Forget China: This Country Has Become the Most Intriguing Cryptocurrency Battleground

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Though traditional equities like stocks and bonds have been relied on for more than a century to create wealth, it's cryptocurrencies that have managed to steal the show, and investors' attention, for the better part of a year. Since the beginning of 2017, the aggregate market cap of all cryptocurrencies combined has launched higher from $17.7 billion to nearly $836 billion as of Jan. 5, 2018, representing a better than 4,500% increase in value in a shade over one year. Never have investors witnessed such a sharp rise in value for a single asset class in such a short period of time.

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There have been no shortage of reasons behind this rally in virtual currencies. Some would say that the rise of blockchain technology has played a pivotal role in pushing valuations higher. It could also be rightly argued that the unfairness of decentralized cryptocurrency markets has greatly contributed to their success. With virtually no ability to make money by betting against digital currencies, it naturally incentivizes emotional investors to push these virtual coins ever higher.

But with parabolic valuations also comes significant risk.

Regulation is a double-edged sword for cryptocurrencies

Arguably one of the primary concerns with cryptocurrencies is their regulation, or lack thereof. Whereas bitcoin (CCC: BTC-USD) benefited in 2017 from Japan making it a legal form of tender, the world's most popular cryptocurrency has also drawn the short stick in a half-dozen other countries that have completely banned it (and other digital currencies). Just as easily as one door opens for this revolutionary asset class, another seems to close.

China is often viewed as one of the biggest battleground countries for the crypto revolution. Last summer, China's government put an end to initial coin offerings (essentially an initial public offering, but for digital currencies), and it announced that it would move to shut down domestic cryptocurrency exchanges.

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Even more recently, the Chinese government announced it would go after the facilities that mine cryptocurrencies, such as bitcoin. A Jan. 3 press release from the nation's central bank outlined a plan to limit power supply to some bitcoin miners, per unnamed sources. Given that China currently accounts for greater than two-thirds of all processing power devoted to bitcoin mining, such a move is a clear blow to the bitcoin community, and the evolution of cryptocurrencies as a whole.

Forget China! This is the battleground country you should be watching

But despite all the attention that China garners as a battleground country for cryptocurrencies, its neighbor, Russia, is far more intriguing.

You see, China is already growing by leaps and bounds, and has been doing so for decades. Its economy is a well-oiled machine. Russia, though, not so much. Its currency, the ruble, has been in shambles more than once over the past couple of decades, and the country's dependency on oil has caused wild vacillations in its economic growth. On paper, Russia would seem like a perfect candidate for the cryptocurrency revolution to take hold.

Just last month, Sberbank (NASDAQOTH: SBRCY), Russian's largest bank by assets, announced that it had executed the first real-money transfer over an IBM (NYSE: IBM)-built blockchain. Though the amount that was transferred remains a mystery, it involved a payer and receiver in two separate banks, and led to an almost instant settling of the funds transferred.

What's more, IBM wasn't the only brand-name business involved in this project. Sberbank listed MegaFon, the country's second-largest wireless operator, MegaLabs, an IT-solutions provider, and Alfa-Bank, a large private Russian bank, as partners along with IBM. Having such a large brand presence for this groundbreaking transaction, along with Sberbank being a member of the 200 organization-strong Enterprise Ethereum Alliance, suggests that Russia's financial system is aiming to deploy blockchain technology within the next couple of years.

But Russian leadership hasn't always been supportive of blockchain technology and cryptocurrencies in general. President Vladimir Putin, who's widely expected to win reelection in 2018 and remain Russia's leader for some time to come, had this to say back in October during a meeting on cryptocurrencies and financial technology:

Virtual [currencies] or cryptocurrencies are becoming and have already become more popular. They have already become or are turning into a full-fledged payment instrument and an investment asset in certain countries. At the same time, use of cryptocurrencies also carries serious risks.

Mind you, these comments from Putin were made after Russia's central bank announced it would support efforts to block access to external websites that offered cryptocurrency brokering services in Russia.

Then again, Putin and the Russian government are also tinkering with the idea of creating a Kremlin-backed cryptocurrency to reportedly help the country dodge international sanctions. Putin's economic advisor, Sergei Glazev, was quoted by the Financial Times as saying that Kremlin-backed cryptocurrency could be useful to carry out "sensitive activity on behalf of the state." While this would imply that Russia does have interest in blockchain technology, it doesn't answer whether Russia's banking industry would be able to put this technology to use.

Personally, I believe Russia offers the perfect dynamic to test the potential of blockchain. The only question is whether the government will allow its financial industry the opportunity to do so on a scaled basis.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.