This past summer, Vladmir Putin met briefly with the brilliant young developer of Ethereum, Vitalik Buterin at the St. Petersburg International Economic Forum. This meeting seemed to codify an intense interest in cryptocurrency markets in Russia. In 2017, some $300 million have been in raised in token sales of new businesses in Russia that use blockchain technology. The business sector is showing excitement. Putin himself has reportedly told his cabinet and associates that Russia needs to figure out a way to get ahead in this market. The Financial Times reports that the Kremlin is “swept up in the cryptocurrency craze.”
The press has caught on to Russian interest with reports of a surprise declaration by Putin economic adviser Sergei Glazev. He is said to be pushing the idea of a cryptorouble, and not just to provide currency choice for the Russia people. Like most people in the world, Russians are already enjoying new ways to buy, sell, and trade in cryptoasset markets. The cryptorouble would serve a particular function: “This instrument suits us very well for sensitive activity on behalf of the state,” he said. “We can settle accounts with our counterparties all over the world with no regard for sanctions.”
No More Sanctions?
Whoa. It’s true that in today’s increasingly decentralized world, the enforcement of old-world financial sanctions has become increasingly difficult. Doing so relies on tracing money and claims through traditional banking institutions. That in turns requires some form of official control and trust based on identity and reputation.
But today, there are many options for transferring and settling claims outside such channels. Because these new channels are comprised of information algorithms and live on decentralized ledgers, they are nearly impossible to monitor with an eye to the enforcement of national claims. Sanctions are going to have a hard time in this new world.
The question is: what is the cryptorouble and what would it do? If the only purpose is to provide financial settlement between Russian companies and others around the world who might be affected by sanctions, that is already possible. There is Bitcoin and its many offshoots. There are applications available on the Ethereum platform. Any number of tokens floated over the last year have international liquidity and can be converted to other digital assets.
What would the cryptorouble bring to the table? It’s not hard to guess: some measure of control by the Russian government and central bank. We have no details yet on how the structure would work. But we can speculate. The best possible guess is that the cryptorouble would add a settlement layer to the official currency. It would enjoy the status of being legal tender. It would permit a more efficient and borderless method of transferring claims.
Backing vs. Representation
I asked Alena Vranova, crypto expert and founder of the TREZOR hardware wallet, to elaborate. She points an interesting distinction between two kind of cryptoassets, one which is “backed by” (to use traditional language) something physical and one which is a tradeable representation of a claim to something else.
The “backed by” option doesn’t make much sense in the bitcoin world, where the source of value here is the scarcity of the information good, the proof of work, the immutability of the information packet, and the underlying cryptography. The physical world is naturally disconnected from the blockchain; hence throwing something like a precious metal into this mix, creates unnecessary complexity that offers no real improvement. In this sense, it would be pointless to float a cryptocurrency with the hope that its value would derive solely, and at a fixed rate, from the existence of the rouble.
On the other hand, cryptoassets work beautifully as ownership claims; that is, as a means of establishing claims on future streams of income or some other good. Russia is seeing this take place often, with new tokens being floated as a means of raising capital for investment in various projects. It is possible to do the same with claims to currencies, in effect creating a new form of money substitute that can be transferred outside traditional banking channels.
In practice, would this mean that the exchange rate of the rouble and the cryptorouble would float? If it is structured properly, it would, though one could venture a market prediction that they would track each other closely. Of course the central bank and the government could attempt to peg the value of one to the other. This would be a form of bimetallism such as the US tried to enforce in the 19th century. Another analogy would be the Bretton Woods system of the post-war period in which central banks tried to maintain a fixed value relationship between a gold dollar and other currencies. Both fell apart due to market pressures.
The Full Loaf
One of the reasons that cryptocurrency is attractive in subverting sanctions is precisely that it resists centralized control. There will always be tensions between this virtue and the vice that all governments in the world practice of wanting to maintain tight controls over their official currency. Many of the efforts of governments around the world to create their own cryptocoin will eventually have to face this problem.
In the early days of email, for example, the US government attempted to encourage people to sign up for and use an official email address. The Postmaster General was certain that people would do so because, he believed, government is more reliable and trusted than any private company. No surprise: no one signed up. The project was a bust. The many efforts to create government-based cryptocurrencies risk the same fate.
If I were advising the Russian government and central bank today, my approach would be different. I would tell them not to waste their time with this half measure. Be the world’s first nation to fully embrace, celebrate, and liberalize Bitcoin and all cryptocurrencies, permitting the sell of gas and oil for Bitcoin. Taxes can still be collected in official currency. Otherwise, allow complete laissez faire for exchanges, ownership, and trading. In other words, keep government out of the money and crypto business entirely. Do that and watch what happens over the next ten years. Russia could be the richest nation in the world.