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Inside Russia’s love-hate relationship with Bitcoin

Illustrations by William Joel and Alex Castro

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After years of ambiguous signals, Russian president Vladimir Putin finally clarified Russia’s stance on cryptocurrencies last week with five presidential orders demanding officials set up a legal framework to handle digital currencies. The orders include plans to tax crypto miners, regulate ICOs, sandbox legislation for newly developed blockchain technologies, and an order that outlines the “formation of a single payment space,” likely part of the digital ruble initiative that the Russian Central Bank has been pursuing. It’s a surprising development that could solidify cryptocurrency acceptance within the Russian Federation.

It’s been a big year for cryptocurrencies: Bitcoin and Ethereum have seen exponential growth in value, and ICOs around the world have generated $2.6 billion in investment. It’s also been a year of regulatory scrutiny: governments in China, South Korea, the US, and most recently, Vietnam, have been introducing legislation to address the recent boom. China has banned Bitcoin exchanges and other trading platforms, and South Korea has planned a ban on raising money through ICOs. In the midst of a worldwide regulatory crackdown, however, Russia’s back-and-forth position has befuddled observers.

On the one hand, Russia has pointed toward wider acceptance. Over the past year, Russian officials have actively encouraged the development of cryptocurrency mining. In June, Putin met with Vitalik Buterin, the founder of Ethereum, in a meeting many interpreted as a government endorsement of digital currencies. As Putin said at the St. Petersburg International Economic Forum that month, boosting the Russian economy and increasing average household incomes “can be done only by developing innovative technologies, including digital technologies.” Since last year, the Russian Central Bank has been overseeing a group of financial institutions that are testing an Ethereum-like “master chain” to possibly issue digital rubles.

“The rush to virtual money is not a fad.”

This past July, Putin’s aide on internet matters, Dmitry Marinichev, took international press on a tour of his own cryptocurrency mine. Marinichev had converted what was originally a Soviet era car factory into a cryptocurrency server farm. Speaking over the hum of mining rigs, Marinichev revealed he had started a company called the Russian Miner Coin. "The rush to virtual money is not a fad or a fleeting phenomenon. The virtualization of our lives is a market process that has gone on and will continue," he said, according to AFP.

A few weeks later, Marinichev announced that Russian Miner Coin was launching an ICO for RMC virtual tokens, which aimed to raise $100 million worth of bitcoin and Ethereum. The plans were detailed in a media deck that touted Russia’s cold climate and cheap electricity bills. The governor of Russia’s Leningrad region, Alexander Drozdenko, recently invited crypto miners to set up a facility in the vicinity of the Leningrad nuclear power plant in order to take advantage of the area’s cheap electricity.

News reports suggest that cryptocurrencies are becoming more visible across the country. This past summer, cafes and restaurants in Moscow began accepting crypto payments. Computer stores throughout the country reported graphic and video card shortages, which crypto miners use to boost their rigs. According to local media, AMD Radeon cards were sold out nationwide in June, and even the remaining units of the Nvidia Geforce GTX 1060 were highly coveted. In August, Burger King rolled out a cryptocurrency in Russia: the Whoppercoin.

Just last month, statements from Russia’s finance minister Anton Siluanov indicated that cryptocurrency would soon be treated like regular financial securities, an approach similar to the one adopted by US Securities Exchange Commission.

Over the same period, Russia has sent competing signals indicating that a crackdown on cryptocurrency may be imminent.

Earlier this month, Putin called for greater cryptocurrency regulation, citing the “serious risks” that virtual currency could pose. Russian officials, including economic development minister Maxim Oreshkin and the Bank of Russia chairman Elvira Nabiullina, have previously referred to cryptocurrency mining and exchange operations as “pyramid schemes.” That characterization is a throwback to Russia’s stance on cryptocurrencies last year, when the Kremlin was considering jailing individuals up to seven years for using or owning bitcoins.

Until Putin’s most recent order, that conflicting narrative left observers scratching their heads. The new regulation would outline an approach that would regulate cryptocurrency across Russia tightly, while still not ruling it illegal.   

“society is ready to accept blockchain technology; the state is not.”

Russia’s sometimes contradicting approach to cryptocurrency regulations is “that society is ready to accept blockchain technology; the state is not,” says Vladimir Popov, a crypto-enthusiast and lawyer who speaks at blockchain conferences across large Russian cities

Cornell cryptographer Emin Gün Sirer says Russia has been weighing cryptocurrency legalization, both the pros, like busting through sanctions, and cons, like facilitating illegal operations, including large crime rings and drug dealing. “The tension between these two desires, and the sheer numbers of potential regulators involved, has led to many countries vacillating on the legality of cryptocurrency,” said Sirer.

Sirer and others have emphasized that fostering cryptocurrencies could be a means for Russian officials to skirt sanctions. Russia faces US sanctions over the 2012 death of Russian lawyer Sergei Magnitsky and the country’s intervention in Ukraine and occupation of Crimea. The Magnitsky sanctions froze all US assets of 18 Russian officials accused of human rights abuse; in 2016, it was expanded to include 44 other officials. The US coordinated with the European Union to sanction Russia for its actions in Ukraine in 2014, limiting Russia’s access to financing and the country’s access to using US and European technologies in its financial, energy, and defense sectors, including US-exclusive oil shale extracting technology. Digital currencies could allow Russian officials to electronically send and receive money out of the country and evade the sanctions.

Senior fellow at the Atlantic Council Anders Åslund points out that Bitcoin and other popular cryptocurrencies can be a way for senior officials to transfer funds out of the public eye. “With Bitcoin, there's an opportunity to improve the secret currency flows. What is normally happening is that they simply legally take out the money from Russia,” he said. “It is allowed.”

Russia also stands to legitimately benefit from the legalization of cryptocurrency

Russian officials have previously been charged with money laundering. In 2014, the Organized Crime and Corruption Reporting Project revealed Russians had laundered $20.8 billion from Russian shell companies to 96 countries around the world using an elaborate scheme over the course of three and a half years. Last year, the Panama Papers revealed a $2 billion offshore trail that led straight to Putin.

Russia also stands to legitimately benefit from the legalization of cryptocurrency. The country has a strong desire to be a leader in blockchain tech. “The countries that are at the forefront of this technology will be the ones developing the new technology and occupying the coveted new leadership roles in the new economy as it emerges,” Sirer says. Over time, Russia may stand to benefit from the adoption of blockchain tech by gaining machine-enforced organizational structures that cut out the middlemen, thereby becoming more efficient and reliable. It’s a point that Adam Ludwin, founder of blockchain infrastructure company Chain, reiterated in his letter to JPMorgan Chase’s CEO Jamie Dimon: decentralized applications benefit and suit “people who are off the countries where access to competently operated traditional services is limited but where internet is not.”

Alexander Ivanov, CEO of Waves Platform, which collaborated with Burger King to make Whoppercoin, says that the digital currencies industry in Russia is still new and growing, and Russia’s government has an opportunity to be a leader in developing a tech that could, in theory, assist in preserving data, and ensuring contracts.

“You can never be sure,” Oleg Kudrenko, a blockchain evangelist who speaks at popular cryptocurrency conventions like ICO Moscow, tells The Verge. “But it looks like Russia will be more open toward cryptocurrencies this year.”