Guest contribution from Olivia Capozzalo and Smith Freeman

The question about whether cryptocurrency really has value and is here to stay is being slowly and firmly put to rest. It does, and it is. Over the past couple of years the Russian government, like most other governments, has started dipping its toes into the waters of digital currency. And like its counterparts worldwide, the Kremlin is still in the process of figuring out what exactly its position is on cryptocurrency and blockchain, and what kind of laws and infrastructure need to be established to implement governance around it.

For the most part, Russian officials are positive about blockchain, the technology that underpins cryptocurrency, and see in it a potential space for Russia to compete on a global scale. As for cryptocurrency itself, the government generally refers to it as a highly risky investment in need of regulation, essentially to make it so that the everyday person would not be able to buy and sell cryptocurrency without going through some hoops to qualify (as is generally the case with ‘risky investments’ in most countries). In addition, the Finance Ministry recently announced that it is considering introducing a patented system of taxation for cryptocurrency mining (more on what mining is later).

For Initial Coin Offerings (ICOs, a method for fundraising by creating a new cryptocurrency token and selling it to the public), the government has taken a much harder line, following the model of countries like the US and Canada, who already regulate the popular crypto funding model. Officials recently announced that plans are in the works to create legislation to help define and regulate ICOs. This latest move really feels premature, considering the country doesn’t yet have legislation that officially defines cryptocurrencies and digital assets in general. Notably, for at least a year the Duma has had an interdepartmental working group dedicated to assessing cryptocurrency risks, looking at crypto regulation, and ways to mitigate risk.

But what does all this mean for a regular Russian looking to trade cryptocurrency? What about for a blockchain technology startup founder in St. Petersburg? Or for the general future and spirit of cryptocurrency within Russian borders? You can listen to a podcast we made that answers these questions here.

In the meantime, let’s run through the basics. What is cryptocurrency? Very simply, cryptocurrency is a digital currency whose transfer and creation is validated and facilitated by using cryptography. Importantly, cryptocurrencies don’t belong to governments, and their worth isn’t determined by them. In other words, unlike legal tender, cryptocurrencies do not derive their value from the government that issued them (or a rare physical commodity, like gold), but from the technology itself, blockchain.

But why do people trust blockchain and its evaluation of cryptocurrency? Basically because it eliminates the need for humans to trust each other. A blockchain is, in its essence, a decentralized database that exists across a network of computers around the world. Each computer on the network contains a copy of all transactions ever made on the blockchain.

Blockchain technology — the decentralized, distributed network — can be implemented in virtually every sector, from finance to entertainment, to government functions, such as voting. Blockchain makes it possible to improve the effectiveness, transparency, and security for pretty much any transaction of value that needs to take place over the internet. It’s a common assertion in the crypto/blockchain space that blockchain technology will soon be as important and ubiquitous as the internet. For most people, blockchain will become part of their lives as the internet did, via applications and devices that make it increasingly easy to interface with.

Right now, these interfaces are being built for blockchain. Everything a person needs to interact with the technology — e.g., crypto ‘wallets’ for storing, sending, and receiving coins, crypto exchanges for trading — is being developed, field tested, and improved upon.

A significant amount of this development is either being done by Russians or in Russia, but is officially registered in jurisdictions elsewhere. There are several reasons why Russian crypto/blockchain startups — or any company working on the internet for that matter — would do this, namely legality, taxation, and for the company’s public image. Many Russian tech companies are focused on foreign markets, notably the US and Europe, and (unfortunately, rightly) fear that their Russian-ness gives them a bad reputation as they start out, and affects their perceived trustworthiness abroad. The irony of hiding your identity while being concerned about trust is not lost on us.

It’s impossible to know exactly what percentage of companies working in the crypto/blockchain space around the world are Russian, but some insiders estimate it to be around 20-30 per cent. Some of the most notable crypto media companies, crypto exchanges, and crypto wallets are actually Russian startups who may or may not employ non-Russians as well, but who publicly position their brands as non-Russian (sorry, we won’t say who out of respect for them). A hefty number of ICOs in particular come out of Russia, though again, only a handful do so officially.

On the other hand, one of the most successful companies on the global crypto/blockchain market happens to be a Russian startup called Waves, founded in 2016 by Alexander Ivanov, a Russian physicist and tech entrepreneur. Waves, among other things, can be described as a platform for crypto-crowdfunding (another name for Initial Coin Offerings or ICOs). In June, Waves itself raised the equivalent of US$16m in bitcoin during their own ICO (the most money raised by an ICO thus far is US$257m, raised this August in just under an hour by Filecoin, a service for decentralized storage on the blockchain).

The most recent record-breaking ICO to officially come out of Russia was from the Russian Mining Center, a self described ecosystem for cryptocurrency miners and investors. The Mining Center raised the equivalent of US$43m in cryptocurrency during their own ICO this September, the highest amount raised by an official Russian company.

So what is cryptocurrency mining? Cryptocurrency mining is the process by which people whose computers make up a given blockchain network are incentivized to keep the network running by verifying transactions that take place on it. Basically, each time a transaction is made on the blockchain, all the computers, or “miners”, on the network race to verify the transaction, which involves solving a complex computational puzzle. The computer that solves the puzzle first gets to place the verified transaction on the blockchain and is rewarded with a small amount of newly minted crypto coins.

Since 2009 when the first bitcoins were issued, there has been a race to solve these puzzles faster (and thus collect the newly minted bitcoins), meaning that the amount of computing power used to mine bitcoin has exponentially increased. At one point you could mine bitcoin with your computer at home, but bitcoin mining now happens globally on an industrial scale. The distribution of bitcoin mining equipment and facilities, however, is fairly skewed toward China, where the vast majority of bitcoin mining takes place – around 70 per cent – while an underwhelming 3% takes place in Russia.

This particular statistic is one that Dmitry Marinichev, the founder of the Russian Mining Center known as the Russian government’s internet ombudsman, aims to push to around 30% in the next few years. One of the main goals of the Mining Center is to manufacture computing hardware that mines more efficiently. In his favor, Russia is a relatively good place to operate industrial-scale cryptocurrency mining. First off, lots of powerful computers require lots of physical space, which Russia clearly has. Secondly, a lot of Russia is cold for much of the year, meaning that less energy is needed to keep the computers at their optimal operating temperature. And lastly, electricity in Russia is very cheap.

Marinichev’s ambitious mining project is also significant in the larger scheme of the Russian economy. It is one example of how Russia can use the development of cryptocurrency and blockchain technology to diversify its economy away from oil and gas. It also gives Russia the potential (and other countries developing blockchain technology) to find a way around the current US hegemony on the global financial system, as Pavel Durov, Telegram and vk.com founder, explained in a statement on his VK page this August. Vladislav Martynov, a current leader in the blockchain space and advisor to the Ethereum Foundation, also made a strong statement about the potential for blockchain development in Russia, saying:

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.

Around the same time as this statement was made, Ethereum’s founder, Vitalik Buterin, met with Russian President Vladimir Putin during the St. Petersburg Economic Forum to discuss the technology. A few months later the Ethereum Foundation signed an agreement with Russian state bank, VEB, to develop blockchain education centers and programs, starting in Moscow.

At this point the notion that blockchain technology will fundamentally alter the way we live and do business is reaching the level of a platitude within the crypto/blockchain industry. But that doesn’t make it any less true. Right now, we’re in the midst of a globally distributed technological development period that threatens both the financial hegemony of the US dollar, and the dominance of Silicon Valley tech development and innovation. This new technology is being pursued and developed by governments and private enterprises all over the world, and the question of who will emerge as the leaders in this new era has yet to be answered.

Olivia Capozzalo and Smith Freeman co-host She’s In Russia, a podcast that aims to push back against Cold War 2 rhetoric by talking about Russia and Russian people in a nuanced way. Olivia works with various crypto/blockchain startups and lives in St. Petersburg, Smith lives in Brooklyn. Find them on Soundcloud, iTunes, Twitter, and Instagram.