In 2016, the Russian government was convinced that Bitcoin posed a threat to their economy and a threat to their national security, so politicians enacted a law that, if passed, would mean imprisonment for anyone using the technology. The offense was accompanied by a 7-year prison sentence.
A year later, Russia established itself as a pre-eminent hub for Bitcoin and other emerging cryptocurrencies, embarking on a bold plan to take over nearly a third of the global Bitcoin mining network from China. Everyone from government to private companies is using blockchain, the technology that powers Bitcoin, at an unprecedented rate.
Moscow’s change of heart has experts guessing what the Kremlin has up its sleeve. Theories range from Russia making a strategic decision to reduce its economy’s reliance on oil and gas through bullish cryptocurrency investments to Russian oligarchs looking for clever ways to circumvent Western sanctions – blockchain technology enables anonymous exchanges and makes them popular with criminal organizations who want to avoid government oversight.
One thing is clear, however: the change came from above. Analysts say Russia’s sudden embrace began on June 3, 2017, when Russian President Vladimir Putin attended the International Economic Forum in St. Petersburg. There Putin had an unexpected meeting in the corridors of the Lenexpo exhibition complex with Vitalik Buterin, the Russian-Canadian programmer who created the Bitcoin rival Ethereum.
“After the meeting, the lights seemed to go on for him,” Tom Luongo, an expert on the Russian economy, told VICE News. “This was one way to quickly advance Russian financial and banking services. They are now moving fast to effectively digitize their entire economy.”
The appeal is obvious. Not only is every major financial institution around the world investing huge sums in research into cryptocurrencies, but according to one expert, Bitcoin mining could, under the right conditions – and Russia has the right conditions – be “10 times more lucrative than pumping oil” . . “
Luongo says Putin soon realized that cryptocurrencies weren’t entirely dangerous and instead offered the potential to diversify the country’s economy away from oil and gas. Russia has so far mainly focused on Buterin’s creation: Ethereum.
Although Bitcoin’s market capitalization is less than a third ($ 29 billion versus $ 93 billion), many experts see a bigger future for Ethereum as it has widespread uses in the financial world that make it possible for banks and other institutions to execute smart contracts.
“Immediately after the meeting, the government turned to cryptocurrencies and said we need to look into it because it could be a breakthrough technology,” Andrei Barysevich, researcher at threat intelligence company Recorded Future, told VICE News.
Russia’s pivot appeared to be overnight. The state development bank VEB is developing an Ethereum-based project; Russia’s billionaire businessman Boris Titov launched a blockchain project that promises secure voting; the Central Bank of Russia is developing its own digital currency called Masterchain; and Burger King Russia uses the currency to promote its restaurants. According to reports, a Russian entrepreneur has patented his plans to distribute “vodka, which is sold under the brand names Bitcoin, Ethereum and Ethereum Classic”.
Last Wednesday, Putin called on his government to enact laws regulating cryptocurrency mining and establishing legal definitions for various digital assets – a move that will give the Kremlin more control over the development of this industry.
But it’s not just about innovation and development. Barysevich believes there are other reasons for Russia’s turn to cryptocurrencies – and bitcoin in particular.
“It’s not because of the convenience of the technology, but because they want to control the technology and make huge profits from it,” Barysevich told VICE News.
The key to Russia’s Bitcoin takeover is a bold venture launched in August to conquer almost a third of the world’s Bitcoin mining network from China. Russian Miner Coin (RMC), a company co-owned by Putin’s internet ombudsman Dmitry Marinichev, is currently raising $ 100 million to fund the construction of huge warehouses full of specialized computers that will work day and night solely to mine bitcoins.
This move is not new in Russia. China has dominated here for two years and is currently mining around 60 percent of the world’s bitcoins. The efforts of the Middle Kingdom have been richly rewarded: The price of a Bitcoin has risen from $ 1,000 in early 2017 to a record high of over $ 6,300 at the present time.
Russia wants to get into the game and has a competitive advantage over almost every other country in the world: Electricity in Russia is cheap and plentiful – especially in regions like Siberia – which makes it an ideal location to run the huge computer warehouses around the clock cost little.
Barysevich said that with electricity prices currently controlled by the government, Russia could make a lot of money on bitcoin. “If you have electricity for 2 cents per kilowatt, that’s ten times more profitable than pumping oil.”
But Bitcoin has some notable drawbacks, including its prevalence and popularity with criminals who adopted the currency because it is difficult to track.
The dodgy origin of the currency has not escaped Putin, who has publicly stated that he wants restrictions on the use of Bitcoin.
Not everyone is buying Putin’s stance, however, as some experts suggest that Russia’s sudden interest in cryptocurrencies coincides with the recent round of US economic sanctions, which even fellow economists say will deal a blow to Russia’s recovering economy.
In particular, Russia’s encouraged interest in cryptocurrencies has not escaped the US government. The US Treasury Department told VICE News that it is aware of reports of Russia and its rampant adoption of cryptocurrencies and continues to monitor “evolving trends and new potential ways to evade sanctions,” a department spokesman said.
Russia’s craze for largely anonymous currencies like Bitcoin and Ethereum comes at a time when Russian financial affairs have never been scrutinized. But Marc Johnson, a security adviser and former CIA officer, told VICE News that early evidence suggests it’s mostly “sincere.”
“There are many people in the Russian blockchain community who have a sincere wish that the technology will succeed because of its unique capabilities,” said Johnson, “but there will inevitably be others trying to capitalize on the anonymity of the currency . “