The year 2017 was momentous in the history of cryptocurrencies. On one side of the spectrum are the optimists such as venture capitalist Marc Andreessen, who tout them as “the next internet”. This view seems to be shared by the adopters as well, as was reflected in the exponential growth seen by Bitcoin and Ethereum, not to forget the massive investment of $2.6 billion generated by Initial Coin Offerings (ICOs). An initial coin offering (ICO) is a means of crowdfunding centered around cryptocurrency, which can be a source of capital for startup companies. In an ICO, some quantity of the crowdfunded cryptocurrency is pre-allocated to investors in the form of “tokens,” in exchange for legal tender or other cryptocurrencies such as Bitcoin or Ethereum.
On the other side are the critics including economist Paul Krugman and Warren Buffet who have called Bitcoin “evil” and a “mirage”. This feeling seems to be shared by many states, as was evident from the regulatory scrutiny that it faced. Governments of China, South Korea, and Vietnam introduced legislation to address the boom in cryptocurrencies. Whereas China had banned Bitcoin exchanges and other trading platforms, South Korea has banned raising money through ICOs. Kremlin, on the other hand, had planned to jail individuals up to seven years for using or owning Bitcoins. At the root of both the extreme reactions is the inability to understand the enigma that is cryptocurrency. It is at this juncture that the first state-backed cryptocurrency ‘CryptoRuble’ and its adoption assume importance.
Cryptocurrency – Enigma wrapped in a mystery
The last decade of Twentieth century was witness to numerous failed attempts at inventing a decentralized digital cash system. In late 2008, Satoshi Nakamoto invented Bitcoin, the first widely used cryptocurrency, as a side product of another invention – ‘A Peer-to-Peer Electronic Cash System’. Cryptocurrencies are digital assets that are encrypted for security. Cryptocurrencies are primarily used to buy and sell goods and services. They possess no intrinsic value and they are not redeemable for another commodity. Unlike traditional currency, they are not issued by a central authority and are not considered legal tender. That brings us to the question of what decides the price of cryptocurrencies.
Primary among them is the relation between supply and demand. The supply of Bitcoin is limited by code in the Bitcoin blockchain. A blockchain is a digitized, decentralized, public ledger of all cryptocurrency transactions. It is programmed in such a way that the rate of increase of the supply of Bitcoin decreases until the number of Bitcoin reaches 21 million, which is expected to take place in the year 2140. As adoption of Bitcoin increases, the slowing growth in the number of Bitcoin assures that the price of Bitcoin will continue to grow. The purpose of the limit is to provide increased transparency in the money supply, in contrast to government-backed currencies. With the major currencies being created on open source codes, any given individual can determine the supply of the currency and make a judgment about its value accordingly.
Another factor that decides the price is the applications of the cryptocurrency. Cryptocurrencies such as Bitcoin and Ethereum have value as a means of exchange. Other cryptocurrencies can have other usages that create value. As uses for cryptocurrencies increase, corresponding demand and value also increase. Since cryptocurrencies are technology intensive, any changes in technology also will affect the price. This became evident in July and August 2017, when the price of Bitcoin was negatively impacted by controversy about altering the underlying technology to improve transaction times.
Despite being widely used, it is the misuse of cryptocurrencies that fuelled the fears about them. Central to this are two factors. Firstly, the anonymity provided by cryptocurrencies in their usage. Anonymity in cryptocurrencies helps criminals evade identification by law enforcement agencies. The problem only becomes worse as cryptocurrencies evolve stronger privacy protection. Secondly is the flexibility provided by operating as a decentralized currency, in which people pay each other without a middleman, like a bank or a credit card agency. The potential of cryptocurrencies in crime was apparent to the whole world when victims of the WannaCry ransomware attack received a simple message on their computer screens informing that files have been encrypted, and will be decrypted upon a payment of around $300 in bitcoin within three days, or $600 within seven days. The growth of cryptocurrency has created a situation whereby, cryptocurrencies are used in illegal commerce, crimes, and money laundering. It is such fears that resulted in the creation of the first state-backed cryptocurrency – CryptoRuble.
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CryptoRuble – Panacea for all ills?
Vladimir Putin, an avowed critic of cryptocurrency surprised many an observer when he announced the implementation of a new national cryptocurrency, the CryptoRuble. CryptoRuble is the first cryptocurrency issued by a state. Once implemented, it will be made the primary cryptocurrency in Russia and mining of other cryptocurrencies will be banned.
The primary difference between CryptoRuble and other digital currency is that CryptoRuble will be wholly state regulated, whereby it will be controlled, issued and maintained solely by the Russian government, whereas others are primarily deregulated and decentralized. Russian citizens will be able to exchange CryptoRubles for regular rubles following the introduction of the currency. It has been clarified that illegal trade of CryptoRubles shall be prevented by levying a 13% tax on the owner of the currency who is unable to declare the origin of their CryptoRubles.
CryptoRuble is planned to be attached to the Russian ruble at a ratio of 1:1 prompting opinions that it is merely a digital version of the ruble, without inculcating any innovative aspects into it. For an establishment which had planned to jail users of Bitcoin, this changed approach is intriguing. Hence the reasons for the change make an interesting analysis. Primary among them is the realization that cryptocurrencies are here to stay and any delay in issuing regulated CryptoRuble will result in this space being occupied by other European nations. Besides this reason, a severely regulated CryptoRuble indicates Putin’s desire to wipe out illegal financial activity associated with cryptocurrencies such as money laundering, the online drugs trade, financing for terrorism and human trafficking. To remove the anonymity element prevalent in Cryptocurrencies, the CryptoRuble uses the encryption designed by the Russian government. This helps in maintaining the traceability as well.
CryptoRuble indicates the desire of the ruling establishment to control the cryptocurrency universe. This trend repeated itself when countries such as Venezuela, Canada, and Estonia moved towards establishing their own cryptocurrencies for various reasons. Venezuela established ‘Petro’ to bypass sanctions and increase the possibility of doing business with international banks, who are wary of the volatility of the Venezuelan peso, whereas Estonia established Estcoin as a proactive step to be part of this digital revolution.
CryptoRuble is an acceptance of the fact that cryptocurrency will be gaining legitimacy as a protocol for all business transactions and payments. Thus, an effort of the establishment to control innovation is more an indication of its inability to stop an idea whose time has come. Thus, CryptoRuble is not only a new player in the cryptocurrency market but also a pioneer in bringing in elements of regulation, control, and traceability in the cryptocurrency space.
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