Putin warns crypto should be treated with caution

Author: Olly Jackson | Published: 18 Jun 2018
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President Vladimir Putin has said Russia does not consider cryptocurrency as a means of payment nor as a store of value. In his annual Q&A session with the Russian public last week, he urged people to treat cryptocurrencies cautiously as they are not backed by anything and said rumoured plans to issue a state-backed cryptocurrency were unfounded.

RussiaRussia has had a shaky relationship with cryptocurrencies. President Putin called for a ban over money laundering concerns and considered jailing anyone for using or owning bitcoins in 2016. 

Yet last October, Russia’s minister of communications and mass media Nikolai Nikiforov said President Putin planned to issue a Russian 'cryptoruble’; this after Russia Central Bank deputy governor Olga Skorobogatova repeatedly claimed Russia was preparing to develop its own cryptocurrency. While Putin’s words last week reject this possibility for now, it is a clear diversion from the rhetoric of two years ago, with messages about the positives of cryptocurrencies, and in particular, blockchain.

Russia has been very keen to promote the use of blockchain technology, approving a bill last month which introduces definitions of smart contract and cryptocurrency in Russian law. The bill makes clear that the Russian Parliament (Duma) believes cryptocurrencies are assets, akin to the UK. Financial Stability Board and Bank of England governor Mark Carney names cryptocurrencies crypto-assets, meaning that they would be regulated as a financial asset rather than a currency.


"The future of cryptocurrency lies in the hands of the participants and the global economy"


Practical benefits

Former interim director of the Office of Compliance and Enforcement at the Financial Crimes Enforcement Network (FinCEN) and Hogan Lovells partner, Gregory Lisa, said there are a number of practical benefits for a state to issue a digital currency.

"A state may appear to be an innovative government if they issue a fiat digital currency and this would show that the government is forward leaning," said Lisa. "These optics count, especially if you’re a government trying to attract certain types of businesses."

There would also be no need to print currency and concerns about forgery would be alleviated. The US Federal Reserve Board budgeted $610 million between 2007 and 2009 for printing, shipping, counterfeit deterrence and other currency-related costs, and with technology making forgeries appear to be more genuine, it is making it harder for governments to keep up.

KEY TAKEAWAYS

  • Putin said this week that cryptocurrencies should be treated with caution and rejected earlier rumours that Russia is set to issue a state-backed cryptocurrency;
  • State-backed cryptocurrencies could be very effective for the two billion people unbanked in the world today. In parts of Africa, for example, many countries have advanced technology but do not have a trustworthy banking sector;
  • Estonia is planning to issue its own cryptocurrency, but to avoid the EU’s ire, is refusing to call it a currency. Its e-resident framework has attracted Angela Merkel and Shinzo Abe;
  • In the future, the decision onto whether a government issues a cryptocurrency will be less of the choice of the government and based more on market conditions and institutional interest.

But even more useful could be the benefits it provides to unbanked citizens of the world. Currently, according to the World Bank’s Global Financial Inclusion database, there are two billion people who do not have a bank account and 16 countries where less than 15% of the population has a bank account. But in countries like Kenya and Gabon where over 40% of people over 15 receive money via a mobile phone, cryptocurrency could be a very quick and inexpensive way for people to receive payment.

For any part of the world, a state-backed cryptocurrency in certain parts of Africa make the most sense, and for other countries where there are problems with global trade, difficult correspondent banking relationships and an untrusted banking system.

Venezuela, the world’s first state to issue a cryptocurrency, did so with political reasons in mind. The recent sanctions placed on the country from the US and the EU led to the issuance of the Petro, backed by oil, gas, gold and diamonds, raising $735 million in its first initial coin offering.

Mario Draghi’s statement that no member state can introduce its own currency may provide a roadblock for European countries to issue their own cryptocurrency but this has not stopped Estonia from going ahead with plans to issue the Estcoin. Estonia has denied that the Estcoin will be a currency and proposed a framework whereby anyone in the world can become an e-resident for €100 ($123) and sign documents online, so people can operate a business through Estonia or open a bank account. Government official Kasper Korjus called it the new crypto nation and since then, German prime minister Angela Merkel and Japanese prime minister Shinzo Abe have become e-residents.

"Foreigners have obtained Estonian e-residency because it makes doing business in Estonia far more convenient thanks to access to electronic services covering almost all aspects of doing business," said Raino Paron, partner at Estonian firm Ellex Raidla. "The ability to handle day to day matters online helps to save time and adds convenience to both non-resident owners and managers of Estonian companies as well as to their cooperation partners."

But while Estonia is adopting a specific crypto regulation framework, it is not expected that the US and other major European economies will follow suit.

"I don’t think there will be specific, exclusive, and all-encompassing crypto regulation in the US," Lisa said. "A good friend of mine in this space has repeatedly pointed out: there is no single regulator of cash, is there? And it is not helpful to say we’ve created something different and the regulations bend to this new innovation."

The future

President and chief executive of the Federal Bank of New York, William Dudley, said the Federal Reserve is exploring the idea of its own digital currency, but any issuance would be well off in the future. France, Germany and the UK have said they have no plans to issue a cryptocurrency in the imminent future, but in the end, the decision could be taken out of their hands.

"Ultimately, the future of cryptocurrency lies less in the hands of the government and more in the hands of the participants and the global economy," Lisa said. "It will not destroy the banking sector, but I do think eventually it will challenge and disrupt existing practices, especially once there’s much more of a critical mass."

In fact, as cryptocurrencies gain more institutional interest, the chances of state-sponsored cryptocurrencies become ever more likely, as it becomes more established as a credible asset class. Goldman Sachs and JP Morgan both appointed a digital assets division in the last two months, in view of exploring investment in the sector and a plethora of other banks have continued to invest in blockchain solutions.

George Morris, Simmons & Simmons partner, said: "As you start seeing more institutional investors entering the market, you need to have a mature exchange ecosystem. There needs to be a clear market opportunity to build on the institutional side."

Some exchanges are actively attempting to attract institutional investors, including Coinbase that this week opened its index fund for investments between $250,000 and $20 million. Fellow crypto exchange Binance announced plans for a $1 billion cryptocurrency fund earlier this month.

If this trend continues and institutional interest grows, it looks only a matter of time before other countries follow Venezuela’s lead. Countries like Russia may not have a choice soon.

 

See also

Japan’s separate rules for crypto could be the answer

PRIMER: US cryptocurrency ICO regulation

Confusion reigns: are cryptocurrencies commodities or securities

 

 


 

 

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