In 2018, Nikolai Mendiaev bought his first bitcoin using a peer-to-peer platform called LocalBitcoin
“It was a rare case, but it happened,” says Mendiaev.
Then in March, Russian President Vladimir Putin declared war on Ukraine. As Russian tanks rolled across Ukraine’s vast eastern plains, Mendiaev moved to Tbilisi, Georgia. He also found more Russians coming to him with questions about how to get into cryptocurrencies. Most of them wanted to send money across the Russian border, says Mendiaev. Mendiaev sent most of them to Binance despite its problems with centralized exchanges. He felt that the platform’s own peer-to-peer service would make it easier for his friends to conduct cross-border transactions.
Russian traffic on crypto exchanges spiked in the early days of the invasion of Ukraine, as Russians traded billions of dollars worth of rubles for bitcoin and tether in March and April. Volume has fallen in recent months, but Russia remains a major market for any crypto exchange. It has also become a more complicated market as sanctions and strict responses from payment service providers have made it difficult to buy cryptocurrencies in Russia. The story follows a familiar framework, as citizens of developing countries flock to cryptocurrencies in times of instability. But these buyers also face the challenges of living in a country whose weak currency can make it difficult to buy bitcoin, tether, or any other cryptocurrency.
“The most important quality for an exchange is just that it’s accessible to Russians because it’s hard to find good exchanges now,” says Mendiaev.
Binance has dominated the cryptocurrency exchange field in Russia for years. But competition increased dramatically after the start of the war, and Binance watched its market lead shrink. As of August 2021, Binance controlled a 62% stake Russian traffic to crypto exchanges, according to Forbes’ analysis of data from SimilarWeb, a web analytics service. That fell to 33% just before the invasion, jumped to 44% in March, and has since fallen to a record low of 27%.
The Bitrue and Bybit exchanges are the only others that bring in at least 10% of web traffic, but it is not clear how much trading volume they control.
“Binance is No. 1, but there are also a bunch of these really small exchanges that probably have very limited volumes,” says Clara Medalie, director of research at digital asset data provider Kaiko in Paris. On August 2nd, Tether/Ruble trade volume reached $2.14 million on Binance, while BitGlobal had the second highest total, barely surpassing $400,000.
As Binance’s share of the Russian pie shrinks, so does the size of that pie. Trade volume between Tether and the ruble peaked in early March, reaching 4.3 billion rubles on March 7. Bitcoin/ruble volume reached more than 2.1 billion on the same day. The volume since then has been much smaller, generally in the tens and hundreds of millions of rubles every day.
It’s hard to pin down the exact cause of that decline, although the fallout from sanctions over the invasion of Ukraine is a logical place to look. The impacts are mostly indirect. After several actions by the EU and the US Office of Foreign Assets Control (OFAC), around 1,200 Russian citizens were sanctioned.
Some observers predicted that crypto would allow Russian oligarchs to evade sanctions, but no evidence appears to have emerged to support that claim. The sharp increase in activity in March and April was mainly driven by individuals fleeing the falling ruble. Crypto exchanges can still operate legally in Russia as long as they do not help evade sanctions against any of the individuals listed.
“Exchanges will never bother to limit users. They will always follow the law, but if the law allows them to do it, they will,” says Medalie.
“Cryptoinnovators are tech companies… Tech-minded companies want to move the market by daring to be innovative,” says Chris DePow, senior policy advisor at blockchain analytics firm Elliptic. “They are willing to deal with more risk.”
Still, many risk-averse financial firms, especially those outside the crypto sector, have shut down their operations in Russia to avoid potential backlash, legal or otherwise. For example, Visa
Those banks, payment service providers and other financial institutions withdrawing from their country make it difficult for everyday Russians to access the crypto markets.
“There needs to be a connection between crypto-oriented businesses and traditional banks, again that point of entry and disbursement,” says Daniel Tannebaum, global head of sanctions at Oliver Wyman, a management and advisory firm.
In the days following the sanctions in March and April, crypto exchanges implemented a number of strategies to reduce risk in their Russian operations. Binance has closed all Russian accounts worth more than 10,000 euros, giving account holders time to remove funds. Other exchanges had similar procedures, working with sanctioned individuals to withdraw their money from their platforms.
The sudden rise in interest in Russia may be surprising, but it follows a long-known trend of cryptocurrency advancement in emerging markets. In Chainalysis’ report on global cryptocurrency adoption, the US is the only country in the top 20 that is not considered an emerging market.
“People in emerging markets have always found ways to move their capital out of the country in search of a more stable currency,” says Sarah Krepps, a professor of international affairs and technology at Cornell University. While most cryptocurrencies haven’t been particularly stable in 2022 — bitcoin is down more than 50% year-to-date — that hasn’t slowed the flow of money out of the ruble into them.
“In Russia, [people] they also try to get their money out of the system to relatives and friends elsewhere,” says Krepps. “People in these countries where the economy is unstable or unpredictable are trying to protect it from that instability.”
The Russians did this primarily by moving their money into tether (USDT