Russia's Blockchain Industrial Base: An Analysis of the Government's Role & National Security Implications
In the race to digital supremacy, nations are leveraging blockchain technology to bolster their industries and fortify national security. One such nation is Russia, whose recent adoption of blockchain technology signals a significant shift in its digital landscape. Russia's embrace of blockchain technology has been rapid and far-reaching. From the establishment of a government-backed blockchain platform to the introduction of regulations that encourage innovation, the country has taken bold steps to ensure its place in the digital future. The development of a blockchain infrastructure is expected to have a dramatic effect on the industrial base, providing secure and transparent interactions between businesses, consumers, and government entities. The Russian government, led by President Vladimir Putin, is actively supporting the integration of blockchain technology into the country's financial ecosystem. The president has even proposed the creation of a national cryptocurrency.
However, the real work in propelling the global blockchain economy is being done beyond the Kremlin walls. Small groups of private software engineers are tirelessly working behind the scenes, developing innovative blockchain solutions, and contributing to the financial evolution. ‘Additionally, this technology will give Russia greater control over its digital data and provide enhanced protection from cyber threats. However, Russia's burgeoning blockchain industry has had to grapple with the negative reputation associated with cryptocurrency-related cybercrimes. For instance, Russian hackers implicated in the hacking of Hillary Clinton’s 2016 presidential campaign allegedly laundered over $95,000 using Bitcoin to fund their operations. This article delves into Russia's burgeoning blockchain environment, examining its impact on the industrial base and national security implications.
1. Blockchain Adoption in Russia's Industries
1.1 Aviation Industry
The Sheremetyevo Airport in Moscow recently connected to the blockchain platform, Smart Fuel, allowing it to instantly pay for aircraft refueling. The platform is a private blockchain where each participant acts as a node owner. The refueling process relies on the interactive interaction of pilots and fuel tanker drivers using tablets. The Smart Fuel platform launched in the spring of 2021 and has since connected to 18 airports in Russian cities, including Saratov, Novosibirsk, Tobolsk, and now Moscow. The platform's use has significantly reduced the time for payments for refueling from four to five days to just 15 seconds. It also reduced the interval for inter-flight servicing of aircraft by 10%.
1.2 Electoral System
Another significant area where blockchain technology is being implemented is in the electoral system. Russia plans to pilot a national blockchain-based e-voting system, a project developed in partnership between Rostelecom, Russia's largest integrated provider, and Waves Enterprise. This system, which employs zero-knowledge proofs and advanced cryptographic primitives, aims to scale to tens of millions of users. The first run of this system is planned for the State Duma elections. For instance, the upcoming constitutional referendum will give residents of Moscow and the Nizhny Novgorod region the option of casting their votes electronically, with their votes recorded on a blockchain system. Blockchain-based voting systems have faced scrutiny due to potential security vulnerabilities. The city council elections in Moscow, where electronic voting was introduced, experienced technical issues that raised questions about the system's reliability.
1.3 Space Program
The Russian space agency, Roscosmos, is also using blockchain technology to protect intellectual property (IP) in the space industry. It is testing an IP protection solution, IP Guard, based on the Waves Enterprise blockchain platform. This tool can detect IP violations and maintain and verify a database of IP data objects. The IP Guard tool is designed to detect and manage IP violations, maintain and verify a database of IP data, and coordinate IP experts. By employing blockchain technology, Roscosmos aims to ensure data immutability and verification, which centralized registries cannot provide.
IP Guard: An Innovative Solution - This blockchain-based tool enables Roscosmos to maintain and verify a database of IP data objects and coordinate IP experts from various fields, such as lawyers, patent specialists, and auditors. The brilliance of blockchain lies in its immutability and verifiability, properties a centralized registry cannot offer, according to Waves Enterprise's Chief Commercial Officer, Igor Kuzmichev. Another innovative feature of IP Guard is the use of smart contracts to provide non-monetary rewards for detecting IP infringement cases. Network participants receive "cosmotokens" that can be later exchanged for merchandise from the agency and other space industry organizations. Currently, in beta testing, IP Guard is expected to fully launch in the summer of 2021, with Roscosmos being the first organization to test the service.
1.4 Finance Sector
Apart from the military, several other Russian organizations are also showing interest in blockchain technology. Major private banks like Sberbank and Alfa-Bank have started experiments involving cryptocurrency trading, providing locals with opportunities to build their cryptocurrency portfolios.
Binance & Russia's Financial Intelligence Unit: In a controversial move, Binance, the world's largest crypto exchange, reportedly agreed to share client data with Russia's financial intelligence unit, Rosfinmonitoring. The unit sought Binance's cooperation to help fight crime and trace financial transactions, including those associated with jailed Russian opposition leader Alexei Navalny. Despite international outcry over Russia's invasion of Ukraine and consequent sanctions, Binance has continued to operate in Russia. This has led to a significant boom in Binance's trading volumes in Russia, as citizens turn to cryptocurrency to protect their assets.
National Crypto Exchange: In a significant development, Sergei Altukhov, a Russian lawmaker, confirmed that the lower chamber is drafting an amendment to establish a national crypto exchange. This move aims to bring billions of rubles of lost budget revenues in the form of taxes back into government regulation. Altukhov believes that the division working within a respected organization interacting actively with the central bank would best deal with operations involving cryptocurrency.
Tether's Role in Trade With China: Chinese importers in Russia are resorting to buying up to $30 million a day of tether (USDT) from Moscow’s over-the-counter trading desks. They use the cryptocurrency to send large sums back to their home country, which has strict capital controls. Despite questions about USDT's collateral, the market seems unfazed. As Konstantin Plavnik, the chief operating officer of Moscow-based crypto derivatives exchange Xena, puts it, "Nobody actually cares if Tether is backed or not". In this situation, some Chinese have opted to use crypto to move money across the border. Chinese merchants bringing cheap goods to Moscow’s shopping malls use crypto to move money around, which was all but officially recognized by the Russian authorities last year.
Collaboration With Bitfury: As part of its strategy to strengthen its blockchain industrial base, Russia has partnered with leading blockchain company Bitfury. Bitfury recently opened an office in Russia with the aim of introducing its blockchain-based products to government agencies and companies. Bitfury, with its products Exonum and Crystal, promises to revolutionize Russia's blockchain landscape. Exonum is an enterprise-grade open-source blockchain framework, while Crystal is an all-in-one Bitcoin Blockchain investigative tool designed for use by law enforcement organizations and financial institutions.
1.5 Bitcoin Mining Boom in Russia
In the meantime, bitcoin mining in Russia has been experiencing a boom. Hardware manufacturers like Bitmain and MicroBT are strategically positioning themselves to benefit from this surge. Russia, with its cheap energy and cold climate, has always been a significant contributor to the Bitcoin hash rate, a measure of computational power contributed to the blockchain. The industry's growth was further propelled when China banned the industry in 2021, making Russia one of the world's largest mining countries.
Favorable Climate & Energy Costs: The cold climate and affordable energy costs in Russia have made it a key player in the Bitcoin mining sector. Miners can install their machines at other companies' facilities for $0.05-$0.055 per kWh, significantly lower than the U.S. average of $0.08 per kWh7.
Government Support for Crypto Mining: The Russian government's direct support for crypto mining projects has been instrumental in the sector's growth. This support is evident in the tax incentives provided, and the establishment of a $12 million crypto mining center in East Siberia. With the government's backing, a new crypto-mining center is being established in East Siberia. This facility, expected to house 30,000 mining machines and consume 100 megawatts from the power grid, is set to open in the first half of 2024.
Tax Incentives: The government has provided a wide range of incentives for crypto mining operations, including zero land and property taxes, reduced income tax rates, and halved electricity prices.
1.6 State Nuclear Energy Corporation
State nuclear energy corporation Rosatom has expressed its intention to develop "advanced" digital technologies, including blockchain. The corporation aims to integrate these technologies on a wider scale to increase the efficiency of the manufacturing process. Rosatom is also actively looking for new talent in the areas of blockchain, artificial intelligence, and the Internet of Things (IoT). This move by the corporation underscores the significant role that these technologies are expected to play in Russia's digital future.
2. Blockchain in Military Defense & Geopolitics
2.1 National Security & Military
Beyond industries, blockchain technology is also being harnessed for national security. The Russian Ministry of Defense is spearheading this initiative by launching a research laboratory to explore potential cybersecurity applications of blockchain. The lab, supervised by the military technology accelerator, "ERA," will test if blockchain can be used to detect and prevent cyberattacks and enhance the military's cybersecurity measures. They believe that the technology can be used to trace the origins of malicious hack attacks, making it harder for hackers to cover their tracks. The lab is under the oversight of the Russian Federation's 8th Directorate of the General Staff of the Armed Forces, responsible for protecting state secrets. '
The facility is being constructed in Anapa, a coastal Russian town near the Black Sea. The Russian Defense Ministry aims for the laboratory to become a technology hub employing about 200 scientists. The lab is also studying the potential for blockchain-based applications in the military. One such application could be a secure messaging system for soldiers on the battlefield, allowing them to communicate with each other without fear of interception. Another potential use case is a secure digital asset ledger, which would enable soldiers to keep track of their equipment and supplies in real-time.
The Russian government has already taken steps to ensure that its defense sector adopts blockchain technology. In 2019, they announced the creation of a special committee to oversee blockchain projects related to military defense and national security. The committee includes representatives from the Ministry of Defense, Ministry of Industry and Trade, Ministry of Communications and Mass Media, Federal Security Service (FSB), Federal Protective Service (FSO), and Rostec Corporation - a state-owned corporation responsible for overseeing Russia's high-tech industries.
2.2 Protecting State Secrets
The Russian government is also exploring the potential of blockchain technology to protect state secrets. It is leveraging blockchain to create a secure and tamper-proof digital infrastructure for all sensitive government data. This system is expected to be more secure and reliable than traditional solutions, as it will make it impossible for malicious actors to access confidential data. The Russian Ministry of Defense is currently developing a blockchain-based system that will allow the military to securely store and share classified information. The system will use cryptography and advanced security protocols to protect state secrets, making it virtually impossible for unauthorized individuals or organizations to gain access.
Additionally, the system will be able to detect any attempts at tampering or modification of the stored data in real time, allowing the government to take immediate action when necessary. The Kremlin and Russian oligarchs recognize the potential of blockchain, and it's clear that the technology will continue to shape Russia's industrial base and have significant national security implications in the future. Russia's blockchain revolution is just beginning, and the world is watching closely. The adoption of blockchain technology has undoubtedly bolstered Russia's intelligence capabilities.
2.3 Putin’s Calls For Independent Blockchain-Based Settlement Network
At the International AI Journey Conference in November 2021, Russian President Vladimir Putin expressed a critical view of the monopoly status quo in global financial payment systems. He proposed an alternative: an independent, blockchain-based settlement network that can offer a safer, more convenient, and independent alternative. He addressed the audience, stating: "Digital currencies and blockchain technology can be harnessed to build a novel international settlement system. It will be safer, more user-friendly, and free from dependence on banks or third-party interferences."
He also enlightened the audience about the potential risks associated with global payments due to the strained relations between Russia and the West, referring to the sanctions imposed by various countries as "illegitimate restrictions". The day before Putin's address, local media reported lawmakers' discussions about amendments to existing cryptocurrency legislation, aiming to establish a legal framework for a national exchange. Another noteworthy development was the introduction of a bill into the Russian State Duma on November 17, proposing the legalization of cryptocurrency mining and the sale of mined cryptocurrency.
2.4 Russia-Iran Collaboration
In 2018, the two countries signed a memorandum of understanding aimed at increasing cooperation in the field of information technology, including blockchain and crypto. Since then, both countries have taken steps to strengthen their cooperation on blockchain and crypto. In 2020, the Russian government announced plans to establish a blockchain research center in Iran, aimed at promoting the development of blockchain technology in the country. Iran has also taken steps to strengthen its cooperation with Russia on crypto, with the country's central bank announcing plans to use Russia's blockchain platform to conduct interbank transactions.
Both Russia and Iran have shown an interest in the use of blockchain technology in trade. In 2020, the Russian government announced plans to develop a blockchain-based trade finance platform aimed at facilitating trade between Russia and its trading partners. Russia and Iran have shown an interest in stablecoins as a means of facilitating trade. In 2020, the Russian government announced plans to develop a stablecoin that would be backed by the country's central bank. Iran has also taken steps to embrace stablecoins, with the country's central bank announcing plans to develop a gold-backed stablecoin.
The adoption of blockchain technology has undoubtedly bolstered Russia's intelligence capabilities. From protecting IP in the space industry, securing defense infrastructure, ensuring transparent elections, to revolutionizing the aviation fuel industry, the technology is playing a critical role in the country's digital transformation. The Kremlin and Russian oligarchs recognize the potential of blockchain, and it's clear that the technology will continue to shape Russia's industrial base and have significant national security implications in the future. Russia's blockchain revolution is just beginning, and the world is watching closely.
Blockchain technology is proving to be a game-changer across various sectors worldwide. In Russia, its potential is being explored across diverse sectors, from defense and space to finance and elections. As the nation continues to innovate and harness the power of blockchain, it sets a powerful example for other nations to follow. Despite some skepticism, the progress made in implementing blockchain technology in Russia's national security measures is undeniable. The nation's journey into the world of blockchain serves as a fascinating case study in the global digital revolution.
