Signals: Fintech joins the frontlines of the war in Ukraine

Just before dawn on February 24th, 2022, Russian troops poured into the north, east, and south of Ukraine, unraveling a world order that had governed since the fall of the Soviet Union. As Western leaders squabbled over how to pick up the pieces of the capitalist and globalist society they had stitched together over the last thirty years, massive lines appeared at ATMs and bank branches across Ukraine, capital flooded out of the country, and bond prices and exchange rates plummeted. The alarm bells were ringing, and Ukraine’s banking system teetered on the brink of collapse.

This collapse wouldn’t have just stolen wealth; it would’ve handed Putin the keys to Ukraine, starved much of the country’s population, and denied Ukrainians the ability to flee to safety. Functioning payment rails, liquidity systems, and capital markets are fundamental not only to battlefield success, but also to a stable economy and to the very definition of a nation-state. And in this era of fintech and decentralization, upholding these key functions isn’t just a government mandate - it falls to the wide array of crypto exchanges, neobanks, payment apps, and other services that have sprung up in the last decade-plus. State actors, while still critical, are no longer the only show in town. Borderless, privatized financial services, when backed by inclusive regulation, are the biggest levers for democratization and economic stability.

To its credit, Ukraine’s government reacted swiftly to the invasion, albeit with a safety net of a few billion in international reserves stocked by the IMF and other institutions. Just hours after the invasion began, Ukraine’s Central Bank, the National Bank of Ukraine (“NBU”), announced a series of emergency measures to stabilize the banking system, including limits on cash withdrawals, a freeze on foreign exchange markets, liquidity provisions for member banks, and a fixed exchange rate. In parallel the NBU reinforced transaction infrastructure across its network with help from cloud services like AWS and internet providers like Starlink, ensuring that SEP, the country’s primary interbank payments scheme, and other cashless payments systems could operate effectively.

As success on the battlefield loosened monetary and fiscal policy, officials relaxed certain measures, like a strict peg to the US dollar, while adding others, including 100% deposit guarantees for retail consumers and hefty interest rate hikes, to the web of wartime red tape. Only made possible because of the massive cleanup of the country’s banking system launched in the wake of the political and economic crises in 2014, these decisive policy choices kept the economy and the country afloat.

Of course, gaps in Ukraine’s banking system still emerged. Money movement was slow and inefficient, KYC / KYB and identity verification were difficult, affordable financing dried up, and cash and other forms of liquidity were scarce. And for the 30% of Ukrainians who remained unbanked and the millions of refugees forced from their homes, these issues were only magnified.

Enter fintech. With a thriving IT sector and a friendly regulatory environment, Ukraine had become a major player in the global fintech movement by the time Russian troops massed on the country’s borders. As soon as Putin announced his “special military operation”, this wave of momentum behind the industry crashed out into the open.

Crypto was the most visible spillover. Kuna, Ukraine’s largest cryptocurrency exchange, saw its trading volume more than triple within just a few hours as Ukrainians, already some of the most avid crypto users in the world, flocked to Bitcoin, Ethereum, and stablecoins. Kuna and other crypto platforms played a humanitarian role as well, facilitating hundreds of millions of dollars in donations for the Ukrainian government via crypto rails in one of the biggest-ever state endorsements of the digital asset industry.

The momentum within Ukraine’s fintech ecosystem extended well beyond crypto, though. Paysera, a digital wallet and cross-border payments platform, partnered with several banks to allow Ukrainians to pick up transferred cash at physical locations. Monobank, Ukraine’s leading neobank, launched a “charity jars” feature that has become wildly popular with millions of users.

Global fintechs entered the fray as well. Western Union and Moneygram waived fees for transfers into Ukraine, digital wallets like Apple Pay and PayPal accelerated the adoption of online and contactless payments, and Mastercard expanded its “purchase with cash withdrawal” feature that significantly widened access to cash. Perhaps most critically, fintechs stepped up to help the millions displaced by the war, with Revolut, for example, streamlining its payments services and easing documentation requirements for Ukrainian refugees. With a legacy banking system that catered primarily to the wealthy and connected and saddled with the direct impact of the war, Ukraine needed fintechs to fill the void - and they have.

As valuable as the fintech industry has been within Ukraine, these issues have since spilled onto the global stage. In many ways, the international banking system should have been prepared for the invasion - the West has slowly ratcheted up sanctions on Russia ever since the initial conflict in 2014. But the full-scale war in 2022, and the unprecedented sanctions that followed, have brought a whole new set of challenges.

Banks that facilitate international transfers are being forced to reconstruct their correspondent banking relationships, double down on controls around BSA / AML and OFAC processes, and ramp up compliance operations and staffing. Many institutions are opting to sit on the sidelines completely rather than scour their balance sheets and customer bases for ties to Russia.

Fintechs have faced similar hurdles. While most halted operations in Russia entirely, compliance costs, particularly for money transmitters, have nevertheless soared. As OFAC enforcement actions against BitPay, Payoneer, and others have proven in the past, fintechs are responsible for maintaining robust KYC processes and procedures (even if they aren’t a regulated Money Service Business), screening for IP addresses and location data, and flagging customer counterparties, among countless other obligations. It is a daunting and expensive task, particularly for the large swathe of the industry that lacks in-house compliance and risk teams.

This economic and financial tug-of-war largely played out quietly, though, until SWIFT, the critical interbank messaging infrastructure for cross-border payments, banned a select group of Russian institutions from its network - a move that Putin’s regime had warned was “tantamount to a declaration of war”. While Russia isn’t exactly known for its subtlety, a rubicon had been crossed, and the stress on banks and fintechs to maintain this ever-expanding patchwork of sanctions only continued to grow.

Inevitably, under this growing pressure, the global economy has begun to crack. Crypto is never too far away from the spotlight: Cryptocurrencies have helped Russia evade sanctions, and Kraken, Binance, and other major players in the space have pushed back on calls for a complete freeze of the Russian economy, with Kraken’s CEO arguing on Twitter that their “mission is better served by focusing on individual needs above those of any government or political faction”, adding facetiously that “if we were going to voluntarily freeze financial accounts of residents of countries unjustly attacking and provoking violence around the world, step 1 would be to freeze all US accounts”.

The fiat world has been similarly unsettled. Frozen out of SWIFT (and the major card networks), Russia has turned to a domestic alternative, SPFS, which it began developing in 2014 as a contingency for this very scenario. Russia has turned eastward well, with Moscow working to integrate with China’s Cross-Border Interbank Payment System (CIPS) and the UnionPay card network as part of deepened cooperation between the two countries.

And in the global arena, sanctions have ignited a firestorm around de-dollarization, with the US-led world order facing the most serious challenge to its rule since its inception in 1944. Frustrated with West’s diplomatic bully ball over the last several decades, much of the world has begun exploring alternative payment networks and technologies, particularly in countries like Sri Lanka where the dollar’s relative strength has made debt repayments and imports far too expensive.

To top it all off, Russia has largely escaped the worst consequences of Western sanctions, leaning on China and other entrenched allies and new relationships with markets like India, South Africa, and Turkey to keep its economy intact. Sanctions have undoubtedly battered the ruble and Russia’s economic base, but whether they have the desired impact - wearing down Russia’s ability and willingness to continue the war - is still up in the air. And while the dollar won’t be dethroned anytime soon, a world where alternative spheres of influence like the yuan hold some weight and the global economy is far more balanced is beginning to emerge.

As the world chases down offshore accounts and the yachts of oligarchs, it’s clear that Ukraine isn’t out of the woods yet, either. Aside from the uncertainty on the battlefield, corruption is still a major issue: Ukraine consistently ranks as one of the most corrupt countries in Europe, behind just Russia. And despite reforms, its banking system continues to face serious scrutiny, including recent allegations of embezzlement around the former Central Bank Governor. The state still controls more than half of the country’s bank assets, leaving the system riddled with related-party lending and political interference and bogging down foreign investment and innovation.

Ukraine’s government has long declared its intention to privatize the banking industry, but the destruction of the war and a sputtering economy make that objective highly ambitious. And with the government reliant on state-owned banks to finance its growing budget deficit, privatization is not only difficult but also politically inconvenient. All this uncertainty comes as inflation remains stubbornly high, bank profits and credit portfolios have been decimated, and poverty and unemployment have skyrocketed. While Ukrainians have proven resilient, the country’s banking system has a major hill to climb.

In Ukraine and around the world, the pendulum has swung back towards the private sector. States have forever enjoyed nearly complete control and oversight over financial services, but the combination of a deepening distrust towards public institutions, the ascendancy of multinational firms and fintechs, and a global economy tipping towards decentralization has loosened that grip. Even Western sanctions against Russia rely on the cooperation of global banks and fintechs (and the continued influence of the dollar). And such sanctions, at least within our current KYC / AML frameworks, are largely ineffective at targeting bad actors, who are still able to move funds freely. Instead these frameworks punish those they are presumably designed to support, i.e. refugees and other underserved groups who have thin files and little financial security.

Regulators are no longer the only voice in the discussion, and the inclusive, interoperable world of financial services we all are looking for requires a new understanding of how governments and private fintechs and institutions interact.

For states, the lessons of the crisis in Ukraine are clear. Principally, frameworks around risk and compliance need to become far more nuanced and inclusive. The world is more fluid and borderless than ever, and traditional boundaries around customer onboarding and user verification are rigid, outdated, and overly tied to physical documents and legacy norms. Of course, a move to uniform global KYC / KYB standards - akin to the recent adoption of global standards for payment messaging - would be transformative, but more realistically, implementing modern risk and compliance frameworks would democratize financial services significantly. As an example, to empower programs serving refugees, regulators could lower KYC requirements for those specific offerings (or perhaps even tie verification to new methods like phone numbers and social media), permitting transactions up to some volume cap that increases with additional data and forms of identity.

And more broadly, governments should prioritize competition and innovation - a mandate only made more urgent with major consolidation in the industry looming. A recent wave of legislation, including the landmark PSD2 Open Banking directive in Europe, has opened up the banking landscape significantly, but in Ukraine and elsewhere, the market is still heavily skewed towards the largest and most connected institutions, hampering foreign investment and undermining the experience for end customers. Enforcing stronger requirements around data sharing, modernizing payment rails, and lowering regulatory burdens for smaller programs all would improve the cost, efficiency, and transparency of financial services, albeit with considerable trade offs around privacy and security.

States will rightfully continue to obsess over customer protection in the wake of the SVB collapse and the crypto winter. But those issues around liquidity and solvency have nothing to do with supervisory concerns underlying payments, customer onboarding, etc. This gap between customer expectations and the reality of regulatory priorities is where states need to spend time.

Private banks and fintechs, meanwhile, have a massive opportunity ahead. With frustration growing around SWIFT and other institutional payment systems, green field exists across blockchain-based solutions and other alternative payment technologies. JP Morgan, Visa, and others are all already diving in headfirst. Fintechs have a part to play around identity as well - LinkedIn’s recent employment verification tool, for example, has sparked some interesting conversations in the space. And modernized regulatory frameworks, deepened competition, and an increasingly borderless economy will unlock whole new customer and deposit bases for emergent players.

But while builders will be eager to get started, this shift in the global banking system brings some real challenges as well. Fraud, privacy, security, and other risks all will increase dramatically in scope and sophistication as the financial universe expands and the influence of the state wanes. Infrastructure tools, like Kyckr for global counterparty risk management and Seon for international KYC / AML, help abstract the growing complexity, but it’s unclear whether fintechs that serve consumers and businesses directly can manage the burden.

The war in Ukraine marks a turning point in the evolution of financial services. Clear and urgent use cases totally aligned with stated policy objectives, like the support of Ukrainian refugees, are colliding with the practical limitations of risk and compliance functions and the bureaucracy of states and governments. That uncertainty can cause legacy firms to become paralyzed. Into that vacuum, fintechs are leading the way.