Confidence Shattered: Bitcoin and Blockchain after Nationalization of Ukraine’s PrivatBank

trust

Rumors of Ukraine’s largest commercial bank PrivatBank inevitable nationalization have been circulating for a long time. One may only guess whether the new record set at Ukraine’s LocalBitcoins last week has anything to do with that; however, the USD exchange rate in Ukraine definitely has, as millions of the bank’s clients rushed to convert their hryvnias into dollars.

Media outlets paid a lot of to this rather extraordinary event, so we’ll just briefly describe the course of events, mostly emphasizing the prospects of cryptocurrencies and blockchain in the light of the country’s biggest banking turmoil ever.

Nationalization of PrivatBank

The bill titled On Measures Aimed at Nationalization of Commercial Bank PrivatBank Public Joint Stock Company was posted by parliament member Alexander Onischenko as early as March 12th, 2015. However, the bank’s press office stated just a few months ago that the bill “had not been reviewed by the parliament.”

Speaking last week at BlockchainUA conference in Dnipro, deputy head of PrivatBank’s E-Business Center Dmitry Donets was confidently joking on the rumors of the bank’s possible nationalization: having seen a person in the audience who just merely opened his mouth to ask a question, Donets said: “No, they won’t.”

Still, overnight into Monday, December 19th, without any prior warning, the government had decreed that 100 percent of PrivatBank assets are now in the state’s ownership. The very same day, the Ukrainian President Petro Poroshenko has officially commented on the event. He noted that the IMF, the World Bank, and the EBRD have been concerned by PrivatBank’s situation and its possible ramifications regarding the entire nation’s financial environment for six months.

Mr. Poroshenko concluded:

“For those very reasons, in these latter hours, the Council for National Security and Defense, the National Bank, the Government, and the Ministry of Finance have approved all legal and formal decisions as to PrivatBank’s passing into 100% government ownership.”

Future of Privat24 and Other IT Projects

ForkLog contacted Alexander Vityaz, deputy chairman of PrivatBank’s board, who heads E-Business Center and is co-founder and CEO of Corezoid. However, Mr. Vityaz said that all questions should be addressed to the bank’s press office.

PrivatBank’s press secretary Oleg Serga was pretty brief in his response to the question whether the nationalization would somehow impact the bank’s plans regarding bitcoin’s integration in Privat24 and other innovative products:

“All technologies and products are working normally, and will keep on working.”

Speaking with ain.ua, Alexander Vityaz was a bit clearer about Corezoid, a service underlying Privat24. It is an independent U.S.-based hosting company owned by Middleware. Answering the question on further cooperation between the state-owned PrivatBank and Middleware, Vitiaz said:

“The old contract with very wholesale prices for PrivatBank is still valid. There’s no economic reason to renew it, however, we should understand that if the hosting bills aren’t paid in time, everything will shut down automatically.”

Additionally, when Dmitry Donets was asked at BlockchainUA whether bitcoin has any future in Privat24, he said that the global banking community considers banks supporting bitcoin transactions riskier counterparties. It means that transnational banks counteract bitcoin’s integration in banking turnover. Still, he said back then, PrivatBank experienced no counteraction on the side of the national regulator when it came to bitcoin-related experiments.

On this basis, one might assume that PrivatBank won’t turn away from bitcoin after the nationalization. However, in the context of the bank’s nationalization a few days after Donets’ speech, his statements obtain another dimension.

Banks: the Trust We Have Lost

Even though banks consider bitcoin operations risky, the story of yet another bank that somehow has gone wrong makes one think about risks of interacting with banks as such. Recent Facebook and MasterCard researches have shown that 92 per cent of young people in the U.S. don’t trust banking system – and it is the United States, not the post-Soviet Ukraine. The same researches show that nearly a third of Europe’s population avoids using bank services for the same reason.

Even though banks are usually big and clumsy, they have rather fragile structures that are held in place by mere trust. No bank can individually withstand usual human panic when depositors suddenly start taking offices and ATM’s by storm to withdraw all their money. No bank would have enough free money in such a scenario. The reason isn’t always because the bank’s management are scammers; more likely, it’s about the very nature of a bank’s activity. The bank loans the deposited money, that’s its economic function after all.

For that very reason, Dmitry Dubilet, deputy chairman and IT director of PrivatBank recently stated:

“Our bank suffered seven informational attacks since the war [in Eastern Ukraine – ForkLog] broke out. No other bank would have survived any of them. Yet the recent attack that started a week ago was the hardest. Every day we saw new records of the amounts withdrawn by panicking clients via offices and ATM’s.”

According to Dmitry Dubilet, the confirming kill came on Saturday, when a local TV channel stated in the news: “On Monday, PrivatBank will put all payouts on hold! However, the bank’s press office neither confirmed, nor denied the information.”

One can’t say, however, that fragile trust is specific for banks only, while cryptocurrencies are a sort of a trustless shelter. Bitcoin is based on trust too, and any panic may shatter its price if there’s no one who, like a central bank, would buy the bitcoins flowing on the market to slow down the collapse.

Blockchain as a Sedative

Cryptocurrencies depend on that fragile trust all the same, yet blockchain allows them to evade several risks inherent in banks. No wonder banks and other financial entities are actively engaged in various blockchain consortiums. Ukraine is one of the world’s leaders in this regard with an open source code app already in place making it easier for banks to move onto blockchain.

Still, banks going blockchain somehow mitigate the risk of a panic described above? There are several arguments suggesting the answer is ‘yes’.

First, blockchain is transparent. A customer would feel much safer if he or she is able to access all operations with their account any time, and if he or she is sure the bank won’t be presenting a distorted version of blockchain to deceive them.

Second, the account access is limited to those having a private key. Customers will only feel even better knowing that their money can’t be moved anywhere without the private key that only they have.

When cashless economy emerges, the concept of storming a bank will lose its vigour. If there is no paper money that the bank must clear its obligations with, there are no crowds of customers taking offices and ATM’s by storm. All you can do is transfer your money to another bank that seems more reliable at the moment.

Banks vs Cryptocurrencies: the Question of Control

PrivatBank has a database for more than 20 million residents of Ukraine. On December 21st, Igor Kolomoiski, the now-former owner of PrivatBank, wrote:

“My lawyers recommend to act as follows: as long as we have access to our servers, send out a text to ALL CUSTOMERS (20+ million Ukrainians) reading: “important information for you on 1+1 [local TV channel – ForkLog] at 7.30 pm.” The channel’s specialists say that after such an announcement the audience will exceed that of the president’s New Year speech for all channels combined! 30 to 35 million.”

However, phone number or IMEI of a customer isn’t everything that a bank knows about their customers.

It’s not news that there were lots of remittances without purpose of payment via Privat24, which in fact were commercial payments, and found no reflection in tax reports. Upwards of 50% of all legal entities in Ukraine are PrivatBank’s clients. When the government obtains access to all that information, there won’t be a chance to evade taxes, therefore, the taxes will be included in the price of their products. Obviously, this would result in a price surge.

The authorities consider cryptocurrencies as a potential means of tax evasion. Indeed, bitcoin transactions are currently pseudonymous and are not controlled by the government. It makes them an appealing means of value storage and settlement, especially during political and economic turmoil. However, the Coinbase case proves that the situation may change any moment, especially if bitcoin and other cryptocurrencies gain more popularity.

Apart from accessing data on bitcoin transactions, the authorities might also use blockchain to introduce a new level of supervision over national currency’s turnover. This transition’s consequences are ambiguous, and are being discussed in scientific and political circles as a part of the Cashless Economy concept.

When Cashless Economy emerges, a national cryptocurrency, in case it will be personified rather than anonymous, will grant the authorities with access to a wide range of data on money owners’ actions. It would completely exclude any possibility of unsanctioned movement of funds. This would ensure anti-corruption efforts and appropriateness of budgetary expenditures. Combined with tools like e-Auction 3.0, it would make the expenditures efficient as well. However, the price here is a serious degradation of privacy.

Can a Cryptocurrency Be Nationalized?

We’ve been witnessing numerous instances of bitcoin demand rising during economic instability periods in various countries. Bitcoin is not controlled by any country; it cannot be blocked or arrested; and owners of pseudonymous accounts are hard to trace. It makes bitcoin an alternative for unreliable banks.

Neither is bitcoin controlled by any nation in terms of issuance, transacting, access, and protocol alteration. A bitcoin account cannot go west. If you keep your private key in safety, bitcoins can’t miraculously disappear from your account to surface on a trusted third party’s account opened in an offshore company. Moreover, the cryptocurrency’s exchange rate depends not only on economic and political crises, but also on news on yet another benevolence of authorities as well.

It is quite obvious, however, that specifically designed blockchain browsers like Chainalysis can see much more than anonymity fans would prefer. In this light, alternatives like Dash, Monero, and ZCash are gradually drawing more and more attention. However, the race of anonymization/deanonymization arms will continue, so the question of possible nationalization of cryptocurrencies is yet to be answered.

Blockchain may be stored in an unlimited number of copies throughout the entire world, and it’s quite difficult to restrict access thereto. However, locations of major mining facilities are well known, and once a government decides to nationalize cryptocurrency, it would prove to be much easier than catching an elusive hacker.

Dmitry Bondar