Russia and cryptocurrency: A hidden relationship

Last year I read a book about “the new Russia” called Nothing is True and Everything is Possible.

It was written by Peter Pomerantsev, a journalist who’d spent a decade producing programmes for Russian state TV.

Here’s the synopsis:

In the new Russia, even dictatorship is a reality show. Professional killers with the souls of artists, would-be theater directors turned Kremlin puppet-masters, suicidal supermodels, Hell’s Angels who hallucinate themselves as holy warriors, and oligarch revolutionaries: welcome to the glittering, surreal heart of twenty-first-century Russia. It is a world erupting with new money and new power, changing so fast it breaks all sense of reality, home to a form of dictatorship–far subtler than twentieth-century strains–that is rapidly rising to challenge the West. When British producer Peter Pomerantsev plunges into the booming Russian TV industry, he gains access to every nook and corrupt cranny of the country. He is brought to smoky rooms for meetings with propaganda gurus running the nerve-center of the Russian media machine, and visits Siberian mafia-towns and the salons of the international super-rich in London and the US. As the Putin regime becomes more aggressive, Pomerantsev finds himself drawn further into the system. Dazzling yet piercingly insightful, Nothing Is True and Everything Is Possible is an unforgettable voyage into a country spinning from decadence into madness.

Throughout the book you learn about the, frankly, ingenious tactics used by Russia’s spin doctors. Or one spin doctor in particular, Vladislav Surkov.

Surkov is a master of manipulation and an architect of “the new Russia”. In his own words:

“My portfolio at the Kremlin and in government has included ideology, media, political parties, religion, modernization, innovation, foreign relations, and … modern art.”

His trademark method of manipulation is his openness about the fact his is manipulating you. As Pomerantsev describes it in the book:

The brilliance of this new type of authoritarianism is that instead of simply oppressing opposition, as had been the case with 20th-century strains, it climbs inside all ideologies and movements, exploiting and rendering them absurd. One moment Surkov would fund civic forums and human-rights NGOs, the next he would quietly support nationalist movements that accuse the NGOs of being tools of the West. With a flourish he sponsored lavish arts festivals for the most provocative modern artists in Moscow, then supported Orthodox fundamentalists, dressed all in black and carrying crosses, who in turn attacked the modern-art exhibitions. The Kremlin’s idea is to own all forms of political discourse, to not let any independent movements develop outside of its walls. Its Moscow can feel like an oligarchy in the morning and a democracy in the afternoon, a monarchy for dinner and a totalitarian state by bedtime.

After reading the book, you can see how Russia’s political manipulators manage to run rings around those in the West.

If our government wants to get something controversial and authoritarian through, all it does to get the press on side is trot out the “paedophiles and terrorists” line.

“This [whatever they want more control over] is helping paedophiles and terrorists. That’s why we’re taking action against it.”

Whereas the methods used in Russia are much more insidious and far smarter. At least, if we’re to believe what’s in the book.

The Russian state is also extremely good with technology. Remember “Russian hackers swung the US election” and “manipulated the Brexit vote”. We hear endless stories about “Russian state hackers” but none about our own.

Is it that Russian state hackers are better than those in the West? Or is it that ours are just better at hiding their tracks? I’m guessing a little of both.

Given that Russians have a flair for manipulation and technology, it should come as no surprise the Russian state has taken a big interest in crypto.

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And with all the above in mind, that’s what we’re going to look into.

What is Russia’s real relationship with crypto?

Over the last 12 months there have been a number of stories linking Russia, and Putin in particular, to crypto.

Let’s have a look at some of the most intriguing ones.

Russian President Vladimir Putin Discusses Using Ethereum with Vitalik Buterin

This is a story that hit (crypto) headlines around the world last June. If you weren’t aware, Buterin is the brain behind Ethereum. He’s a 24-year-old Canadian-Russain. Born in Russia, he moved to Canada with his parents when he was six.

Here’s the crux of what happened at the 2017 St. Petersburg International Economic Forum (SPIEF), taken from Bitcoin.com’s report:

… Russian President Vladimir Putin met with Ethereum founder Vitalik Buterin. Putin also spoke about Russia’s economic reform and the digital economy, while the central bank discussed bitcoin’s taxation and its own digital currency.

Oh yeah, that’s right, Russia is developing its own state-backed cryptocurrency. We’ll get to that in a second. First, here’s the video of that conference if you’d like to watch it. But be warned, it’s all in Russian.

Buterin later confirmed on Reddit that he had spoken with Putin after the conference, but that this conversation wasn’t caught on video.

Why did Russia want Buterin at this conference – well, most likely because, as we just saw Russia is creating its own state-owned cryptocurrency.

As the Financial Times – and numerous others – reported in January:

Putin considers “cryptorouble” as Moscow seeks to evade sanctions

From the FT’s article:

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.

By issuing a state-owned cryptocurrency it would let Russia know the dealings of all its citizens. All their transactions would be stored and accessible to the state on a ledger, along with their identities.

This is part of the double-edged sword of crypto’s transparency. On the one hand it holds those in power to account. On the other, it could be used as a tool for ultimate control.

That’s why many in the world of crypto are against “permissioned”, “controlled” or “privately run” cryptos. Most cryptos – like bitcoin, Ethereum, Litecoin and almost all of the ones you can buy on exchanges – are open source for that reason.

Crypto wants to take away the power from central authorities, not give them more. This is also why there is a big movement for privacy-focused cryptos like Monero – see my previous article on Monero here – Enigma, Zcash and others.

In fact, Ethereum will soon be implementing privacy features of its own. Make no mistake, Buterin is not a fan of authoritarianism. You can read his philosophical and political views on his Medium blog.

“State-backed” cryptos take crypto technology and turn it inside out. They change a developed to increase fairness and freedom into one used for suppression and control.

So it will be interesting to see what happens when (and if) the cryptorouble emerges.

Putin has taken a great interest in cryptos over the course of the last year. And he seems to be very much in their favour. At least outwardly.

After China’s crypto crackdown in September, rumours started that a Russian crackdown would soon follow.

But Putin had other ideas.

Putin to central bank: do not create unnecessary barriers for cryptocurrencies

On 10 October 2017, he held a meeting to discuss the future of crypto in Russia. Here are some of his statements that came out of the meeting.

Today, I propose addressing a topic that is relevant not only for our country, not only for Russia, but is probably becoming relevant also for the rest of the world. I am referring to introducing digital technology in the financial, banking sphere, and using innovative financial instruments. Modern technology in the banking sphere certainly opens up new opportunities for organisations and citizens, making business activity and everyday life more convenient. As is known, virtual currencies, also known as cryptocurrencies, are becoming or have already become very popular; in certain countries they are becoming or have already become legal tender, as well as an investment asset. That said, the use of cryptocurrencies also carries serious risks. I know the Central Bank’s position; I have discussed this topic with the Governor on several occasions. … I would like once again to draw your attention to the need to use the advantages that are offered by new technological solutions in the banking sphere. At the same time it is important not to create unnecessary barriers, of course, but rather to provide essential conditions for advancing and upgrading the national financial system.

You can see the full transcript and video here.

Putin was quick to show the world that Russia was pro crypto and pro technology.

Why? Well that goes back to the famous quote attributed to Mayer Amschel Rothschild:

“Let us control the money of a country, and we care not who makes its laws.”

Did he ever actually say it? It’s hard to know. But it’s a good maxim none the less.

What I would argue is in today’s world, that quote could be changed to:

“Let us control the world’s technology, and we care not who makes its laws.”

Because it’s technology that all our lives and the political power of the world depends on.

Weapons technology, communication technology, computer technology, financial technology. It’s all about technology, and who is best at it.

As I wrote in February, the US won the internet war. It created the biggest internet corporations, made the most money and is the undisputed world capital for technology.

Now that cryptos are promising to bring a whole new technological world order, no nation wants to be left behind.

I’d wager that’s the reason Russia has been so on the ball when it comes to crypto. It sees the potential and knows that if it gets a head start on other countries, it could make a killing.

The US also knows this, which is why it has come out as so pro crypto over the last few months. To everybody’s surprise the US regulators are hugely encouraging of crypto.

Of course, they want to squash the scams and try to flush out the fraudsters. But overall, they want crypto to succeed. And they want it to make the US its home.

Just last week we saw Nasdaq’s CEO, Adena Friedman, come out and say Nasdaq was open to becoming a crypto exchange.

She told CNBC: “Certainly NASDAQ would consider becoming a crypto exchange over time”.

All of this US positivity was precipitated by Putin’s remarks about crypto.

If crypto really does turn out to be “the new internet”, none of the world’s most powerful nations want to be left behind. This is also why I think China will soon begin relaxing the strong measures it has taken against crypto.

Even Russian super scientists are trying to cash in on crypto

But Russia’s relationship with crypto goes deeper than just Putin and the Kremlin.

As the BBC reported in February:

Russian security officers have arrested several scientists working at a top-secret Russian nuclear warhead facility for allegedly mining crypto-currencies. The suspects had tried to use one of Russia’s most powerful supercomputers to mine Bitcoins, media reports say. The Federal Nuclear Centre in Sarov, western Russia, is a restricted area. The centre’s press service said: “There has been an unsanctioned attempt to use computer facilities for private purposes including so-called mining.”

If you’ve been following crypto events, you’ll know that mining bitcoin takes up a massive amount of energy and computer power. So what better machine to use than a military super computer?

It was a good idea, obviously these supercomputers have safeguards and the scientists were arrested.

Still, that hasn’t stopped other Russians making big bets on bitcoin mining.

Investors are buying power stations in Russia to mine cryptocurrency

That was the headline Zero Hedge ran in mid-January.

It quotes an RT article about the sale. Here’s what the RT article had to say:

Two electric power stations in Russia have been sold for the purpose of cryptocurrency mining, the Kommersant newspaper reported, citing sources. It is the first such deal in the country. The two power stations are in Perm Region, on the western slopes of the Middle Ural Mountains, and in the neighbouring Republic of Udmurtia. The facilities will be used to create a data center and a center for cryptocurrency mining, the newspaper reported. The stations were reportedly sold for about 160 million rubles (about US$3 million). The reported new owner of the power stations, businessman Aleksey Kolesnik, has indirectly confirmed the acquisition, but said that cryptocurrency mining will only be possible after Russia adopts the relevant legislation.

That “relevant legislation” is promised to come in July, when Russia will officially legalise crypto (within a complicated framework, by the looks of things).

As CCN reported in March:

Russian authorities are planning to pass new legislation that would effectively legalize cryptocurrency markets by summer 2018. As revealed in a report by the Russian parliament’s official publication on March 1, Russian president Vladimir Putin has set a deadline on July 1 for relevant cryptocurrency legislation to be adopted in the country.

So, who will come out on top in the race to be the first crypto superpower?

Will Russia beat the US to the punch, or will it be a smaller power that takes the lead?

Let me know what you think in the comments below.

Until next time,

Harry Hamburg

Editor, Exponential Investor

PS Personally, I think by the end of the year Malta may go on to supersede both the US and Russia when it comes to crypto supremacy. That’s where all the big players have been moving to of late. Why? Well, I think that’s a story for another day.

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Category: Cryptocurrency