Ukraine is putting everything on the line to become the world’s leading crypto superpower. Investors are now concerned about the Russia problem

Ukraine is putting everything on the line to become the world's leading crypto superpower. Investors are now concerned about the Russia problem

Ukraine has been promoting itself as the world’s leading decentralized banking centre, not just in Eastern Europe. However, only five months after the government approved digital financial assets and started the process of regulating them, a border war has erupted, putting a damper on the country’s lofty crypto intentions. From the outside, Ukraine’s pitch as a crypto hub is straightforward: a local tech industry would flourish to attract foreign investment thanks to low taxes, minimal bureaucracy, and a surplus of highly skilled engineers. However, Ukraine has a lot more to offer within its borders. The booming tech sector might help the Eastern European country reposition itself as a place where innovation and development are independent of both the West and the East, rather than a service economy where Western corporations commonly outsource backend work. “The development of a new sector would allow us to attract fair investments and improve our country’s reputation as a high-tech state,” Mykhailo Fedorov, Ukraine’s vice prime minister for digitalization, said after the country legalized Bitcoin in September. However, as more than 100,000 Russian troops crowd at the border, Ukrainians in the crypto business are hoping that the forces on the border, as well as media coverage of them, do not paint Ukraine in a negative light, scaring away investment. According to Illia Polosukhin, a Ukrainian co-founder of NEAR Protocol, a decentralized application platform that competes with Ethereum, border disputes “increases danger that was already considerable.” In addition to causing investor skepticism, the current situation in Ukraine is also mentally taxing for entrepreneurs, according to Polosukhin. “You can’t take risks when you’re anxious.” He stated, “You cannot think creatively.” “Building start-ups is a high-risk endeavor. Creating start-ups is a creative endeavor. Cryptography is particularly inventive because no one knows what we’re up to yet.” According to analytics firm Chainalysis, Ukraine ranks fourth in the Global Crypto Adoption Index, with nearly $8 billion worth of cryptos entering and exiting the nation each year. According to the New York Times, the daily amount of cryptocurrency transactions is about $150 million, far exceeding the volume of interbank swaps in fiat currency, the hryvnia. According to Ukrainian software developers, much of the growth in the decentralized financial market is due to a lack of other investment opportunities since the country’s 1991 independence from Russia. “When people, especially post-Soviet folks with that older perspective, have some funds in their hands, real estate will be their first investment choice.” Dmity Tolok, the CEO of Primex Finance, a business building a blockchain-based brokerage protocol, said, “That was kind of the top priority where they placed their money.” “Crypto is another relatively simple asset,” he added, adding that the growth of crypto is due to large worldwide exchanges such as Binance. He explained, “People are just throwing money at it because there aren’t many other investing options in emerging markets.” Ukraine also lacks a vibrant stock market, and overseas ones are out of reach for many Ukrainians, making it one of Europe’s poorest countries, with the majority of capital leaving the country. “Crypto became a destination. Either you’re purchasing real estate or you’re buying cryptocurrency. There are no other possibilities in Ukraine,” stated NEAR Protocol’s Poloshukin. Ukraine has a large developer skill pool in addition to the money moving in the crypto markets. Ukraine is ranked first in the world for attractiveness in terms of IT outsourcing in 2021, according to Dutch IT company DAXX. Ukraine is also ranked first in the world for hiring programmers. Turning this to Ukraine’s advantage appeared straightforward to those in power. The next logical step, with money flowing into the system and a huge group of extremely capable developers willing to work on it, was to establish regulations that would entice people to come in and invest. When Ukraine approved Bitcoin, Oleksandr Bornyakov, Ukraine’s deputy minister of digitalization, said, “The passage of the law would speed the admission of foreign exchange markets to the Ukrainian market.” The Ukrainian digital ministry has set a goal of increasing the percentage of GDP contributed by technology from 5% to 10%, as well as doubling the number of people employed in the sector to 500,000.

The Russian stumbling block

However, as Ukrainian regulators attempt to regulate cryptocurrency marketplaces, Russian tensions loom—and not only in the military sense. Unlike Ukraine, Russia’s militarily fortified neighbor is threatening to outlaw crypto usage and mining owing to the cryptocurrency’s energy-intensive nature, market volatility, and danger to the ruble, Russia’s currency. While Russia’s Central Bank asks for a blanket ban (Russia’s finance ministry has expressed disapproval), Ukraine has long presented itself as a crypto-friendly country, according to Oleksandr Bornyakov, Ukraine’s Deputy Minister of Digital Transformation. “Our pro-crypto position contrasts sharply with that of our neighbors, where officials have proposed a ban on cryptocurrency use and mining,” Bornyakov added. “I’d want to remind them that crypto regulation, rather than a prohibition, will be more effective. “Despite heightened tensions, many Ukrainians remain hopeful that investment will follow once regulations are approved. “I know certain corporations with billions of dollars in assets under management that will surely use it to set up shop here—and store part of their capital here and pay taxes on it,” Polok added. However, things are not so apparent in the case of the border situation. “Those major issues that the media speculates on have an impact on how investors view Ukraine and prospective assets.” It is, without a doubt, playing a really terrible role. Because of this, no one is coming to Ukraine, and there is still no regulation,” Polok noted. “Foreign investment was taking place.” It is now possible that it will contract to some degree. “I am from Ukraine, and I really want to assist people there and start figuring out how they can shift from the service industry to constructing innovative projects, which I know they can,” said Poloshukin, who decided to add with optimism, “I am from Ukraine, and I’d like to support the people there and figure out how they can switch from the service industry to building innovative projects, which I know they can.”

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