Russian President Vladimir Putin endorsed cryptocurrency and Bitcoin rival, Ethereum, earlier this year. What does this mean for the future of the Russian technology industry and fintech in the long term? Is Russia one-step ahead with Burger King’s WhopperCoin? With geopolitics being at the forefront of everything Russia does and those experimenting with cryptocurrencies still in doubt and insecure, Putin’s interest was treated with caution.
Just yesterday, Russian state-owned development bank Vnesheconombank (VEB) and other government ministries unveiled a blockchain research center to be headquartered at the National University of Science and Technology in Moscow, as part of a digital initiative led by Putin. VEB chief Sergei Gorkov highlighted that this would lead to the development of blockchain with ‘a group of investment funds with external financing from both Russian and foreign investors,’ Gorkov said.
Alexander Dunaev, COO at emerging markets fintech company ID Finance, said that the Russian government is recognizing the change in financial services caused by technological disruption. ‘The last time the world saw such an unprecedented change was in the second half of the 20th century with the adoption of personal computers - which Russia missed due to geopolitical isolation. There is a lot of will to avoid this pitfall in the future.’
‘The Central Bank supports the changes enthusiastically. We see this in the creation of a legal framework to embrace fintech – we can draw attention to the liberalization of remote identification rules and general infrastructure sponsoring. It will be helpful to keep building on top of the current momentum with the adoption of the PSD2 rules to liberalize access to data,’ Dunaev said.
It could be said that Putin’s endorsement of Ethereum, the more tried and tested of the blockchain cryptocurrencies, came after being left behind as Dunaev mentioned. However, again, there is a lot of concern surrounding the growth of blockchain because of Bitcoin's association with money laundering. ‘The Russian judiciary treats bitcoins as the so called money surrogates which have previously been linked with fraudulent pyramid schemes and are now illegal for both companies and private individuals,’ Dunaev said.
According to Bloomberg, Putin was attracted to Ethereum as a ‘potential tool to help Russia diversify its economy beyond oil and gas’. After meeting Ethereum founder Vitalik Buterin, Putin said that ‘the digital economy isn’t a separate industry, it’s essentially the foundation for creating brand new business models,’ - critical after Russia’s recession. Vlad Martynov, adviser for nonprofit organization The Ethereum Foundation, compared blockchain to the internet.
‘Blockchain may have the same effect on businesses that the emergence on the internet once had - it would change business models, and eliminate intermediaries such as escrow agents and clerks. If Russia implements it first, it will gain similar advantages to those the Western countries did at the start of the internet age,’ Martynov said. This attitude has led to a boom of a different kind this year in Russia, according to Dunaev.
‘The rapid ascent of various cryptocurrency prices since the beginning of 2017 attracted so much attention that Russia saw a drought in graphics cards used for mining. Blockchain started being associated with ‘get rich quick’ schemes. The recent boom in initial coin offerings (ICOs) in Russia may pose a secular threat to blockchain adoption as the unregulated nature of these securities will inevitably result in unscrupulous companies and individuals taking advantage of the speculative hype. There is not a shadow of a doubt that among a number of promising projects issuing tokens, an even greater number are indeed a new form of Ponzi schemes,’ - so, Putin may be going with the safer and more secure option with Ethereum.
Technology that is fully unhackable does not exist. Michael Jackson, a partner at early-stage venture firm Mangrove Capital Partners and board advisor to digital assets software firm Blockchain, highlighted that at present, all major payment systems in use in Russia are under the control of foreign entities. ‘That is not desirable for any sovereign state, especially one as proud as Russia. Putin wants to bring them under state control which is completely understandable. Hack proof technology is desirable for everyone but blockchain technology helps define the ultimate truth as to whether a document exists, what it contains and when it was created. This prevents 'retrospective' modifications and is a clear part of a fight against corruption,’ Jackson said.
As Dunaev states, Putin’s endorsement of Ethereum means that ‘blockchain is no longer a bogeyman. It is more important for the attitude of the judiciary, which interprets and applies the law of Russia, than industrial applications. It will also drive the development of the government cryptography standard by security services, enabling future government use.’ Jackson said that while digital currencies are here to stay, Russia having a plan is a strong statement. ‘That said, Ethereum is new and it seems unwise to commit exclusively to one version just now. I would expect to see various trials and certainly a significant change or fork in Ethereum following these. It's difficult to imagine it's perfect.’
