Russia’s Crypto-Ruble Just Changed the Game

The crypto-ruble is confusing a lot of people. It shouldn’t.  Putin just took the lead in Crypto-technology.


For weeks now we’ve been getting very mixed signals out of the Russian Government about cryptocurrencies.  On the one hand we see it embracing the new technology while at the same time going on the warpath against them.

Because of that there is a lot of confusion in people’s minds as to what the endgame for cryptos in Russia looks like.  I’ll try to clear this confusion up given what we know.

But, suffice it to say, this is very good news for both Bitcoin and the Russian economy.  Give me a few minutes and I’ll explain why.

Putin’s Law

Vladimir Putin is very much a law and order kinda guy. If you watch Putin operate in the public arena he always does so with an eye towards the law.  He believes strongly in the law.  And cryptocurrencies, despite their obvious benefits to a Russian economy that needs the type of disintermediation cryptos offer, operate in a legal gray area that makes Putin uncomfortable.

So, the goal with Russian official crypto-policy is to stamp out the illegal activities – the money laundering, terrorism-financing, human-trafficking, etc. – while simultaneously using the technology to modernize Russia’s internal capital handling capabilities.

This is what the crypto-ruble is all about.  It is a way for Russia and Russians to provide a gateway between the crypto-world and the so-called real one.  It ensures that this new form of ruble properly tracks capital flow through the Russian economy.

By taxing crypto-rubles at the capital gains rate for those that cannot provide a paper-trail of ownership, Russia and Putin are incentivizing the development of low-cost crypto-payment systems to exchange rubles for goods only in cryptocurrencies that also track ownership, like Ethereum and others that have transparent blockchain histories.

The Russian Capital Invitation

Putin is openly inviting investment capital into Russia that is legal and above board.  Russia wants legitimate businesses to operate in Russia in whatever currency they like as long as that business is transparent.

The crypto-ruble provides the means by which to convert, transaction-cost-free, back into the national ‘fiat’ currency to pay bills, taxes and the like.  This is in direct opposition to how the U.S., for example, treats cryptocurrencies.

The 2014 I.R.S. rule that classified Bitcoin as ‘property’ means that every Bitcoin transaction, no matter how minor, creates a potential capital gains event.  It means that buying a cup of coffee at Starbucks in Bitcoin is taxable for both the person buying the coffee (capital gains on the sale) and Starbucks when they go to sell those Bitcoins, buy dollars and pay salaries, order supplies, etc.

It’s why the capital that has moved into cryptocurrencies isn’t moving back out.  It’s why the ICO market has exploded.  Billions in profits actively looking for new investment opportunities without paying taxes.

It’s also the main reason why Amazon, for example, doesn’t take Bitcoin.  Who wants that hassle?

Can you imagine Amazon’s Schedule D if it accepted Bitcoin?

The crypto-ruble’s structure dispenses with that for those that can prove ownership via the blockchain.  Bitcoin allows for transaction transparency, so does Ethereum, Litecoin and many others.

Now, cryptos can exist side-by-side with rubles without worrying about the threat of double taxation, unless you earned your money in the murk, at which point Russia wants 13% capital gains.  This new system won’t bring that capital back into the Russian economy, but it wasn’t coming back anyway.

Russia Embraces its Own Cryptos

By calling Bitcoin as a Ponzi scheme and an avenue for money laundering Putin and the Bank of Russia are simply attacking technologies that are not home-grown.  They are, like every other person in the markets, ‘talking their book.’

Putin would prefer people use platforms that are Russian.  Remember, he’s also a nationalist trying to bring Russia prestige in this important market going forward.

Ethereum and WAVES are both platforms designed by and built for Russia. So, you’ll notice that Putin has never spoken out against Ethereum.  WAVES continues to fly under a lot of people’s radar, but it is just as disruptive as Ethereum.

They both provide a platform to act as Infrastructure as a Service (IaaS) for the next generation of internet-based applications.  Ethereum is a kind of operating system for Internet 3.0 while WAVES is next generation forex exchange as well as providing an easy platform for issuing new public/private equity.

WAVES is what will back the Moscow Exchange’s move to trade cryptocurrencies and their derivatives.  It will act at the gateway for all of the currency exchanges.  So, if you have dollars, Bitcoins, rubles or Ethereum you can buy and sell stocks on the Moscow Exchange eventually.

All nice and legal.  All above-board.

Evil Putin is looking for pension-fund investors seeing Russian bonds trading above 7% and he just gave fund managers a way to come in through the crypto-back door.

Don’t think for a second that Putin doesn’t like Bitcoin as a means to attract investor capital.  This is what Russian Miner Coin is all about.  He just wants it to be regulated so it can ensure the public sphere is maximized.

The Fight for Capital in Flight

Capital will always flow to where it is treated best.

Given the tenuous situation in the global financial and p0litical systems, Russia’s stable government is an asset. What investors need is the confidence of being able to get their money out after putting it back in.

The scheme for the crypto-ruble is part of that confidence-building process.

I know now, as an American investor, I can, for example, invest in a Russian company’s stock or bond offering directly.  I can get paid my dividends or coupons in crypto-rubles, immediately exchange them for bitcoins or whatever currency I want to use as I see fit.

Oh, and if I never convert them back to dollars, I can put off paying taxes until I do.

That’s not really possible now, especially with sanctions.  If it is possible, it’s expensive and a major hassle.  Putin is a smart man with an excellent team around him.  Moves like this are made in response to aggressive moves made by the U.S. to starve his country of capital, i.e. John McCain’s sanctions.

He and his team understand that providing a platform by which capital can enter Russia that is barred through normal means now is key to surviving the next couple of years.  It’s not his responsibility to monitor what U.S. investors do, only that they comply with Russian law.

First-mover advantage is important here.  If Russia continues to develop blockchain technology and embrace it in a relatively tax-free way, it won’t matter that it is ‘regulating’ the beautiful decentralized market of cryptos.

What will matter is that Russia treats its crypto-investors better than everyone else.  In the fight for global capital flows, you don’t have to be perfect, you just have to be slightly better than everyone else.  Arbitrage will take care of the rest.

And tax-free ruble/crypto exchange is the killer app that the crypto-market has been looking for to take it to the next level.

Russia got there first.


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17 thoughts on “Russia’s Crypto-Ruble Just Changed the Game

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  10. Hi Tom
    Just stumbled on your sight while reading up on crypto’s. Very interesting insight.
    Do you offer any specific advice on buying/ selling crypto currencies in your investment letter?
    Dmitri

    Like

    • Dmitri,
      Yes I do. And the community is a private hat channel on Slack where weask questions, etc.

      I am also on periscope regularly discussing cryptos,markets and geopolitics…all of which come together in a cohesive portfolio strategy.

      Thanks for your interest

      Like

      • Hi Tom
        Just stumbled on your sight while reading up on crypto’s. Very interesting insight.
        Do you offer any specific advice on buying/ selling crypto currencies in your investment letter?
        Dmitri
        How can I follow the discussion on Slack?

        Like

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  13. Pingback: Why Russia Had to Embrace Cryptocurrencies | Gold Goats 'n Guns

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