to impose national and local restrictions on how to use cryptocurrencies, cryptocurrency companies will just go elsewhere. That’s why Zug has so many of them, and maybe soon Ukraine, too.”

Cryptocurrencies’ shady side poses a challenge for Ukraine, which is ranked 117th on the 2020 Corruption Perceptions Index. Although Ukrainians’ desire for corruption to be tackled once and for all propelled Volodymyr Zelensky to the presidency, the country remains ensconced in the netherworld of the corruption index; in 2019 (the year Zelensky was elected), it ranked only a few spots lower: 126th.

The International Monetary Fund also seems concerned about the lack of progress. Add to this a sector frequented by people who may not want their financial transactions monitored and you get a dangerous mix. (Never mind the nuclear power plants.) “If you have a country that’s known to be corrupt, if it allows cryptocurrencies to operate anonymously, it can become attractive for money launderers,” Ciupa pointed out. “If you can’t defeat corruption as it is, how are you going to defeat it once you’ve added lots of cryptocurrency challenges?”

Bornyakov, who was a serial tech entrepreneur before becoming a minister, is aware of the risks cryptocurrencies bring. “They’re a technical innovation, and technical innovations are often used by criminals,” he said. “But we have to consider the possibilities as well as the risks. We totally understand that cryptocurrencies can be used by criminals, but cash is used by criminals, too.”

Many of the cryptocurrency firms already active in Ukraine are legitimate. There are blockchain development companies that create the highly complex blockchains—transaction logs—through which cryptocurrencies travel. There are also various fintech businesses and support firms, all with Silicon Valley-sounding names. But there are also firms like the Milton Group.

Last year, the Swedish daily Dagens Nyheter uncovered a massive scam run by the firm out of an office in Kyiv, from which workers sweet-talked unsuspecting people around the world to invest in fake cryptocurrencies. Swedish prosecutors investigating the scam are trying to involve Europol and other European counterparts in the case, while Swedish Foreign Minister Ann Linde has discussed it with the Ukrainian government, but to date there has been no trial, let alone convictions.

Interestingly, the largest number of bitcoin owners are to be found in city councils, the Ministry of Defense, and the National Police.

Ukrainian civil servants, for their part, have enthusiastically embraced the new currencies. According to government figures, by the end of March this year, Ukrainian civil servants had declared owning a total of 46,351 bitcoins, which amounted to an average of $1.7 billion at the current Bitcoin exchange rate, or $2.6 million per bitcoin-owning civil servant. They also owned a variety of other cryptocurrencies.

Interestingly, the largest number of bitcoin owners are to be found in city councils, the Ministry of Defense, and the National Police. The largest individual bitcoin owner is one Mishalov Viacheslav Dmytrovych, a deputy in the Dnipropetrovsk City Council, who owns some $700 million worth of the currency. These are astounding amounts in a country where the average monthly income, as of April this year, is around $450. This is also a country that is hoping to receive $2.2 billion from the IMF this year.

Trying to propel itself from an agriculture-exporting economy to a high-tech one, Ukraine has made a daring bet. But while cryptocurrencies are certainly here to stay, trying to become their epicenter may be taking the bravery one step too far.

Elisabeth Braw is a columnist for Foreign Policy  and a fellow at the American Enterprise Institute, where she focuses on defense against emerging national security challenges, such as hybrid and gray-zone threats. She is also a member of the U.K. National Preparedness Commission. Twitter: @elisabethbraw