The Taiwan Banker

The wartime economy necessitates a mix of physical cash, centralized digital cash, and decentralized digital assets. The first is useful in all situations, but vulnerable to physical seizures. The second is vulnerable to potentially hostile legal measures in areas controlled by the enemy, but may be more practical when physical bank branches are available. The third is designed to be as robust as possible, but may not integrate well with the international banking system in a financial war environment. A portfolio of the three can help a country under occupation diversify against the uncertainty of a fluid military situation. The best way for banks to prepare for a military contingency is to balance system stability with inclusiveness. Ukraine did implement some short-term measures as Russia’s intentions became clearer in late 2021, according to Andriy Dubas, President of the Association of Ukrainian Banks. The central bank, as well as non-governmental industry organizations, organized stress tests for banks, which were kept quiet as the government still insisted that no invasion would take place. Nevertheless, said Dubas, “the real preparations for the war took place from 2014 to about 2019.” 2014 was the year of the Euromaidan protests, which marked a decisive turn away from Russia in both politics and business. In this sense, they could be compared to the Sunflower Movement which occurred in Taiwan that same year, although significantly more violent. Ukraine’s military modernization following Russia’s “grey zone” invasion that year has attracted much attention, but less recognized was a parallel process in the banking sector that gave the country an important additional element of resilience following Russia’s overt invasion in February. A revolution in banking regulation Banking regulators were one of the main objects of the 2014 revolution. Ukraine’s endemic corruption was severe, and president at the time Yanukovych led an extravagant lifestyle (although the full extent of his corruption would not be discovered until he later fled the country). The EU-Ukraine association agreement which he wavered in signing, thereby triggering a popular uprising, would have included mandatory transparency measures, which was one reason why it was so highly anticipated in the first place. Banking was rife with self-dealing, which Valeria Gontareva, later Governor of the NBU, called an “oligarch banking model.” Following the success of the movement, great efforts were made regarding disclosure of beneficial ownership. By 2017, Gontarva said that 100% of bank ownership was accounted for, up from 40% in 2014. The system prevented small and less-connected businesses from receiving adequate financing. Ukraine engaged in wide-reaching reforms to ensure macroeconomic stability and improve financial controls. Donbass and Crimea were important industrial centers and had contributed almost 1/3 of Ukraine’s exports before Russian-backed separatists Russia seized them. In 2015, Ukraine’s inflation exceeded 40%, and it almost exhausted its foreign exchange reserves defending the hryvnia. After weathering the initial shock, the National Bank of Ukraine (NBU, the central bank) adopted a targeting regime to successfully keep inflation under 20% since then, while also easing foreign exchange controls. Ukraine’s anti-corruption efforts have been assisted at times by the IMF. Later, as Ukraine sought international loans in response to the COVID pandemic in 2020, it passed a banking law making declarations of banks’ insolvency final, so the process could not be dragged through the courts for years on end. Aside from streamlining market exit – an important part of the capitalist process – the law was widely seen in the context of Ukraine’s political transition, and nicknamed the “Anti-Kolomoisky Law” for its effect on the previous owner of a large bank which had been declared insolvent. Leaping forward Ukraine is the poorest country in Europe, with 2020 per capita GDP of US$ 3,727. It has made some progress on financial inclusion, although with uneven results, as would be expected at that income level. In fact, starting from such a low base has allowed it to ‘leapfrog’ past some of the development steps of other countries. A 2021 study found that 56% of its transactions by value in 2020 were non-cash, a level comparable to Taiwan’s. The report also found that inclusion was harmed by the loss of branch networks due to the insolvency of nearly 90 banks as part of the reform process from 2014-2017. In 2018, the government opened up payments in the domestic currency without bank accounts through the postal system, allowing e-payments to grow despite a large unbanked population. International payment platforms did not function before the war. Local PayPal accounts could not receive payments, causing freelancers to occasionally travel overseas to open bank accounts elsewhere. By the time of the pandemic, Ukraine aspired to become a cryptocurrency hub, with the world’s 4th-highest adoption rate, and it was on the verge of passing legislation allowing banks to open cryptocurrency accounts before the war started. In reaction to the invasion, the NBU implemented a number of measures, most significantly freezing the exchange rate and imposing some temporary account withdrawal limits. Short-term system stability was ensured thanks to liquidity injections, such as automatic refinancing arrangements for one year, with the possibility of extension for a second. Meanwhile, deposit guarantees were increased from UAH 200,000 (about US$ 7,000) to an unlimited amount. In the first period of the war, some refugees reported problems accessing their money. Payment channels were however quickly expanded. On March 17, PayPal announced the end of restrictions on its services, with fees waived. Ukraine also signed the aforementioned cryptocurrency legislation. At the same time, it also made some moves to cut off enemy finances, banning transfers to or from credit cards issues from Russia or Belarus. All banking services except for foreign exchange have remained online in the parts of the country Ukraine still controls, said Dubas of the Association of Ukrainian Banks. Gray hats and red hats For Taiwan – which is in a similar geopolitical situation, but with a very different institutional and cultural context – the most important lesson from the war might be that the dog that didn’t bark. Cyberattacks haven’t played nearly as important a role in Russia’s invasion of Ukraine as expected, for reasons that remain unclear. It may have been a strategic choice for Russia, for some reason, or could reflect disarray in its intelligence organs. The reason could yet be related to reporting: nobody has an incentive to reveal their own vulnerabilities. Another possibility is that Ukraine, perhaps with the help of Western intelligence and international hackers, has shored up its defenses to a sufficient extent to ensure some degree of security. Incidentally, Dubas sees software as a growth industry in Ukraine during its recovery phase. He anticipates that because the industry doesn’t require strong ties to any particular location, it will particularly grow in the Western part of Ukraine. In Taiwan’s case, a thriving fintech ecosystem would be likely to improve its security, not only by directly providing infrastructure, but also by nurturing a talent pool in important areas. For comparison, PayPal is only available through one bank in Taiwan, and cryptocurrency is completely disconnected from the banking system. Taiwan is indeed concerned about the possible effects of Chinese money in the wake of the Sunflower Movement, but this worry should not stand in the way of its overall development. National security should balance real risks with possible rewards from openness. As one example of the dangers of a “zero tolerance” approach, Taiwan has yet to develop a culture of “grey hat” bug bounties. Companies’ desire not to hear bad news can ironically prevent them from evaluating their security in an unconstrained environment. Taiwan could be more proactive about creative security solutions; it is hard to think of another country who should be more concerned in this area. Ukraine’s experience demonstrates that finance is a critical sector for national rejuvenation, being in a position to balance real production with stability and control. It is impossible to achieve security solely through de-risking. Instead, a risk-based approach allowing organizations and divisions within them to exercise their best judgement is critical – not only for commerce but also for broader security.