In the past six months Russia’s attitude towards cryptocurrencies has done a complete one-eighty.  Since President Vladimir Putin met with Ethereum designer Vitalik Buterin Putin has gone from hostile to ‘cryptos’ to the leading edge of government support of them.

Why?  What’s the big deal?

To answer those questions I have to start back at the beginning. 

Blockchain Basics

First, is the blockchain.  Blockchains are encrypted digital ledgers of transactions that occur within a private peer-to-peer network which have been verified to be correct by all the members of that network. 

The process of verifying those blocks of transactions is called mining because when the block is decrypted, thereby verifying its contents, the network issues a reward to the first person to do so.  These are the tokens or coins (and there is a difference depending on the type of blockchain), such as Bitcoin or Ethereum, that you’ve heard so much about.

 They represent the accumulated value of all of the transactions that have occurred on the network and represented by the blockchain.  At their core, cryptocurrencies add a layer of trust to doing commerce of all kinds on the internet that is not present within the current banking and payment systems.

These are distributed networks, peer-to-peer networks, whose security rises in strength the more people use them.  That process is handled within the software and it’s different for each cryptocurrency out there. 

The current global banking system is controlled by very few people.  It is cobbled together through a mix of proprietary and, in some cases, antiquated systems and managed by people who don’t necessarily care about its well-being.

The blockchains, being open source, are capable of being worked on and upgraded by anyone willing to do so.  And that decentralization is its core competency and strength.

Russia’s Blockchain Epiphany

Putin’s meeting with Buterin dispelled Putin’s fears of this decentralization and the blockchain’s extra-legal status.  Putin is a very law and order kinda guy.  He is also a very flexible and strategic thinker.  And this flexibility is what makes him a great leader.

Once Buterin explained to Putin how the blockchain could be deployed to strengthen fundamental Russian societal institutions, decrease corruption and graft and be brought into the monetary system in ways that complement his goals for the Russian state, the rest is just logistics.

For Putin he knows that Russia’s weakness is not its labor pool, its technological potential, or its physical capital.  Russia’s fundamental weakness, which was exploited to great effect in 2014 by the U.S. and the EU, is its financial system. 

I’ve said this many times, what is holding the Russian economy back is a lack of professionalism in the way capital flows through the country.  Its banking system is, effectively, third world, and still corrupted by Western influences.

Ethereum and other ‘smart contract’ cryptocurrencies have the ability to help Russia leap frog from its current level of financial back office efficiency to surpass that of the West because so much of that back-office work involves the processing, clearing and archiving transactions which is inherent in the information contained on the blockchain.

Putin is not alone in realizing this.  Every country is looking at this technology to improve its financial services.  And for Russia, its vast geography can be shrunk immensely by implementing blockchain technology to streamline things like permitting, tax collection, property transfers, etc. 

But Putin’s embrace of blockchain goes much further than that.  I’ve outlined this in multiple articles on the subject (here and here).  He understands that cryptocurrencies are a strategic weapon against future hybrid war attacks by the U.S. and western banking interests.

War and Peace

As I outlined in my last article on the subject of Russia and cryptocurrencies, Putin issuing the directives he did to create a legal framework for them is an important step towards bringing even more capital into the space.

This week Bitcoin is spiking on news that the CME Group will begin trading Bitcoin futures.  Now despite my serious misgivings on what that news means in the long run, it will bring a lot of money into the cryptocurrency markets that is not allowed by law or covenant to enter now.

The same effect is what will happen with Russia’s plan to grant them legal status.  Now, companies and investors who demand that kind of structure will be willing to put their capital to work into blockchain-based projects in Russia.

For now, given the structure of capital markets, this is a net benefit both for cryptocurrencies and for Russia itself.  Putin is also supporting a major research facility into cryptocurrency software and cryptography, two areas in which Russia is already a world leader.  Another brick in Russia’s blockchain foundation.

But, for me, the most important thing is that Russia expects to use its legal framework for cryptocurrencies across all of the Eurasian Economic Union (EAEU).  And this is the key to understanding how Russia can further insulate itself from attack through the foreign exchange markets, the favorite playground of Putin’s nemesis, George Soros (and others of his ilk).

The more the EAEU’s economy is decoupled from its national currency in cross-border transactions, the less vulnerable the domestic, central bank issued currency is:. 

Think of it like this.  I have a business in Moscow with clients in Astana. They can pay me in bitcoins which I can exchange for rubles when I need to or use to pay my suppliers in Minsk.  My client never has to go to his Kazakh bank and exchange Tenge for Rubles (yes, I know the Kazakh currency name off the top of my head).  I never have to go to my bank and exchange Rubles for Belorussian Rubles.

Bitcoin and other cryptos can be taken as payments, made a part of my business’s accounting and all of that and the Bank of Russia only has to deal with regulating the flow of rubles throughout the domestic economy.  It becomes more immune to external attack like late 2014.

As the business owner, yes I’ll have to exchange bitcoins or Ethereum for rubles to pay my taxes and any local suppliers.  This takes a tremendous weight off the central bank, and, frankly, the government itself. 

Russia, Iran and China are locked in a death-match with the U.S. and Western oligarchy for survival that will play out over the next fifteen to twenty years.  Cryptocurrencies are a strategic and tactical weapon that can be deployed to radically change not only the way we interact with our governments, but the way governments interact with each other.

Putin’s goal before he exists the world stage is to leave Russia on a path to sustainable societal growth for the rest of the century.  He’s made that abundantly clear in his recent interviews. 

Embracing cryptocurrencies and the blockchain is a major step along that path.