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Why Russians loves Cryptocurrencies?


There is not country that can claim to be at the center of the crypto world, though many would like to be. Bitcoin, after all, was designed to be a stateless digital currency. Ethereum’s deepest thinkers are a roving band of Airbnb-surfing programmers scattered around the world.

But even if there’s no capital or country for crypto development, Russian programmers have an outsize presence in the world of virtual assets. In particular, they are deeply involved in markets for initial coin offerings (ICOs), which allow firms to raise money in exchange for digital tokens.

Around the world, Russian accents are commonplace at ICO pitch competitions, most of the whitepapers or ICO sites are in Russian, where the people behind projects seeking financing try to entice investors. But their influence isn’t immediately obvious in the numbers: The US, Singapore, Switzerland, and UK are leaders when it comes to ICO money raised. The same is true when measured by the locations where projects are registered (pdf).

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But when you look at where the CEO or founder of ICO-seeking projects is based, Moscow came out on top last year, according to venture capital firm Atomico:

Russia is rich in programming, mathematics, and cryptography talent, in part a legacy of the Soviet era when science and physics education was prioritized, according to Technological experts.

After the Soviet Union collapsed, there were masses of scientists but few science jobs available. Technology startups were a way out for some people, according to a BBC report. Computers weren’t widely available until relatively recently, and a person able to control and operate digital systems became something of a hero. At the same time, tech firms require little capital to start with the operations and, amid ongoing sanctions, it remains an easier way to sell products or services abroad.

Intellectual capital

Crypto innovation is coming out of Russia because it has some of the best intellectual capital in the world, according to Oliver Hughes, chairman of Tinkoff Bank, a digital lender based in Moscow. Even Sberbank, Russia’s biggest bank, behaves like a fintech firm, he said. Sberbank reportedly has more than 11,500 developers, which is more than all the employees at Snap, Square, and Twitter combined.

Funding is likely part of the reason. Russia has technologists, but access to the capital for them is limited. ICOs, meanwhile, have been a way to raise piles of cash quickly. Blockchain companies raked in more than 4 billion USD via ICOs last year, more than 4 times what was raised via venture capital, according to technology advisory and investment firm GP Bullhound.

ICOs are a convenient way to raise money without going the banks or following traditional paths, said Olga Smirnova, chief operating officer at DigRate, which provides ratings for ICOs. She said there are hundreds of conferences in Russia about token offerings per year; she recalled once going to the wrong event because there were two separate ICO conferences in the same building, on the same day.

And then there’s the weak  traditiona economy (paywall) and anemic income growth, which may be driving some Russians into crypto, whether to work on projects or speculate on tokens.

A complicated relationship

Egor Lavrov, chief creative officer for Paragon Coin, a cannabis industry project, visited Moscow recently and said everyone in the country is interested in ICOs and Bitcoin. He said even his Wheely driver (an Uber competitor) asked him whether he should invest in ripple, a particularly volatile crypto asset: “They hear stories about people getting rich.”

Paragon, meanwhile, is the target of a potential US class action lawsuit, which says it may have sold unregistered securities when it raised $70 million from investors in an ICO. Paragon said in a statement that it is “dedicated to staying compliant with all applicable laws, and endeavored to do so throughout the entire ICO process.” Lavrov, who was born in Moscow but has lived big part of his life in the US, said Paragon has 15 employees in Ukraine.

The Russian government has a difficult relationship with crypto. Last year, a Russian spy reportedly boasted that blockchain will “belong” to the Russian Federation.

There are some panic that the Kremlin is trying to influence the blockchain and cryptography standards in a way that allows the state to undermine it—perhaps resembling the way the US is suspected to have installed its own cryptographic backdoors.

Russian president Vladimir Putin has said the country needs to accelerate its digital economic strategy, and he briefly met in the last June with Vitalik Buterin, the Canadian-Russian creator of ethereum, which provides the distributed computing for many ICOs. Putin’s government has also considered developing its own cryptocurrency (paywall).

But a few months after Putin’s meeting with Buterin, the government cracked down hard on crypto, at least for the private sector. Putin criticized bitcoin, saying it’s used by criminals, and the central bank began deliberations over blocking websites that deal in digital assets. Sergey Shvetsov, first deputy chairman of Russia’s central bank, said these currencies have “signs of a financial pyramid.”

Reason to be wary

For Russia’s financial authorities, there’s good reason to be wary. Thousands of citizens had their savings shredded by a massive Ponzi scheme after the USSR collapsed, when most Russians had no idea what a legitimate investment ought to look like. Half of the 300 million of dollars raised by ICOs in Russia in 2017 went into pyramid schemes, according to Russian newspaper Izvestia, citing the Russian Association of Cryptocurrency and Blockchain.

While crypto is a global mania, Russia comes to it with legions of enthusiastic technology experts and, like the rest of the world, more than a whiff of fraud and criminality. It’s mixed with a broader public that was financially naive and poorly protected by regulators amid economic hardship in the past. Although every government is trying to figure out ways to protect investors, weed out the scammers, and still encourage innovation, this challenge is particularly acute in Russia.

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