Best of the Week
Most Popular
1.North Korean Chinese Proxy vs US Military Empire Trending Towards Nuclear War! - Nadeem_Walayat
2.Researchers Find $10 Billion Hidden Treasure In A Dead Volcano - OilPrice_Com
3.Gold and Silver : The Battle for Control - Rambus_Chartology
4.Asda Sales Collapse and Profits Crash! UK Retailer Sector Crisis 2017 - Nadeem_Walayat
5.Deep State Conspiracy or Chaos - James_Quinn
6.The Stock Market Guns of August, Trade Set-Up & Removing your Rose Tinted Glasses - Plunger
7.Gold Stocks Coiled Spring - Zeal_LLC
8.Neil Howe: The Amazon-Walmart Rivalry Will Determine the Future of Retail - John_Mauldin
9.Crude Oil Price Precious Metals Link in August - Nadia_Simmons
10.Gold and Silver Precious Metals Nearing Breakout - Jordan_Roy_Byrne
Last 7 days
Seeking Confirmations – US Stock Market - 21st Aug 17
The changing demographic of online gamblers - 21st Aug 17
Gold is a coiled spring… the breakout is here, fundamentals are in place, technicals are compelling - 20th Aug 17
A Midsummer Night's Dream: Buy Gold and Silver - 20th Aug 17
Gold Mining Stocks 2017 Fundamentals - 20th Aug 17
EIA Weekly Report and Crude Oil - 19th Aug 17
4 Insights for Adjusting Your Portfolio in a Rate-hike Environment - 19th Aug 17
Gold Direction Indicator - 19th Aug 17
Historical Inevitability and Gold and Silver Ownership - 19th Aug 17
You Are Being Lied To About “Low” Gold Demand - 19th Aug 17
This is Why Cocoa's Crash Was a Perfect Setup - 19th Aug 17
Gold, Silver Consolidate On Last Weeks Gains, Palladium Surges 36% YTD To 16 Year High - 19th Aug 17
North Korea Is Far From Being Irrational… It Has A Plan - 18th Aug 17
US Civil War - FUNCTIONAL ILLITERATES TRYING TO ERASE HISTORY - 18th Aug 17
Bitcoin Hits New All-Time High Over $4,400 As It Catches Paypal In Total Market Cap - 17th Aug 17
3 Psychological Ingredients behind Great Web Content - 17th Aug 17
The War on Cash - Rogoff, Orwell and Kafka - 17th Aug 17
The Stock Market Guns of August, Trade Set-Up & Removing your Rose Tinted Glasses - 16th Aug 17
Stocks, Bonds, Interest Rates, and Serbia, Camp Kotok 2017 - 16th Aug 17
U.S. Stock Market: Sunrise ... Sunset - 16th Aug 17
The Next Tech Crash Could Delay Your Retirement by a Decade - 15th Aug 17
Gold and Silver Precious Metals Nearing Breakout - 15th Aug 17
North Korea Showdown: Pivotal Market Turning Point - 15th Aug 17
Tech Stocks DOT COM Bubble Do-Over? - 14th Aug 17
Deep State Conspiracy or Chaos - 14th Aug 17
From the Trans-Atlantic Axis and the Trans-Asian Axis - 14th Aug 17
Stock Market Intermediate Correction Underway - 14th Aug 17
The Islamic State Jihadi Pivot to Asia - 13th Aug 17
Potential Pivots Upcoming for Stocks and Gold - 13th Aug 17
North Korean Chinese Proxy vs US Military Empire Trending Towards Nuclear War! - 12th Aug 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

Here’s Why Russia Opens The Door To Cryptocurrencies

Currencies / BlockChain May 03, 2017 - 05:21 AM GMT

By: John_Mauldin

Currencies

Antonia Colibasanu : Russia has announced that it will legalize the use of cryptocurrencies. The government confirmed last week that a draft bill would create the legal framework for trading in bitcoin, dash, ether, and other digital currencies.

This comes a year after the same Russian institutions said people trading in these currencies could be jailed. This raises two important questions: Why has the government made this U-turn? What opportunities does it now see in this technology? The answers lie in Russia’s need to address serious problems in the banking sector and their impact on the economy.


The Russian economy has been under severe strain since 2014. Oil prices dropped and the United States and European Union imposed sanctions that have dried up foreign investment. As the costs of accessing money increased, the banking sector was affected by the downturn.

Against this backdrop, the Russian Central Bank has intensified its anti-corruption campaign. This is meant to address dodgy, inefficient banks. Some of these banks use money-laundering schemes to remove capital from the country. About 100 banks have closed in the last three years. Central bank head Elvira Nabiullina said the campaign would continue for at least two more years.

Liquidity Concerns

But closing banks is expensive. The process has so far cost the Deposit Insurance Agency (DIA) about $50 billion. In addition, the central bank needs to act carefully to avoid a liquidity crisis caused by closing banks.

Local companies depend on banks for liquidity. Extended cash shortages in the country’s mono-industrial regions could fuel social unrest. The central government wants to avoid this unrest.

For example, Tatfondbank in Tatarstan was investigated last December. Protesters called for the central government to force local employers to pay salaries, which were late. The salary problems may have had other causes. Business inefficiencies aren’t directly linked to the banking sector. But Russian business culture is personal, especially in the regions. Company owners are friends with bank managers. These ties mean that what happens in the banking sector could impact how businesses operate.

The personal ties between local businesses, banks, and regional administrators are a source of corruption. Russian central authorities want to at least reduce, if not eliminate, this corruption. The most common crimes the central bank found in banks it closed were lending to companies with no real business activities, providing fictitious loans to individuals, and fraud involving tradable securities. However, by the time investigators start looking into these banks, their owners often have fled. That leaves a hole in banks’ balance sheets. The DIA must cover this hole by paying back depositors.

Stopping Fraud

The current credit system is opaque. Central authorities have trouble identifying people involved in the regional banking system. This allows small banks to operate more or less separately. But closing banks is not enough to limit fraud and its effects on the Russian economy. Authorities must find ways to stop it from happening in the first place.

One solution is to implement new technological applications that allow the government to identify people involved in the system in real time. This is why the Russian government has adopted a more positive stance toward cryptocurrencies.

The use of digital money is not what excites the financial elite. Rather, they are interested in the technological platform that supports it. Cryptocurrencies are not issued by the government. Unlike traditional currencies that are printed, cryptocurrencies are minted in the digital world.

The most successful cryptocurrency is bitcoin, introduced in 2009. New bitcoin units are issued via algorithms that secure their issuance and future transactions. People can buy bitcoins with traditional currencies on bitcoin exchange markets or at their banks. They can use them to buy goods or services in countries that allow their use.

Governments’ biggest fear of cryptocurrencies is anonymity that could facilitate money laundering. But bitcoin has less anonymity than earlier digital currencies. The trading system it is built on, called a blockchain, facilitates tracking user transactions.

The Blockchain

Bitcoin’s growing popularity and acceptance is due to the blockchain. People often wonder how and where digital currencies are stored. Bitcoins are not stored in a file or on a server. Their circulation is tracked using a blockchain. A blockchain is a secured ledger that allows transactions to be timestamped and verified. Bitcoin transactions, not the actual bitcoins, are tracked.

This process provides a record of bitcoin users. The blockchain’s technology is built on this logic. Three main characteristics allow it to increase the efficiency of the financial and other sectors. First, it does not have a central database or server that can be hacked. The blockchain is distributed among multiple computers that host data. Second, it is accessible to network members who can see bitcoin transactions in real time. Third, it is encrypted.

Like other technological applications, it can be adopted and adapted by a multitude of users. This includes the financial sector. Governments and businesses can create their own versions of a blockchain or use the existing bitcoin platform.

The benefits of using blockchain technology, apart from the ability to track users, include increased processing speed, lower costs due to less bureaucracy, and increased security once central attack points are eliminated. These benefits are attractive to Russia’s financial system. However, many details still need to be worked out.

Looking Forward

It is unclear whether Russia will adapt bitcoin’s existing blockchain platform for the entire banking sector and regulate its use through new legislation; use the platform until banks develop their own systems; or approve the cryptocurrency’s use to better understand how the blockchain technology application can help Russia’s financial sector.

It is also unclear if the leadership in Moscow will resist these moves. But one thing is certain about the recent U-turn on the use of cryptocurrencies: Russia’s central authorities and elites understand the benefits of implementing blockchain technology within the banking sector. They are hoping to use this technology to decrease fraud and corruption, which in turn would decrease government costs.

Grab George Friedman's Exclusive eBook, The World Explained in Maps

The World Explained in Maps reveals the panorama of geopolitical landscapes influencing today's governments and global financial systems. Don't miss this chance to prepare for the year ahead with the straight facts about every major country’s and region's current geopolitical climate. You won't find political rhetoric or media hype here.

The World Explained in Maps is an essential guide for every investor as 2017 takes shape. Get your copy now—free!

John Mauldin Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife