A Step Closer to Legitimizing Cryptocurrency? Or Ways to Go?

When one thinks of cryptocurrency, Bitcoin often comes to mind. The digital currency has a fixed supply and its value is derived from what others perceive its value to be. An attractive characteristic of Bitcoin is that it eliminates the need of a third party provider (think Uber) for monetary transactions, is anonymous, and doesn’t need to be regulated by a central authority. In an increasingly globalized world, where direct in-person cash transactions aren’t realistic, or clearance from third parties is too costly or time consuming, cryptocurrencies fill the gap. Moving away from the sense of authority and regulation that hovers over current financial transactions, cryptocurrencies provide protection against monetary meddling.


Take sanctions against banks and industries, for example. Or what the Central European Bank (CEB) did to Cyprus during its 2012 financial crisis, when it seized large deposits from users of the nation’s second largest bank (although these have been associated with criminal activity). If there was a lesson to derive from this financial crisis, it was that a centralized financial authority could cause a cascade of effects on the economy and give way to socio-economic injustices. Without the rules and their enforcement by regulatory bodies, a decentralized system is more transactionally transparent and geographically borderless. Also, the market capitalization of decentralized currency is greater.


Enter Ethereum, the creation of Vitalik Buterin, a former University of Waterloo student from Toronto. Without going into too much detail, Ethereum is best described as a decentralized supercomputer that enables peer-to-peer contracts using “if-then” scenarios that are executed using self-enforcing codes. It also uses blockchains like Bitcoin does, and uses Ether as the form of payment for executing the contracts. It has already caught the attention of financial giants like JP Morgan, and investors are interested in the possibilities that Ethereum’s supercomputer network offers. However, this doesn’t exclude Ether from the price volatility of speculation, like those that Bitcoin experiences. Access to virtual currencies still remains outside of the mainstream public, but as the financial sector becomes globally intertwined, the tides may be about to turn. Unilateral steps taken to legitimize financial technologies like decentralized currencies–whatever their intentions–could encourage multilateral movements.


In the summer of 2017, Buterin was invited to the St. Petersburg Economic Forum and met President Vladimir Putin. What came out of that meeting was the need to push for proliferation of a digital economy, and its ability to revolutionize business models. In fact, Russian national bank VEB took on a collaborative agreement with Ethereum to use and test its blockchain capabilities. There was the belief that Russia would use Ethereum to establish a national virtual currency, and ergo become a trailblazer of cryptocurrencies and digital economies.


Not long since, the Moscow Stock Exchange announced that it was considering developing the infrastructure required to begin trading cryptocurrency. A lag in its progress are the legal kinks that need to be worked out. For instance, drafting a bill on how to define cryptocurrencies and how they should be regulated, whether by using new laws or currently existing ones. Understandably, the process from idea to implementation may be a long one, given that the consultation of many industries, ministries, and departments must be consolidated. But, should Russia try and gain an advantage over other countries and dominate the digital asset industry, it can lay the groundwork for other countries to follow–similar to what happened with the advent of the Internet. It doesn’t appear that international interest in digital assets will die down anytime soon, but accessibility problems in participating in the digital economy still loom. The initial idea was that only qualified investors will be invited to sell and purchase cryptocurrencies as financial assets on the Moscow Stock Exchange. Recently, the Central Bank of the Russian Federation released a statement that seems to take a U-turn approach to introducing virtual currencies to the marketplace. In their release, the Bank of Russia–which is not a financial regulator in Russia–notes that it considers cryptocurrency use too premature for adoption.


Aside from accessibility issues that exclude participation of the lay person, others remain. For actors and stakeholders affected by EU and US sanctions against Russia, what measures will be put into place to mitigate circumventing them? How will the anonymity that incentivized digital currency use be affected? Or, how will enforcement of regulations across borderless transactions be accomplished, or compliance with anti-laundering efforts? But, the potential for industry innovations is also abundant should a streamlined cryptocurrency platform gain momentum.


If other nations follow suit and see the merits of supplementing their economies with cryptocurrencies, it can set off a race to legitimization and implementation of digital economies. With more participants, the Internet of Things, a system that collects data without human-to-human or human-to-computer interaction, becomes more sophisticated and valuable; and data can be sold.


The era of blockchains becoming the new normal for transactions may still be in its early stages, but as it matures, it will restructure financial markets and institutions.


Photo: “ADM8” (2011) by Ars Electronica via Flickr. Licensed under CC BY-NC-ND 2.0
