Russia is exploring ways to create a “cryptorouble” that could help it circumvent western sanctions as the traditionally technophobic Kremlin gets swept up in the cryptocurrency craze.
Moscow officials say President Vladimir Putin has commissioned work on establishing a cryptocurrency, as state-run Russian institutions rush to embrace blockchain, the shared ledger technology on which bitcoin and other digital currencies are based.
Sergei Glazev, an economic adviser to Mr Putin, told a recent government meeting that a cryptorouble would be a useful tool to get around international sanctions.
“This instrument suits us very well for sensitive activity on behalf of the state. We can settle accounts with our counterparties all over the world with no regard for sanctions,” Mr Glazev said.
He added that the cryptocurrency would be “the same rouble, but its circulation would be restricted in a certain way”, allowing the Kremlin to track its every move.
Following a meeting in the summer with Vitalik Buterin, the Russia-born founder of cryptocurrency Ethereum, Mr Putin ordered his cabinet to come up with a framework for regulating them.
As with the internet, which the Kremlin has largely learnt to tame in recent years, the interest in cryptocurrencies reveals Russia’s desire to harness a concept originally designed to be free of government influence.
Blockchain technology uses cryptography to allow many parties to share and update a single and immutable record of information without relying on a central authority.
Several of the world’s biggest central banks have examined the potential of the technology. Some, such as Sweden’s Riksbank, are considering using it to launch their own digital currency. But others have shied away from adopting blockchain technology, which the European Central Bank and Bank of Japan described as too “immature” for use in their payment systems.
Other authoritarian states such as North Korea are already reportedly stockpiling cryptocurrencies to make payments on the black market, or, in the case of Venezuela, attempting to create their own.
But it is far more difficult to create a state-backed cryptocurrency that would replace existing financing models — such as raising capital for state-run banks or funding the defence sector — which are barred by sanctions.
While cryptocurrencies such as bitcoin provide their owners with an element of anonymity — making them a popular way to pay for illicit activities — it is not clear how a cryptorouble would help Russian companies and individuals to escape international sanctions or avoid detection by US authorities.
It is also unclear whether the cryptorouble would be issued by the Russian central bank or the country’s commercial banks and who would be able to open an account.
“Crypto isn’t the answer in a quick way,” said Alan Waxman, head of corporate business at Gazprombank, the sanctioned state-run Russian lender.
The Office of Foreign Assets Control, an arm of the US Treasury that implements sanctions, “can see the means of avoidance,” he added.
A surge in interest in bitcoin led to sometimes frenzied trading in 2017 and drew warnings from regulators around the world of the dangerous volatility of the digital currency market. Bitcoin surged 20-fold over the year to a high of almost $20,000 before falling sharply.
In Russia, more than $300m was raised in 2017 in “initial coin offerings” — sales of tokens that fund business projects — including $43m raised for a bitcoin mining farm run by Dmitry Marinichev, Mr Putin’s internet ombudsman.
However, Russia’s central bank has said that cryptocurrencies “have all the signs of a financial pyramid”. It wants to restrict access to “qualified investors” to prevent a rerun of Ponzi schemes used to trick Russians unfamiliar with capitalism in the 1990s.
Sasha Ivanov, who runs Waves, Russia’s largest blockchain platform, said the cryptocurrency market was “essentially like the unregulated financial market in 19th century America”.
Sergei Gorkov, chief executive of VEB, the troubled Russian lender that ran up $18bn in foreign debt obligations and is now trying to reinvent itself as a blockchain leader, said putting government tenders and the bank’s loans on blockchain would make state institutions more transparent.
But others disagree. “If you input the wrong data, the chain will still be false,” said an executive at another state-run Russian bank.
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