Bitcoin, among other cryptocurrencies, 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 and reshape 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 opportunity and is driving societal progress towards 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, as the country has already made bitcoin legal tender, to potentially learn more about the implementation.
Bitcoin is a form of currency which is exchanged solely in the digital world and is meant to be completely decentralized from government. This allows users to oversee and approve transactions 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-bitcoin legislation is an important step for the booming cryptocurrency 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 bitcoin 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 bitcoin 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 improve efficiency as the sector is plagued with inefficiencies and financial losses.
The bitcoin mining industry is an ideal partner to consume surplus power from nuclear reactors by taking excess electricity and using it for bitcoin mining. This would help maintain 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 in 2020. Bitcoin mining gives Ukraine’s energy sector some life to emerge from this financial black hole. The mining 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.” As a result, the Ukrainian government could mine bitcoin and hold it within its reserves, or they could deposit it into an account for every citizen or sell the bitcoin to boost the national GDP.
Ukrainians earned around $400 million from bitcoin investments in 2020, making Ukraine’s bitcoin investors some of the richest in the world. The bitcoin 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, noting 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, paying exorbitant money transfer fees via traditional banking methods. However, bitcoin 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 percent of Ukraine’s banking sector after the government discovered over $5 billion dollars was missing from its ledgers. The Ukrainian banking sector is widely believed to be dysfunctional and is dominated by corrupt oligarchs.
After Russia invaded Ukraine in 2014, Ukraine’s economy took a nose-dive and the 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.
Given the high degree of corruption in the government, business and banking sectors, the 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 bitcoin to protect their assets. The young, innovative population eagerly looks to the future and is ready to leave behind the scandalous and broken system. The desire for change is great and the bitcoin prospects for Ukraine are enormous.
A supportive framework from the Ukrainian government for the digital asset space will allow more companies to grow in the space, fund state taxes and drive further innovation as adoption of bitcoin will only increase. With high adoption rates and the state promoting bitcoin-friendly legislation, Ukraine has a chance to become one of the world’s leading bitcoin hubs. This opportunity should not be wasted.
This is a guest post by David Kirichenko. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.