Russia is going all in on bitcoin — and everyone's got a theory

In 2016, the Russian government was convinced bitcoin was a danger to its economy and a threat to its national security, so much so that politicians introduced legislation that, if passed, would spell jail time for anyone found using the technology. The offense carried a 7-year jail sentence.

One year later, Russia has established itself as a preeminent hub for bitcoin and other emerging cryptocurrencies, launching an audacious plan to grab almost one-third of the world’s bitcoin mining network from China. Everyone from the government to private businesses are embracing blockchain, the technology which powers bitcoin, and they’re doing so at an unprecedented rate.

Moscow’s change of heart has left experts guessing at what the Kremlin has up its sleeve. Theories range from Russia making a strategic decision to reduce its economy’s reliance on oil and gas through bullish cryptocurrency investment to Russian oligarchs looking for clever ways to avoid western sanctions — blockchain technology allows for anonymous exchanges, making it popular among criminal entities looking to avoid government oversight.

One thing is clear, however: change came from the top. Analysts say Russia’s sudden embrace began on June 3, 2017, when Russian President Vladimir Putin took part in the International Economic Forum in St. Petersburg. There, Putin had an unexpected meeting in the corridors of the Lenexpo Exhibition Complex with Vitalik Buterin, the Russian-Canadian programmer who created bitcoin-rival ethereum.

“After the meeting, it seemed to me that the light flicked on for him” Tom Luongo, an expert on the Russian economy, told VICE News. ”This was a way to rapidly push forward Russian financial and banking services, they are now moving rapidly to effectively digitize their entire economy.”

The appeal is obvious. Not only is every major financial institution around the world pouring huge amounts of money into research in cryptocurrencies, but according to one expert, in the right conditions — and Russia has the right conditions — mining bitcoin could be “10 times more lucrative than pumping oil.”

Luongo says that Putin soon realized cryptocurrencies were not entirely dangerous, and instead offered the potential to diversify the country’s economy away from oil and gas. Russia has thus far focused primarily on Buterin’s creation: ethereum.

While having less than a third the market capitalization of bitcoin ($29 billion versus $93 billion) many experts see ethereum having a bigger future, as it has widespread applications in the financial world, allowing banks and other institutions to run smart contracts.

“Right after the meeting, the government pivoted towards cryptocurrencies, and said we need to start looking into it because it might be a ground-breaking technology,” Andrei Barysevich, a researcher at threat intelligence company Recorded Future, told VICE News.

Russia’s pivot occurred seemingly overnight. The state development bank VEB is developing an ethereum-based project; Russia’s billionaire businessman Boris Titov launched a blockchain project promising secure voting; the Central Bank of Russia is developing its own digital currency called masterchain; and Burger King Russia is embracing the currency to promote its restaurants. One Russian entrepreneur reportedly applied to patent his plans to distribute “vodka that trades on the Bitcoin, Ethereum, and Ethereum Classic brand names.”

Last Wednesday, Putin asked his government to create legislation to regulate cryptocurrency mining and establish legal definitions for various digital assets — a move which will give the Kremlin greater control over how this industry develops.

But it’s not all about innovation and development. Barysevich believes there are other reasons behind Russia’s turn toward cryptocurrencies — and in particular bitcoin.

“It is not because of the convenience of the technology, it is purely because they want to be controlling the technology and making huge profits out of it,” Barysevich told VICE News.

Key to to Russia’s bitcoin takeover is an audacious enterprise launched in August to grab almost one-third of the world’s bitcoin mining network from China. Russian Miner Coin (RMC), a company co-owned by Putin’s internet ombudsman Dmitry Marinichev, is in the process of raising $100 million to fund the building of vast warehouses full of specialized computers that will work day and night with the sole purpose of mining bitcoins.

This gambit isn’t new to Russia. China has been dominant here for the last two years, currently mining around 60 percent of the world’s bitcoins. The Middle Kingdom’s efforts have been richly rewarded: the price of one bitcoin has soared from $1,000 at the beginning of 2017 to a record high of over $6,300 as of this writing.

Russia wants to get into the game and has a competitive advantage over almost every other country in the world: Electricity in Russia is cheap and abundant — especially in regions like Siberia — making it an ideal location to run the vast computing warehouses 24/7 at little cost.

Barysevich said that with the current government-controlled electricity prices, Russia could make a lot of money from bitcoin. “If you have an electricity at the cost of 2 cents per kilowatt, it’s 10 times more profitable than pumping oil.”

But bitcoin comes with some notable drawbacks, including its proliferation and popularity among criminals, who’ve embraced the currency because it’s difficult to trace.

The currency’s shady origins hasn’t been lost on Putin, who has publicly said that he wants restrictions put in place on who can use bitcoin.

Not everyone is buying Putin’s posture however, with some experts suggesting that Russia’s sudden interest in cryptocurrencies coincides with the latest round of U.S. economic sanctions, which even friendly economists say will deal a blow to Russia’s recovering economy.

Specifically, Russia’s emboldened interest in cryptocurrencies hasn’t evaded the U.S. government. The U.S. Treasury told VICE News that it is “aware of the reports” regarding Russia and its increased adoption of cryptocurrencies, and they are continuing to monitor “evolving trends and new potential avenues for sanctions evasion,” a spokesman for the department said.

Russia’s enthusiasm for largely anonymous currencies like Bitcoin and ethereum comes at a time when Russian financial affairs have never been more closely scrutinized. But Marc Johnson, a security consultant and former CIA operations officer, told VICE News, early indication suggests it’s mostly “sincere.”

“There are a lot of people in the Russian blockchain community that have a very sincere desire to see the technology succeed because of its unique capabilities,” Johnson said, “but there will inevitably be others who seek to capitalize on the currency’s anonymity.”