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Cryptocurrency in Russia: A Useful History of a Love-Hate Relationship
As part of our series on cryptocurrency around the world, we’ve covered quite a few East Asian countries – like South Korea, China, and Japan – that are playing an important role in the crypto economy and the future of blockchain. However, blockchain innovation isn’t limited to East Asia, and today we’ll look at cryptocurrency in Russia, another global powerhouse for development talent and business acumen in the blockchain space.
Recently, there has been a lot of talk about the Russian government’s attitude toward cryptocurrency and whether they will recognize it as currency, legalize it, and create clear regulations for cryptocurrency companies. All of these questions have major impacts on the future of crypto in Russia. We don’t yet have definitive answers on how Russia will legally define cryptocurrency, since the laws are still being written and revised. We do have hints, however, and we can look to Russia’s love-hate history with cryptocurrency for clues as to what’s to come.
One thing is clear, whatever Russia decides will impact the crypto community heavily. The blockchain ecosystem already relies heavily on Russian development talent. In addition, there’s reason to believe cryptocurrency adoption would be strong in Russia against a weak economy and rising global sanctions in the wake of Putin’s support of the Syrian regime. Indeed, Russia is one of the most interesting cases of blockchain and cryptocurrency’s intersection with geopolitics and global affairs. In this article, we’ll cover all that history and more to see what role crypto might play in Russia and the world’s future.
To understand Russia’s relationship with blockchain and cryptocurrency, it’s important to place modern Russia in the historical context of the Soviet Union. Although it has been over twenty-five years since the Soviet Union collapsed, Communism, authoritarianism, and highly-centralized institutions can still be felt throughout the country. One consequence is Russia is a prime candidate for decentralizing efforts. The highly centralized nature of Russian society and bureaucracy is a big part of what attracts Russian developers to blockchain.
Of course, Russia wouldn’t have such a strong pool of computer, engineering, and cryptography talent if it weren’t for that same centralized Communist system. The Soviet Union sought to demonstrate its might to the world through technological advancements, and they prioritized technical education for citizens. The result is Russia now has pipelines in place for training highly skilled developers that excel in blockchain environments.
The numbers speak for themselves. According to angel investor Elena Masolova, as of 2017, a full twenty percent of the top fifty blockchain projects (as ranked by funds raised) were founded solely or in part by Russians. Across all ICOs last year, more CEOs of blockchain projects came from Moscow than any other city, easily beating out Silicon Valley. St. Petersburg also came in sixth in the rankings.
Blockchain and cryptocurrency are an enormous opportunity for Russian entrepreneurs, especially coming from a country where access to startup and venture capital is limited. The Russian economy is struggling, but Russian blockchain projects can raise money from around the world. Additionally, they have the technical talent available in the country to be able to design and build the blockchain projects they promise.
2. The Hate
With blockchain holding so much promise for Russia and a horde of well-trained Russian developers ready to implement it, a Russian blockchain ecosystem and crypto economy seem like a no-brainer. However, things aren’t that simple. There are major institutions that have a vested interest in the status quo. A Russian blockchain revolution could mean bad things for the Russian government, major banks, oil oligopolies, and other giant Russian institutions.
Since the early days of blockchain’s penetration into Russia, Russian politicians and bankers have been hesitant about the technology. Some have outright decried it while others have offered conflicting opinions on the role blockchain should play in Russian society. Perhaps chief among the detractors, and amongst the conflicted opinionists, is Vladimir Putin. Shortly before announcing a plan to nurture young technologies, Putin criticized crypto and called for a regulatory crackdown.
Furthermore, Russian central bankers have called cryptocurrencies a pyramid scheme. For a while, bankers were backing and the Russian legislature was considering a punishment for owning Bitcoin that would have jailed anyone who held the currency. In the face of all this negativity, it seemed the only option for Russian developers and entrepreneurs interested in blockchain was to leave the country. Many did, and to this day you’ll find Russian-born professionals in a diaspora, working in blockchain around the world.
3. Warming Up
Last year, Russia’s attitudes toward cryptocurrency began to tip toward favorability. Putin announced that the country needed to work on its digital economic strategy, as the economy of the future continues to move online. To that end, Putin met with Vitalik Buterin in June of last year to talk about crypto, blockchain, and the role countries can play in asset issuance and regulation.
By October 2017, Putin said Russia should support and welcome cryptocurrency. He called for legislation that would create a framework for cryptocurrency companies in Russia. Moreover, Putin pushed for a national infrastructure to support cryptocurrency and even alluded to a cryptocurrency version of the Russian ruble, the CryptoRuble.
Putin’s remarks put in motion an effort to draft legislation for cryptocurrency regulation and adoption in Russia. A year later, that legislation is still in debate and has yet to be passed. The current version of the bill, however, is weaker than originally anticipated. Experts are skeptical of the bill’s usefulness in clarifying the legal standing of cryptocurrency or helping new Russian crypto companies form.
4. Hidden Motives
Some have speculated that the Kremlin’s newfound interest in cryptocurrency is merely an extension of their desire to control currencies and blockchains in the country. According to a New York Times report, in April 2018, a Russian spy boasted that soon blockchain technology will belong to Russia.
If the Russian government and companies can gain a meaningful stake in mining power, platform utility, developer workforce, and investor capital, they can heavily influence the types of standards and use cases blockchain adopts. In the way the US dominated the early growth of the internet (including the US government creating and testing protocols like ARPANET and early emails), Russia hopes to control the early growth of blockchain.
5. A Crackdown
In October 2017, shortly after Putin’s meeting with Buterin, the Russian government and central bank began a crackdown on cryptocurrencies. Sergei Shvetsov, the first deputy governor of Russia’s central bank went so far as to call Bitcoin a pyramid scheme. Putin, in his remarks, said cryptocurrencies were used by criminals to launder money and make illicit payments. The central bank began to look into blocking Russian websites that offer digital assets to consumers.
Of course, the illicit activities and pyramid scheme aspects of cryptocurrency in Russia could be mitigated if banking institutions or registered exchanges managed the fiat gateways to cryptocurrency. Unfortunately, most Russian banks will not deal in cryptocurrencies due to the lack of well-defined regulations. Despite high demand, the most popular way to acquire cryptocurrency in Russia is via peer-to-peer services like LocalBitcoins.
Once again, historical context plays an important role here. A major reason regulators are so wary of cryptocurrency is a Ponzi scheme that affected millions of Russians shortly after the collapse of the Soviet Union. The perception of cryptocurrency as a scam isn’t helped by the massive number of fraudulent ICOs in the market last year. Russian regulators have good reason to be worried.
6. The Love
That said, there’s plenty of love for cryptocurrencies in Russia as well. Nearly half of all Russians have heard of cryptocurrency and 13% claim to understand crypto well, according to research from Romir. Another survey from the All-Russian Center for the Study of Public Opinion found that 56% of Russians had heard of Bitcoin. In Moscow, that figure jumps to 74%.
One of the main forces attracting Russians to cryptocurrency is the weak Russian economy. Russia has long relied on its oil and natural gas reserves as a major source of income. As the price of oil has plunged over the past few years, Russia has seen hard times. Additionally, Russia continues to become increasingly isolated, both politically and economically from the rest of the world. Recent sanctions from the United States and other countries have taken their toll on the Russian economy. Moving assets to crypto makes sense as a store of value in a country whose currency is losing value relative to other global currencies.
7. Making the Relationship Official
The next step in Russia’s cryptocurrency love-hate story is to agree on a bill that will define and regulate the industry. That bill is still up for debate, but we do know some things about its contents and what to expect.
First, Russia will likely tax cryptocurrency investors the same as any other individuals, including capital gains. Cryptocurrency and blockchain businesses will be taxed like any other business of the same type.
Second, the Russian central bank will retain its role in currency emission. The CryptoRuble that Putin alluded to will not be happening, at least not as a part of the current bill.
Third, unregistered crypto operations will likely face criminal liability under the new law. Participating in crypto activities will require mandatory registration with the state. This provision is more restrictive than cryptocurrency laws we’ve seen in other countries. Mandatory registration takes away from the anonymous nature of blockchain and makes it easier for the state to track and control crypto markets.
Ultimately, these are still just proposals, since no law has yet been passed. However, a lot is riding on the final version that becomes law as it could set Russia on a course to dominate blockchain or it could further alienate blockchain entrepreneurs and developers to leave Russia even more quickly.