Putin and his people once threatened to jail bitcoin users. Now, they can’t get enough of the digital money.
In early June, Russian President Vladimir Putin attended the annual St. Petersburg International Economic Forum. The headline moment at the event was a wide-ranging and at times combative interview with Megyn Kelly. But Putin quietly made news in another way—he signaled an official volte-face on the issue of cryptocurrencies, digital financial instruments such as bitcoin.
If Lugovoi’s name sounds familiar, it’s probably because he was one of two men implicated in the 2006 death of Russian spy Alexander Litvinienko in London, via radioactive polonium-210 poisoning. A former KGB officer himself, Lugovoi is now an MP in the far-right LDPR party. He’s also deputy chairman of the Duma committee on security and anti-corruption.
Last year, Lugovoi told a conference that blockchain-based currencies could become the best way to get around U.S. and EU sanctions. “This is is [sic] a rare situation where the sanctions policy of the West gives rise to the opportunity for homegrown business to create something new and allow the national economy to move forward,” Lugovoi said, according to Newsweek.
And the Russian blockchain community is indeed growing. A conference held in Moscow in May attracted hundreds of people; another is planned for September. And a group of banks working under the supervision of the Russian Central Bank is currently testing a proprietary Ethereum-based “masterchain.” Not only that, but Russia’s largest online retailer, Ulmart, is expected to begin accepting bitcoin in September. And another politician suggested setting up a “Crypto Valley” on the Crimean Peninsula to raise regional funding in the part of Ukraine that Russia annexed in 2014.
At the St. Petersburg forum, Deputy Prime Minister Igor Shuvalov enthused that Putin had “caught the digital economy bug,” and that the president had attended a small closed working group on the subject in which he kept them talking about the technology well past midnight. Putin even met privately with the founder of Ethereum, 23-year-old Canadian-Russian Vitalik Buterin on the margins of the conference.
As I write this, the market capitalization of all cryptocurrencies is still relatively modest, just under $100 billion, approximately what shoe-maker Nike is worth. But the market is growing by leaps and bounds. Ethereum’s flagship token, the ether, was up 4,000 percent for the year earlier this summer.
Most cryptocurrency transactions are perfectly trackable, thanks to a distributed ledger. (That sort of verification is part the appeal.) But trackable is not attributable. And in order for financial laws to function properly, some level of attribution must be built into the system.
As more governments agree on regulatory regimes to integrate cryptocurrencies into their business, more money will flow into them. Oligarch-sized transactions that would be difficult to impossible now will become more and more possible.
This isn’t a problem in countries that operate under the rule of law. The United States and others are already working on laws and regulatory frameworks that will eventually be able to fully accommodate cryptocurrencies and take advantage of their unique properties. For example, it’s now possible to trade bitcoin and ether as easily as yen and euros.
But what about in kleptocracies like Russia, where laws are bent and molded to facilitate, rather than prevent, corruption? It’s not hard to imagine a situation where regulations are either designed to be ignored for the benefit of certain people, or are simply toothless and thus throw the door open to all manner of illicit activity.
The Magnitsky Act has been a thorn in the side of Putin and his cronies for a long time. But as we stand at the threshold of a new era in the world of finance, he may think he’s found a way to beat it.