Russia’s Startups Seek Refuge Abroad in Face of Bitcoin Ban

By October 11, 2014Bitcoin Politics
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bitcoin, russia

Due to Russia’s status as the ninth-largest economy in the world, its rising interest in non-cash transactions and its evolving payments ecosystem, the country has unsurprisingly been a market of interest for the bitcoin community, both domestically and internationally.

However ripe for disruption the Russian market might be because of these factors, though, the country’s parliament may soon cast the deciding vote as to whether bitcoin will play any role in country’s ongoing payments upheaval.

On 1st August, Russia’s Ministry of Finance announced a draft bill that, if approved, would standardize the country’s definition of ‘money surrogate’, banning all forms of value that may fall into this category, including bitcoin and alternative digital currencies.

Last week, the regulator doubled down on its restrictive stance toward bitcoin, revealing monetary penalties for those who use or even advocate for bitcoin in the full text.

Artem Tolkachev, managing partner at Tolkachev & Partners, a law firm that has long advised regional startups, told CoinDesk that this looming threat has led him to actively encourage his clients to take their businesses to safer jurisdictions.

Tolkachev told CoinDesk:

“Due to the negative attitude of Russian authorities to cryptocurrencies, we’re advising most of our clients to structure their business in foreign jurisdictions. Most of our clients are starting to operate outside Russia.”

Tolkachev, who rose to prominence in the local bitcoin community as the author of an early and influential report on the industry, said that many of his clients are taking his advice, basing their operations in other countries to avoid the potential impact of the bill.

“The adoption of the bill in [its current] wording will literally mean that bitcoin is illegal in Russia and one can hardly help bitcoin business after this step,” he said, adding:

“Actually, the only possibility that will be left for them is to move to a better jurisdiction, to one of the emerging bitcoin paradises.”

Seeking refuge abroad

Tolkachev connected CoinDesk with two startups lead by Russian entrepreneurs, who agreed to share their stories about their struggle to serve the market.

Vladimir Chelpanov, CEO of bitcoin stealth startup ALFAcoins, for example, has opted to incorporate his business in the British Virgin Islands as it seeks to identify new target markets for its services.

“We started the business as [a] cryptocurrency payment processing service for stores in Russia, but, under huge changes in the market, we were forced to reorientate the company to international markets,” Chelpanov explained.

For now, he believes the draft bill will lock not only ALFAcoins, but other entrepreneurs out of what he called the world’s fourth-largest bitcoin market after China, the US and Europe, although this may not result in a substantial migration.

“No Russian companies are officially involved in bitcoin business,” he said.

Anton Vereshchagin, founder of bitcoin exchange InterMoneyExchange Corp, has been more active at trying to engage regulators in dialogue, though his company is now registered in Belize.

Vereshchagin said his attorneys had been writing letters to the Bank of Russia, seeking clarity, but suggested that communications have stalled.

“The answers were not exact, but it was before the recent updates,” he said.

An alternative market

Vereshchagin, however, is still watching the Russian market, which he cited as a potential target due to the large amount of underbanked citizens and the rising popularity of alternative online payment methods.

“The Russian market is quite interesting, so we were hoping for better news,” he said. “I always hope for the best, but am getting ready for the worst. I will be glad to be mistaken, but right now the chances are pretty low.”

InterMoneyExchange Corp has now turned its focus to the European market, recently adding Sofort Banking as a payment method to enable users in 10 European countries to purchase bitcoin, a move that could be embraced by other Russian bitcoin entrepreneurs.

Pavel Ivanov, a Russian native and the founder of digital currency exchange platform, EXMO, for example, is following a similar path, seeking to serve only European markets.

Launched in 2013, the UK-based company seeks to provide a full suite of brokerage and trading services to appeal to European miners, traders and consumers. Ivanov was keen to stress that EXMO, while founded by Russian citizens, serves only the wider European market.

While EXMO has a diversified market presence, it still maintains support for the Russian ecosystem, sponsoring and appearing at conferences such as the recent CryptoForum, held in St Petersburg this August.

Unlike many of his peers, Ivanov was personally dismissive of the new law, seeing the draft bill as an early and uniformed reaction from the government; one that will eventually give way to greater understanding of digital currency and its utility.

He said:

“This is the third verbal bitcoin ban in the last year, which will probably not be implemented. There are still a lot of intelligent people in Russia, which we believe will someday become a majority.”

Hopefuls soldier on

Still, reactions to the latest statements from the country are mixed, with some startups choosing to continue with their go-to-market strategies until the laws are finalized.

Intercoin Bank (ICB), for instance, launched its universal bitcoin services platform on 29th August. The startup estimated it had registered 700 users before the most recent Ministry of Finance warning, although it says it has struggled to translate this interest into deposit activity.

ICB told CoinDesk that it has a 10-person team based in Moscow and Kazan. The platform, which has been in development for seven months, styles itself as a bitcoin bank, offering exchange, payment processing and deposit services – sophisticated offerings that could be transitioned to other markets.

Speaking through an interpreter, the company said ICB is currently only targeting the Russian market, although its legal team is exploring potential backup plans.

“Territorially they are located in Russia, but the laws [there] are constantly tightening, so the lawyers are trying to find new ways of operating in these conditions,” the interpreter said in an interview held before the most recent Ministry of Finance statements.

Bitcoin media unperturbed

Even in the face of potential monetary damages, local community news sources and blogs maintain that they will keep publishing up until and after the bill is passed.

Russian news blog, for example, said its business has nothing to fear from the new laws, as its website is located in Europe.

“We’re not afraid. If they ban in Russia, we’ll just move to another mirror,” the company told CoinDesk.

Ivan Tikhonov, founder of popular and influential bitcoin security forum BTCsec, was similarly dismissive of the draft bill before the latest penalties for bitcoin promotion were included. He explained that BTCsec has no servers in Russia and that it doesn’t use Russian registrars or other services.

Tikhonov said:

“If the site will violate any laws, authorities can simply close the access to it in Russia, this practice is now widely used.”, he claims, has been the largest Russian-language information resource on bitcoin since it was founded 2011, serving Ukraine, Belarus, Kazakhstan, Moldova, Kyrgyzstan, Estonia, Lithuania and many other countries in addition to Russia. The website leverages a unique publishing model, rewarding users in bitcoins for publishing popular news.

BTCsec will respond to any regulatory changes as they arise, Tikhonov suggested, and may be open to changing its publishing behavior if necessary.

When asked about the latest addition of monetary penalties, Tikhonov said optimistically: “This law is not in force. Terms are subject to change.”

Disclaimer: This article should not be viewed as an endorsement of any of the companies mentioned. Please do your own extensive research before considering investing any funds in these products.

However ripe for disruption the Russian market might be because of these factors, though, the country’s parliament may soon cast the deciding vote as to whether bitcoin will play any role in country’s ongoing payments upheaval.

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