The Shady Cryptocurrency Boom on the Post-Soviet Frontier

Until fairly recently, the only way to pass money outside this system was to do so in hard cash, either by handing it to the person you are paying or by sending it through a hawala network, a kind of informal Islamic Western Union that relies on trust and familial bonds rather than wire transfers and regulations. But even after you’ve received your piles of banknotes you still have a problem. If you try to buy anything that costs more than a few thousand dollars, the seller is legally obliged to alert the authorities. The same will happen if you try to deposit a large amount of cash in a bank account or invest it in stocks or bonds. The only way to spend the cash you have received without attracting scrutiny is piecemeal, through small purchases, or to launder it like Walter White through a cash-heavy business. So ultimately all of us—individuals, businesses, even nation-states—sit in the school kid circles, knowing that our conversations will be monitored.

The mighty dollar makes America the schoolmaster. If the US Treasury decides that a US bank has facilitated illegal payments, it can withdraw its banking license. And if the treasury finds that a bank outside the US has broken the rules, it can block the institution from communicating with any US bank. Effectively that bank is then cut off from any payment system that uses the dollar, and from holding dollars in the Federal Reserve.

And the dollar is more than just a sovereign currency: 62 percent of all foreign exchange reserves held in nations’ central banks worldwide are in dollars, and it is used in 90 percent of all foreign exchange transactions, according to the finance website the Balance, making the US the gatekeeper to the global banking system. President Donald Trump wields the dollar like a weapon. The US Treasury slaps new sanctions down nearly weekly, on Iran, North Korea, Venezuela, Syria, and Russia. Since 2012 the US has imposed more than 60 rounds of sanctions on Moscow—punishment for its annexation of Crimea and its meddling in the 2016 election, among other things—halving the country’s foreign direct investment, wiping out $500 billion in investments in its energy sector, and hammering Russian banks’ ability to do global business.

That’s a perfect opening for cryptocurrencies. They do away with the need for banks altogether, creating a network free from intermediaries where money can be passed unimpeded. What’s more, no banks means the US role of gatekeeper, along with the power of its sanctions, vanishes. And so, like a virtual retelling of The Breakfast Club, the kids can take over the school—and do whatever they want.

Sanctions offer their own opportunities, grifts ready-made to plug into a cryptocurrency system just over the horizon. In July, at his chic restaurant in the Belarusian capital of Minsk, local businessperson Sergey Mirgorodsky explained how his country is cashing in on the Russian embargoes. After Putin annexed Crimea from Ukraine in 2014, the EU restricted trade, investments, and tourism to the peninsula. In retaliation, Putin banned some European food imports, emptying many luxury goods from shelves in Russian supermarkets.

Companies in Belarus, which shares a border and a customs union with Russia, started filling the gap. “European producers send their products here, stamp them with a ‘Made in Belarus’ label, and then send them on to Russia,” Mirgorodsky laughed. “I know of one European salmon company which sends it here to be smoked so it can get the stamp.”

Elsewhere, Belarus is an economic basket case, littered with state-run zombie enterprises that do little more than enrich government cronies and keep much of the population in unproductive employment. President Alexander Lukashenko, once the manager of a Soviet collective farm, just celebrated a quarter-century in power and has a habit of putting his opponents in jail. Belarus is the only European country to have kept the death penalty and is periodically placed under US and EU sanctions (many EU restrictions were lifted in 2016).

Lukashenko likes to appear in military uniform on Belarus’ national days, when the army parades Soviet-style down the grand Minsk boulevards. Having once described the internet as “garbage,” he seemed an unlikely contender to implement the world’s most forward-thinking cryptocurrency regime. But in December 2017, Lukashenko passed a decree allowing businesses registered with (although not necessarily physically located in) High Technology Park, an anodyne business center on the gray outskirts of the capital, to mine, develop, and trade in cryptocurrencies. It has, in theory, turned this ex-Soviet backwater into the most progressive blockchain jurisdiction in the world—“like a Seoul inside Pyongyang,” says one Belarusian crypto-entrepreneur.