What if your biggest client is your biggest reputation risk?
When Vostok, the enterprise branch of Waves, a blockchain startup, launched last year, it was proud to showcase its Russian connections.
It debuted with the news of a partnership with Rostec, a state-owned mega-corporation with ties to many hi-tech industries.
But the Russian links have been a double-edged sword. While the Rostec tie-up earns legitimacy at home, it complicates things abroad. Rostec was sanctioned by the U.S. in 2014 following Russia’s annexation of Crimea and the war in Ukraine.
“There were risks for promoting our brand on the West,” said CEO Sasha Ivanov in an interview.
So Waves decided to distance itself from Vostok’s brand — though not completely.
“We can’t totally separate from our Russian roots, even if they might impede the business a bit,” Ivanov said. “I think we should become the main blockchain tech advocate in Russia.”
Leaving ‘East’ for WEST
In July, Ivanov sold the Vostok brand to the investment firm GHP Group for an undisclosed amount. The team and the Vostok product, however, remained with Waves.
After the sale, Vostok (Russian for “East”) was renamed Waves Enterprise, and Waves and GHP decided to form a joint venture to develop the transportation blockchain together, sharing the profits 50/50, Ivanov said. GHP invested $3.8 million in the venture, according to Waves.
The new name is meant to distance the company from the Vostok brand, mostly because of its close affiliation with Rostec, Ivanov said. Vostok’s VST tokens, issued last year, were re-branded too, becoming WEST: Waves Enterprise System Token.
Registered in Switzerland, Waves is striving to become a key blockchain provider for the Russian state. Based in Moscow, in a large office in the middle of a hipster office cluster, Waves is walking a fine line between being friendly with Russia’s state-controlled corporations (many of which are sanctioned by the U.S. and Europe) and building a positive image for the global market.
Any business wanting to lead Russia’s blockchain effort necessarily has to talk to government bodies a lot and Waves has been expanding its work with the government-related structures. The company has recently secured partnerships with several entities linked to the Russian government.
Blockchain for elections
These include the Department of Information and Technologies in Moscow City Hall, which trialed the first blockchain voting system for elections to a Moscow legislative body.
About 450,000 Moscow residents could vote electronically during the September 8 municipal elections, though the experiment got some harsh reviews. French security researcher Pierrick Gaudry showed that the system could be hacked quite easily.
Ivanov said Waves found bugs in the system and the authors of the voting system made some patches as a result. However, the experiment didn’t go as smoothly as planned.
“We found a lot of bugs in that system. It was weirdly designed and didn’t rule out data manipulation,” he said. Contacted by CoinDesk, the Department of Information and Technologies hadn’t commented on the Waves partnership by press time.
Even so, Ivanov sees a promising future for blockchain in election management.
“Blockchain can help the government communicate with the civil society. It’s a good marketing tool for the government. It’s hard to tell how much transparency it will bring, but definitely more than there is out there now,” he said.
Hyperledger challenge
Currently, Hyperledger is the leader in enterprise blockchain, both worldwide and in Russia. But Waves believes it can catch up. The Waves Enterprise product, built upon the public Waves blockchain as a ready-to-use, out-of-the-box option, is designed for clients that don’t want to hire their own development teams, Ivanov said.
Waves Enterprise, together with GHP Group’s subsidiary FESCO Transportation Group, is now in talks with the major players of the logistics market in Russia, starting with the railroad monopoly The Russian Railways, or RZD, which has already been testing a solution by Hyperledger to track the production of train car wheels. RZD didn’t respond to CoinDesk’s request for comment.
One way Waves is trying to differentiate itself from Hyperledger is to get the Waves Enterprise cryptography certified with the Russian Federal Security Service, or FSB. Such certification is necessary for working with government bodies in Russia but it is a long and costly process.
So far, only one enterprise blockchain system in Russia has passed the certification process: Masterchain, a system for banks. Waves hopes to complete certification by the end of this winter. The process, overseen by FSB-approved personnel and designed to ensure software has no hidden features, costs companies up to $100,000, Ivanov said.
Not like China
Waves worked with Rostec to develop a roadmap for blockchain development in Russia. According to the document, cited by the Russian media outlets when it was published last May, most government IT systems should be put on the blockchain, which will require about $1 billion of investment.
The document was not greeted with universal approval, Ivanov said. “The roadmap apparently didn’t meet the government’s expectations, and the government didn’t realize why [it needed to] use the blockchain tech. We’ll make another attempt.”
There will probably be more opportunities to take advantage of the government’s ambitious blockchain plans. Its nearly $28 billion Digital Economy initiative aims to improve broadband coverage and increase the use of home-grown software in government bodies.
Blockchain can be both a liberating technology as well as a tool for surveillance and greater control. In recent years, Russia, like China, has curbed the free online realm in favor of a managed system. In 2017, it attempted to block the encrypted Telegram messenger (the attempt failed) and the Russian parliament recently passed a law to create a “sovereign internet” — an internet segmented away from the global commons.
But Ivanov does not sound too worried. He thinks Russian internet users will continue to find ways around government censorship.
“The things that China is doing, they are kind of dying here. Or they turn into a farce.”
Edit (10:02 UTC, Nov. 25, 2019): Amended quote from Ivanov regarding Moscow voting system and corrected description of the deal with GHP Group.