When Russia talks more sense about an economic issue than famed business elite-influencers who boast millions of followers, those followers should be worried. The authoritarian nation that’s massing its armies on the Ukraine’s borders just issued an insightful assessment of the craze in cryptocurrencies, all negative. Amazingly, you’ll learn more listening to the Bank of the Russia than such celebrated crypto-bulls as Tesla’s Elon Musk, Block’s Jack Dorsey, and MicroStrategy’s Michael Saylor. You might want to pay special attention since Bitcoin’s dive below $35,000 is casting doubts that its the global currency of the future (Dorsey) or a fabulous store of value (Musk and Wood).
The Bank of Russia bashes crypto
On January 20, as Bitcoin hovered around $43,000, Russia’s equivalent of the U.S. Fed issued a “Consultation Paper” advocating that the government ban all cryptocurrency production, trading, and investing by its citizens and banks within its borders. Russia is the latest entry in a long line of nations seeking to boot or limit crypto mining, or restrict or abolish transactions in digital currencies from Bitcoin to Ether to Cardano. The list encompasses China, the former top hub for mining, as well as most of the nations where the big Chinese producers sought to relocate: Iran, Kazakhstan, Iceland, India, Sweden (where top officials favor a stoppage), and Georgia, which announced it was weighing an outright prohibition on Bitcoin mining days before Russia’s bombshell.
Russia makes three key points the U.S. crypto-bulls ignore
The first is that crypto will never work as a currency––though it poses a short-term threat––and that it’s mainly a vehicle for wild speculation. “In the long run, the potential use of cryptocurrencies for settlements [transactions] seems limited,” the statement reads. A great example is the disastrous experiment in another dictatorship, El Salvador. In that Central American nation, the regime has imposed Bitcoin as a “forced” currency that all banks and citizens must accept for payment. But folks and businesses are so distraught by the king of crypto’s volatility and that they’re refusing to use it and sticking to the dollar––and risking arrest in the process. By the way, it costs multiple times more for families in the U.S. or Europe. to send remittances to loved ones in El Salvador via Bitcoin than dispatching dollars through a Western Union.
The central bank’s take on the crypto-frenzy hits the mark: “The rapid growth of their market value is predominantly spurred by speculative demand and expectations of a further rise in their prices, which leads to the formation of a bubble in the markets. Crypto currencies also have signs of a financial pyramid as increase in their prices is largely driven by demand by new market participants.” Sounds like the way celebrity endorsements and stock market froth drove drove prices skywards, fundamentals be damned.
Russia’s second point: Crypto can undermine a currency system
Second, the Bank of Russia warned of crypto’s “threat to financial stability.” “Cryptoization limits monetary policy policy sovereignty,” write the authors. Their argument here is a bit confusing: If they don’t see crypto as a viable currency, how is it going to challenge the Ruble? Still, on the remote chance that could happen, Russia would lose its ability to control the money supply and promote price stability. The Bank seems most concerned that a flood of crypto would swell inflation. But another possibility could also “limit monetary sovereignty” if the signature crypto gained favor in paying for things.
The supply of Bitcoin that can ever flow into circulation is famously fixed. For its champions, that gives it a big advantage over fiat currencies, where central banks are free to boost the money supply and send prices racing. By contrast, if Bitcoin became coin of the realm, its value could never be debased by minting more coins. But the fixed number of Bitcoin and other cryptos makes then useless as currencies. The money supply must grow in tandem with output in good and services to keep prices stable. That the number of Bitcoin can’t expand means that the same, rigidly fixed amount of money would chase more and more goods, causing crippling deflation.
Russia’s third point: Crypto mining is a waste of electricity
Russia has emerged as a major destination for the Bitcoin miners ejected from China. Such major enterprises as BitRiver, MineSpot and BitCluster are running their banks of ASIC computers in Siberia and across the nation’s frozen northern tier. As of August, the latest numbers available, Cambridge University puts Russia’s share of Bitcoin production at 14%, twice its level in May. The big attraction is cheap energy, chiefly the megawatts generated by coal. Even at Bitcoin’s current price of around $35,000, Russia’s miners are securing gigantic margins thanks to the super-low cost of their feedstocks. Russia’s facing the same problem that led to blackouts and brownouts in Iran, Kazakhstan and practically anywhere else unbridled mining is allowed.
And the Bank of Russia knows it. The nation is hardly a paragon on environmental virtue. The share of renewables that lights homes and powers plants is miniscule. The central bank recognizes that at anything like these prices, Bitcoin and other crypto mining will grow like crazy in the months and years ahead if it isn’t stopped, robbing the juice needed to produce cars and steel. “Cryptocurrency mining creates unproductive uses of electric power,” the Bank declares, “which threatens the power supply of residential buildings, social infrastructure, and enterprises.” The statement also nods to “Russia’s environmental agenda,” but that’s a negligible motive. Russia will simply need the power the miners are hoarding to run their economy, a realization that even the greenest of nations, including Sweden and Norway, have now reached.
The solution: Ban crypto and create your own digital currency
The Bank of Russia tacitly acknowledges that crypto may harbor one valuable use: It’s much cheaper to send large dollar sums abroad using virtual currencies than dispatching dollars or Rubles via a bank. So it’s following China and India by planning its own digital currency, a virtual Ruble whose supply the central bank can control. The authors describe their Central Bank Digital Currency (CBDC) as “a new payment infrastructure which will enable businesses and government to conduct instantaneous transactions with minimal fees. Hence, the benefits of cryptocurrencies which make them attractive…for operations other than money laundering…namely high-speed, convenience, and relative low cost could be realized through the digital currencies of the future.”
Faster, cheaper? Sounds like goals a staunch capitalist would prize. The Bank of Russia identified all the problems of crypto and produced a blueprint on how to get rid of them. Then, they grabbed its one valuable use, and established how their citizens and businesses could deploy it legally and transparently. Russia’s economic model is not one any nation should adopt, but its crypto agenda makes a lot of sense.
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