Russia has finally made concrete steps towards introducing a long-discussed central bank digital currency (CBDC) – the digital ruble – that is expected to enter into circulation in 2025.

Earlier in July, the State Duma, the lower chamber of the Russian Parliament, adopted a law introducing the digital ruble. Before enactment, the law has to be also approved by the Federation Council, the upper house, and signed by the president. Still, no trouble is expected at this stage, and the adoption of the digital ruble legislation is set to create a legal base for Russia's CBDC.

In accordance with the legislation, the Central Bank of Russia obtains the status of the digital ruble platform's operator. The regulator will also be responsible for the security of digital rubles in circulation, as well as for the organisation and round-the-clock operation of the platform.

The platform will be used for digital ruble emission, while commercial banks will operate as intermediaries between the central bank, on the one hand, and private individuals and companies, on the other hand. Banks will open wallets on the digital ruble platform for their clients and execute transactions on the platform. In the future, digital wallets are expected to be able to also operate offline, and the central bank promised to create its own technology to facilitate that type of transaction.

Meanwhile, the digital ruble will be more traceable than the existing non-cash payment solutions, and it will be easy to track any chain of payments and determine all the participants in any specific deal.

Cheaper and faster transactions

The central bank says that the digital ruble will operate primarily as a means of payments and transfers. Therefore, it wouldn't be possible to open a deposit in digital rubles or take a loan in the Russian digital currency. Similarly, no interest will accrue on assets held in wallets on the digital ruble platform. In the future, the regulator says, the digital ruble could also be used for crossborder payments.

The specifics of the digital ruble platform's operation are yet to be finalised by the central bank's board. However, it's already been announced that private individuals will pay no fees on payments or transfers in digital rubles, while companies will pay a fee of 0.3%.

The digital ruble will be fully controlled by the central bank, and commercial banks won't be able to open accounts in the new digital currency.

The law comes into effect as of August 1, 2023, but the digital ruble is expected to be launched no earlier than 2025, while in 2023 and 2024 pilot projects are to be run for a limited number of customers and for limited types of operations.

In 2025, a roadmap for the digital ruble is expected to be completed, while full-fledged deployment of Russia's CBDC is likely to take place two to three years from now, Olga Skorobogatova, deputy chair of the central bank, was quoted as saying by the Russian edition of Forbes.

"I think, all citizens will get an opportunity to open digital wallets, receive and use digital rubles around 2025-2027," she said. "But this will also depend upon banks, which we will be connecting to the platform gradually."

Long preparations

Discussion of the digital ruble began a few years ago, and it took much longer than expected for something concrete to come out of it. Back in October 2020, Elvira Nabiullina, governor of the central bank, for the first time mentioned a hypothetical possibility of launching a CBDC.

In March 2021, the central bank first revealed plans to launch a prototype version of a digital ruble platform before the end of that year, according to the regulator's unnamed senior officials.

A year later, plans to run "pilot transactions" in 2023 were announced, while Nabiullina said that a prototype had already been built and tests with several banks were in progress.

Meanwhile, a few other countries have launched or are preparing to launch CBDCs. In China, the digital yuan was rolled out in January 2022, but, as of today, it only accounts for 0.16% of China's total monetary supply.

Crypto remains banned (so far)

Incidentally, preparations for the launch of the digital ruble have apparently had little impact on Russia's stance on crypto, which remains banned for payments or trading.

A draft law 'On Crypto Currencies' has been discussed for a long time, and, according to a report by the Russian business daily Vedomosti, the most recent version still contains a ban on payment in crypto currencies.

However, the overall political and economic situation is apparently having an impact on the legislators, and the new version of the draft stipulates the use of cryptocurrencies for foreign payments – a step apparently aiming to help in a situation when Russian banks face restrictions on international payments in the wake of the aggression against Ukraine.

In accordance with the draft, quoted by Vedomosti, Russian companies and individual entrepreneurs could be allowed to use crypto for foreign trade transactions. All crypto transactions would be run by Russian banks, and only customers passing authentication would be allowed to make transactions of that kind.

For the last few years, Russia's central bank has remained an ardent opponent of crypto. The regulator's suggestions regarding the law on crypto include a complete ban on crypto mining (which is currently legal in Russia) and owning crypto (the existing legislation hardly addresses this at all).

Who is set to benefit from the digital ruble?

At this point, it's not yet clear if and how private individuals could benefit from the adoption of the digital ruble. However, tech-savvy companies may be able to use the CBDC to their advantage.

Incidentally, CBDCs are not cryptocurrencies, but they use crypto's underlying distributed ledger technology and smart contracts. Thanks to smart contracts, payments in digital rubles could be done automatically, in a more efficient, transparent and cheaper way.

The main advantage would be cheaper transactions for companies currently accepting plastic cards and paying substantial acquiring fees. Currently, a fee for accepting plastic cards at POS terminals could be as high as 3.2%. A cheaper alternative is the central bank's fast payment system, which charges a fee of roughly 0.7%. The digital ruble, in addition to a fee of only 0.3%, will also offer higher payment limits.

According to Yegor Krivosheya, head of research at the centre for financial technology and digital economy research at Skolkovo university, only a company that already knows how to work with distributed ledger technology can afford to build a customised solution based on the digital ruble, while the rest will have to stick to very basic functionalities.

He was quoted by Vedomosti as saying that companies with a higher level of digitalisation and expertise with distributed ledgers can receive real advantages from the digital ruble.

Still, some industry players are sceptical about the prospects of the digital ruble. Holding substantial amounts in digital rubles could be insecure, as there will be ways to counterfeit the digital currency, Alexei Skorodumov, chairman of the board of the Derzhava bank, told Vedomosti.

"Smart contracts are already used for non-cash payments," added Artyom Sokolov, president of the Association of Online Trade Companies. "I don't yet understand how the new non-cash payment system will be different from the existing one."

Vladimir Kozlov has covered Central and Eastern Europe for more than 20 years. He is currently based in Istanbul, Turkey.