Russian regulators are taking severe steps against cryptocurrencies, and bitcoin might be facing tough times in the months to come. But does this equally refer to Ethereum and its “crypto-fuel” ether?

Despite a certain dissent among Russian regulators concerning technicalities of the “bitcoin ban”, the life for digital currency fans in the country is likely to get harder. The Ministry of Finance, which has been officially opposing bitcoin since 2014, has recently introduced some amendments into its prohibitive bill that presumes stricter punishment, both for merchants and customers, for operations with “surrogate money”. But by legal standards, the term remains rather vague. And while bitcoiners are convinced that the draft law is aimed directly at them to limit their activity on the territory of Russia, it seems very likely that, if the law is passed, the country should as well forget about Ethereum and all the smart contract benefits.

Not a currency…

To begin with, by implication ether is not money. This is, at least, the way the developers put it. Ether “is not intended to be used as or considered a currency, asset, share or anything else,” reads Ethereum website. Instead, it is considered to be a “crypto-fuel” for the platform. Ethereum provides a scalable blockchain and combines it with a programming language, allowing people to create projects on top of it; ether makes it possible, incentivising developers and guaranteeing the system’s health altogether.

That is to say, it is not the primary function of ether to serve as a means of payment. Or, to be more precise, this “fuel” is not supposed to be used as a means of payment for goods and services in the outside world. But there is one particular area in which you pay with ether: the ecosystem of Ethereum.

Indeed, anyone willing to develop and utilise an application based on Ethereum will have to use ether to pay. And this is how it differs from bitcoin: bitcoin is not attached to any platform. Ether, on the contrary, seemingly does not make much sense outside Ethereum.

The primary building block of Ethereum is a smart contract. This is a program that is run by many computers at the same time and allows to update ledger records. Smart contracts can serve many purposes: maintain a software library, manage an ongoing relationship between multiple users, record membership in an organisation or maintain a multisignature access procedure. A smart contract can be used to run a political party or levy taxes.

…Or a currency?

In spite of that, from the point of view of Russian legislators ether may possess many qualities of a regular digital currency. It is mined in blocks, just like bitcoin and myriad of other altcoins. 5 ethers are created every 15 – 17 seconds and sent to the miner of the block. The only difference from bitcoin here is that 2 or 3 ethers are sometimes given to the miner who has also been able to find the solution but whose block did not arrive in time to be included in the chain.

The emission mechanism is slightly different from that of bitcoin. The number of bitcoins is finite and bitcoin mining will stop one day; the mining of ether will continue although it will be slowing down. But the general principle common to both: there is no authority that can stop or restart the emission.

Ether has its market price, which is currently about $10 and is highly volatile, just like a cryptocurrency price should be. And one of the main reasons why cryptocurrencies are considered dangerous by the authorities is the instability of their exchange rate, which may become disastrous for ordinary users.

Ether is not backed by anything in the sense fiat currencies are (except for the popularity of Ethereum, of course). Ether is transmitted through a blockchain which makes the procedure anonymous. This is another important argument against cryptocurrency universally referred to by regulators, as they keep insisting that the anonymity inevitably gives way to money laundering, cybercrime and terrorism.

It is worth noting, though, that unlike bitcoin, Ethereum has not been explicitly mentioned in the context of terrorism and crime in general. So for the layman, the image of ether is more favourable. The reason is obvious: ether is by far less widespread than bitcoin and, as far as we know, no fraudster has ever demanded ransom in ether by now. Why should they, anyway, if there is bitcoin around?

But Ethereum is, in a sense, even “worse”. “Ethereum is not an altcoin,” said platform founder Vitalik Buterin in a recent interview, “Ethereum is going to be ten thousand altcoins”. This probably shouldn’t be taken literally, but the developer makes it clear: anyone will be able to create a cryptocurrency based on Ethereum.

Against the trend

Ethereum is originally designed as a “giant workshop” giving thousands of users around the world the opportunity to create their own applications, from digital currencies to a customised version of Dropbox, says Charles Hoskinson, core developer of Ethereum. And it seems that in this case mistrust for cryptocurrencies may be stronger than the interest in the blockchain technology expressed by Russian regulators.

Russian top officials have many times reasserted that blockchain is worth researching. A special task force has been formed within the Bank of Russia to investigate possible implications of the technology. Head of Russia’s largest bank Sberbank Herman Gref has indicated that blockchain is able to revolutionise many sides of life, including governance.

But at the same time, decentralised systems are made less attractive for the government due to their anonymity and lack of control. This makes ordinary users susceptible to fraud, claim the officials. There must be a way for the authorities to identify a user on the blockchain, thinks Olga Skorobogatova, Deputy Governor of the Bank of Russia and head of the Bank’s blockchain research team. An open anonymous blockchain like the bitcoin blockchain is not acceptable, she said.

So far it remains difficult to foresee the future of Ethereum in Russia. On the one hand, the platform is rapidly expanding, and one might expect that it will be welcomed by Russian officials, who may be interested in the opportunities it brings. On the other hand, the Ministry of Finance is demanding up to 7 years in jail for operations with “surrogate money”, and if the bill is passed, the conditions for a platform capable of creating “ten thousand altcoins” may turn out not quite favourable.

Andrew Levich