“I am a supporter of cryptocurrencies, I think that there should be the Kryptoruble. But this is a complicated issue. At a working group on the blockchain we agreed that we would proceed with caution, but would not drag out the process.”
Shuvalov added that the Russian government, the Central Bank, and the Federal Security Service were working on the security implications of the introduction of this currency, and added that the advance of cryptocurrencies could not be stopped, but they had to be introduced in such a way that would boost the national economy rather than weaken it. Russian President Vladimir Putin said in late July he was “cautious” about the usage of cryptocurrencies since the area was not well regulated.
Shuvalov also said that the government was interested not only in cryptocurrencies, but in other applications of the blockchain technology, which allows the registration and timestamping of various transactions, with the relevant information kept in a distributed database available to all network users. This has implications across the entire supply chain and especially within e-commerce, an industry where Russia is developing as a world leader.
“Blockchain for us is not an ability to generate the equivalent of money, but also and, perhaps, above all, a mechanism that may ensure a professional, transparent and fast government service. We are now looking at providing government services through the blockchain.”
A distributed ledger technology allows for two types of ledger: a public one, open to everyone in the Internet, which is the kind that bitcoin cryptocurrency uses, and a permissioned ledger, which can only be maintained by a limited number of participants who need permission to access the network.
Developing cryptocurrencies is one method that Russia and China can use to break away from the dominance of the US$ and banking system in their global trade, a longer term goal for both nations. Benefits of Russia developing a Kryptoruble would be that it is a digital currency, and, therefore, cannot be counterfeited or reversed arbitrarily by the sender, as with credit card charge-backs.
Payment is also immediate. For example, purchasing real assets typically involves third parties (lawyers, notary), delays, and payment of fees. In many ways, the cryptocurrency blockchain is like a property rights database. Cryptocurrency contracts can be designed and enforced to eliminate or add third party approvals, reference external facts, or be completed at a future date or time for a fraction of the expense and time required to complete traditional asset transfers.
There are also additional security benefits. When you give your credit card to a merchant, you give them access to your full credit line, even if the transaction is for a small amount. Credit cards operate on a “pull” basis, where the store initiates the payment and pulls the designated amount from your account. Cryptocurrency uses a “push” mechanism that allows the cryptocurrency holder to send exactly what he or she wants to the merchant or recipient with no further information.
It would also usher in lower user transactional fees. There aren’t usually transaction fees for cryptocurrency exchanges because the miners are compensated by the network. Even though there are currently no cryptocurrency transaction fees, it can be expected that most users will engage a third-party service, such as Coinbase, creating and maintaining their bitcoin wallets. These services act like Paypal does for cash or credit card users, providing the online exchange system for bitcoin, and as such, they’re likely to charge fees in future. However, as banks are excluded, those high TT service fees would disappear.
It also decentralizes the ability for people to settle bills, something the current global banking system piggybacks from, and makes huge profits. A global network of computers use blockchain technology to jointly manage the database that records bitcoin transactions. That is, bitcoin is managed by its network, and not any one central authority. Decentralization means the network operates on a user-to-user (or peer-to-peer) basis. The forms of mass collaboration this makes possible are just beginning to be investigated – as Russia’s Central Bank will no doubt be examining.
Cryptocurrencies also put the owner of the money back in charge. Since cryptocurrency is not bound by exchange rates, interest rates, transactions charges, or other charges of any country, it can be used at an international level without experiencing transactional issues. This, in turn, saves time as well as money on the part of any business, which is otherwise spent in transferring money from one country to the other. Cryptocurrency operates at the universal level and, hence, makes transactions quite easy. There is no other electronic cash system in which your account isn’t owned by someone else.
It may be some time before the Kryptoruble becomes a reality, and as President Putin observed, it requires regulation. However, with countries such as Russia and China wishing to escape the global financial management and reporting systems implemented by the United States, considerable efforts will be put in to making the Kryptoruble become a reality in one form or another.
Russia Briefing is written and produced by Dezan Shira & Associates. The firm provides Russian and international businesses and governments with strategic, legal, tax and operational advisory services to SMEs and MNCs investing throughout Russia and Asia. We maintain 28 offices across China, India and the ASEAN nations as well as St. Petersburg and Moscow. Please contact the firm at email@example.com visit our Russia Desk or visit our practice at www.dezshira.com
In this issue of Russia Briefing, we explain the basics of business set up for foreign investors, from trademark registration, representation, trading mechanisms, and manufacturing. With low corporate tax rates, Russia is set to become the most dynamic of the trade corridors opening up to Asia.