Moscow’s ambitions to become aninternational financial centre may have come unstuck in 2014, but the city is rapidly becoming a preeminent global hub for a different type of finance.
A recent study cited by Quartz named the Russian capital as the top city for initial coin offerings (ICOs) last year, based on the location of the chief executive or founder of the fund-raising company, well ahead of Silicon Valley. This is all the more impressive given that ICOs remain illegal in Russia itself.
Of course, in some ways this is a fairly dubious distinction, given the dicey reputation of ICOs. Russia’s official cryptocurrency and blockchain association estimates that at least half of the $300 million raised in ICOs last year went to scammers.
Part of the problem is that, despite the unparalleled enthusiasm of Russians for crypto schemes – around half of all ICOs globally are thought to involve some Russian participation – the sector is entirely unregulated.
Now, however, various entities from both the public and private sector are trying to bring some order and transparency to a chaotic market.
First and foremost is the Russian government, which is expected to pass long-awaited legislation regulating the sector this autumn. The precise details have yet to be hammered out, but the draft laws currently before the Duma set out precise definitions of and restrictions on “digital money” and “digital rights”.
They also for the first time create a framework for ICO issuance in Russia, including a requirement for all issuers to produce a white paper setting out information on the company, the planned use of proceeds and the obligations associated with the tokens.
The law merely states that these disclosures should be made via the internet – but for those wanting to reach a wider audience, the Moscow Exchange (Moex) is offering a solution.
The group has announced plans to create a platform that will collate information on these and other ICOs for the benefit of investors. Alexander Afanasiev, Moex’s chief executive, says there is an urgent need for such a scheme.
“Russian citizens are already very active in ICOs as issuers and investors worldwide, but they are not sufficiently protected,” he says. “We want to create infrastructure that will provide better investor protection.”
The demand for high-quality information is intense because there are so many scam ICOs and so much scam research on the market
– Yakov Barinsky, Hash
He is keen to stress that the platform – the first of its kind anywhere in the world – will be part of Moex’s depository business and that the exchange has no plans to act as a listing venue for ICOs.
Registration will be voluntary and the minimum disclosure requirement will be fairly low. Moex is hoping, however, that issuers will see the advantages of providing more detailed information.
“Being more transparent will give firms access to a wider investor base,” says Afanasiev.
The initiative was partly inspired by a recent survey conducted by Moex, which indicated that up to 30% of young Russians see cryptocurrencies and ICOs as the natural focus for investment, rather than traditional asset management or capital markets products.
“Of course today they don’t have much in the way of savings, so their interest is only sporting – but they are the investors of tomorrow, so we can’t ignore them,” adds Afanasiev.
The register, which is expected to be up and running by the end of the year, will be open to issuers from any jurisdiction.
“I believe we can create a platform that would be of interest to all reputable ICO issuers; if it does attract firms from other countries, then they would be very welcome,” he says.
Also looking to help ICO issuers and investors is Hash, a Moscow-based startup that bills itself as the world’s first crypto investment bank.
The project is the brainchild of former employees of Qiwi Blockchain Technologies, a subsidiary of Russian e-payments firm Qiwi. Officially launched in June, it is planning to offer a range of services including cryptocurrency trading, ICO advisory and research.
“We want to bring the investment banking model to the crypto market,” says Yakov Barinsky, Hash’s chief executive.
The initiative was partly inspired by the rapid growth in funds focused on crypto assets. Many funds have as much as $100 million to invest, according to Barinsky, with large pockets of cash located in all of Asia, Latin America, Europe and the US.
“For the past two years the quantity of crypto capital has been rising constantly,” he says. “There is an increasing number of institutional investors who have accumulated some cryptocurrencies and are looking for professional researchers and investment advisers.
“The demand for high-quality information is intense because there are so many scam ICOs and so much scam research on the market.”
One of Hash’s key strengths is that it can offer technological expertise as well as more traditional business analysis, thanks to its tie-up with Qiwi Blockchain Technologies.
“The big difference between crypto and traditional currencies is that with the former the technology is as important as the macro and microeconomics,” says Barinsky. “With something like Ethereum, when there is some new micro invention or upgrade it affects the price.”
Technology support is also part of Hash’s offer to ICO issuers, along with the ability to connect them with pools of capital and support in preparing the increasingly detailed disclosures required by investors. “The market is becoming more demanding when it comes to the quality of ICO projects,” says Barinsky.
As of early July, Hash was already fielding enquiries from potential issuers in Latin America, Germany, the UK and even the US.
Barinsky notes, however, that physical location has limited relevance in the crypto world.
“It makes more sense to segregate clients by language than by geography,” he says. “We are focusing on building teams of Chinese, English, Russian, German and Spanish speakers.”