Locked down in Russia, and pondering blockchain.

Paul Goncharoff

Historically, the timeline for popular awareness of the blockchain began with public networks like Bitcoin (founded by the mythical moniker Satoshi Nakamoto) in 2011. A little  later Ethereum was born, and both burst upon the world with explosively speculative cryptocurrencies. They offered the promise of financial independence and decentralization as each participant, or “peer” action is responsible to themselves and not to or through banks. 

Satoshi Nakamoto

As the field and its applications expanded and matured beyond speculative thrills, the bedrock of the blockchain was formed in 2014 with the release of Blockchain 2.0, and in 2015 with the birth of the far more developer & business oriented Ethereum (founded by Vitalik Buterin, born in Kolomna, Russia). The business uses for either of these pioneering blockchains was quickly embraced by companies interested in learning how these technologies can help them, and developing into use solutions such as DLT (Distributed Ledger Technology). 

Vitalik Buterin

For those who might not know, DLT is a decentralized database managed by multiple participants, across multiple nodes. The transactions (or votes) are then grouped in blocks and each new block includes a hash (A hash is a function that converts an input of letters and numbers into an encrypted output of a fixed length. A hash is created using an algorithm and is essential to blockchain management.) chaining them together, this is why distributed ledgers are often called blockchains. Some of us confuse these two terms and use them interchangeably. But even though their meanings overlap in several areas, they aren’t quite identical.

They both generally refer to a record of information that’s distributed across a network, and both permit a greater degree of transparency and openness than had been enabled by earlier, centralized databases or digital records. But this is where the analogies end since blockchains and distributed ledger technology (DLT) each come with their own distinguishing features. There are two simple key distinctions, and depending on your perspective, some say Bitcoin-style blockchains are more innovative than their distributed ledger counterparts while others qualify DLT as more useful for everyday commercial purposes. I am no techno-weenie, so I will leave these niceties for others to pick at.

Their needs today are largely being addressed with corresponding improvements in data security and decentralization. Today many enterprises in Russia and globally can and do interact with each other on the blockchain, where the loss of any one of them will not pose a threat to the integrity of the entire system. Recently there have appeared development groups like Chainlink which operationally bridge the various blockchain ecosystems, enhancing them all.

In Russia, cryptocurrencies and public tokens are outside legal regulation, in Europe, they are looked at with caution, and generally central banks view them suspiciously as a threat to their sovereign currencies. Tokens however, for the uninitiated, are units of value issued by a tech or crypto start-up, intended to be a piece in the ecosystem of their technology platform or project. Tokens are supported by blockchains. They only physically exist in the form of registry entries in the blockchain.

The blockchain in Russia, as everywhere, is filling ever-growing applications as a way to organize interactions between entities. Companies operate on their own IT systems, which are not interconnected either among themselves or between banks. Even if we assume that automation reaches 100% within each company, there is practically no interaction between players in one industry. For data exchange, at best, electronic document management is used, or at worst e-mail. Blockchain as a method of communication between companies in Russia seriously began to be implemented around the middle of 2018. These are the first but important steps towards automation.

Blockchain is suitable for any systems where information exchange between participants is required: for example, between companies within the same holding, banks or corporate communities. Today there are several networks in Russia that are quite capable of satisfying organizations that do not have the opportunity to work with a large, usually costlier, IT vendor. Among them are Russian companies like: MixBytes, Maxilect, Edone, Exyte, HWdTech, Evrone, HuskyJam, and others constantly springing up as demand for this field booms.

The cryptocurrency and digital assets side of the blockchain is also growing in popularity in Russia. This, despite the State Duma’s opinions and regulations aimed at crypto assets. Just recently Russia’s State Duma released a draft of proposed litigation toward cryptocurrencies and companies that deal with the technology. The draft is called “On Digital Financial Assets,” and is an updated version on how lawmakers might regulate the crypto industry in the near future. Russians today can own cryptocurrencies or other digital assets, but the new proposal does prohibit the widespread circulation and even evangelism when it comes to digital currencies versus the Russian ruble.

In spite of the Duma’s party-pooping proposal, Russian trade volume for cryptocurrencies for example on the peer-to-peer trading platform Localbitcoins (LBC) has been surging. For two months straight Russia has outpaced a number of other countries who have also been seeing significant trade volumes stem from Russia. Coin Dance statistics indicate that Russia has accounted for 20% of May’s total LBC trade volume, with June keeping pace. Even though regulatory clarity has kept Russians in the dark, LBC’s data shows that citizens from the region are demanding more cryptocurrencies than they have in past years.

Data from (BCH), Local.Bitcoin.com, indicates that Russians are trading a lot on BCH as well. Just to compare, in crypto-active regions like Venezuela, Brazil, Cuba, Iran, and Colombia, there are people who have traded 50 to over 100 times regularly. In Russia, however, traders have settled over a thousand buys and sells in the same time-space.

Russia was recently featured in the Onfo research report, which had shown the country saw a faster “network effect” for crypto than the likes of the U.S. and Germany. The trend of adoption continues despite Russian lawmakers proposing a law that will allegedly criminalize buying cryptocurrencies with cash.

Moving on from cryptocurrencies, nowadays, blockchain technology is actively implemented in all business sectors in some shape or form, and Russian real estate is one such area.

The real estate blockchain boom in Russia began a few years ago as numerous big development companies began experimenting with the technology to improve and streamline processes.

Rosreestr (The Federal Service for State Registration, Cadastre, and Cartography) was the first of now several official organizations to register transactions using the blockchain in Russia. Today, blockchain technology is actively implemented in all business sectors in some manner.

What was achieved by Rosreestr’s use of the blockchain? It allows documents submitted for state registration by applicants to be registered automatically without any human intervention, minimalizing errors, and boosting transparency and speed. Equity agreements are also registered through the blockchain thanks to this service improvement. The main goal was to streamline and optimize processes while protecting and increasing data security. The blockchain increases the level of data security thanks to its immutability and inherent decentralization. It also helps to optimize information control and provides added transparency and accessibility to all participants involved.

Ultimately, the historically the murky world of Russian real estate will be part of the dustbin of the past. The property and development business can hope to ride the success of its future expansion with the help of blockchain, where there is greater transparency in regard to the investment processes for new construction projects. It is also a much-needed breath of fresh air as it can provide protection from the most commonly practiced fraud, and eliminate the risk of corruption with illegal unilateral changes.

Greater use of the blockchain in Russia should help Russia’s real estate sector become safer. It is true that both primary and secondary real estate operations in the country have been plagued by risk. A gaggle of con-artists in Russia have dined heartily well ever since perestroika by defrauding victims, “selling” property falsely documented that they have no right’s to, or is simply not for sale. With the help of blockchain, such documentary fraud will be impossible as the technology is transparent and immutable. Additional pluses are the time needed for processing the transactions went from 15 days on average to just one day, and the gangs of intermediaries in real estate transactions will no longer be as needed when contracts can be concluded much faster, with less scope for corruption.

Russia’s bureaucracy has melded many related services into the real estate sector: lawyers, banks, development companies, agents, government inspection and tax services, and so on. With such a large multifaceted system in place, errors in drawing up contracts for the sale of real estate are inevitable, yet now with the help of blockchain technology, the costs associated with these errors have already been reduced, and I trust that the purchase of a new house will become a more pleasant and safe business proposition.

On totally different tangent, and getting away from Russian real estate, one Russian company “Waves Enterprise” recently entered into a partnership with Microsoft that will see their blockchain platform added to the existing “Microsoft Azure Marketplace”. This is part of a joint initiative aimed at the adoption (and promotion) of corporate blockchain solutions. This joint integration is called  Blockchain-as-a-Service (BaaS). The main applications for BaaS include supply chain optimization, notarizing data, and the tokenization of industrial assets. Under this agreement, the two companies will also jointly develop possibilities allowing businesses to use the blockchain technology for optimizing corporate processes in Russia.

Despite the fact that Waves and Microsoft will cooperate in further developing blockchain in Russia, the investment in this sector has significantly decreased due to the pandemic effects.  In Russia, just 32 investment deals were concluded in April for a total of USD$50 million. This is half the amount invested in March. The pandemic has pushed investors to cut funding for startups, yet there are positive trends as well. More and more investors are ready to invest in projects in exchange for tokens, and not for shares in the company’s securities, as was traditional until recently. 

Taking a broader view, it is worth noting that global spending on blockchain solutions should exceed $ 4.3 billion by the end of 2020. This is 57.7% higher than in 2019 ($ 2.7 billion), but 7.7% lower than many forecasts announced before the virus outbreak. According to analysts, the average annual growth rate of the blockchain compound annual growth rate (CAGR) for the five years from 2018 to 2023. will amount to 55.3% in the Asia-Pacific region and 51.7% globally. By 2023, spending on DLT (distributed ledger technology) will hit $14.4 billion.

The numbers are not huge, when compared to say the US Dollar debt today, but consider it all began a scant six years ago in 2014 when Blockchain technology was separated from the currency, and Blockchain 2.0 was born. This opened the door to developers and the potential for other financial, interorganisational transactions in applications beyond cryptocurrencies. The Ethereum blockchain system came on at the same time, which was much more applicable to business applications. The Ethereum blockchain introduced computer programs into the blocks, representing financial instruments such as bonds or other assets. These are today known as smart contracts, and they are growing like Russian mushrooms!

Paul Goncharoff, Moscow July 18, 2020

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