Russia prepares a crackdown on crypto

Russia prepares a crackdown on crypto
Russians have turned to cryptocurrencies to avoid capital controls and sanctions making it hard to transfer money. Now the government is cracking down on the industry in order to keep control of money. / bne IntelliNews
By Vladimir Kozlov in Cyprus May 14, 2024

Russia is preparing a crackdown on cryptocurrencies in a bid to establish control over the segment that so far has been operating largely under the radar.

The State Duma, the lower chamber of the Russian Parliament, is currently considering a bill on the regulation of cryptocurrencies in Russia. The document stipulates a complete ban on the organisation of crypto circulation as of September 1, 2024, making exceptions only for officially registered miners and projects by Russia's central bank.

In accordance with the draft, only Russian firms and individual entrepreneurs included in a special register will be able to mine cryptocurrencies. Private individuals will be allowed to mine cryptocurrency without being included in the register, provided they comply with the energy consumption limits set by the government, which could discourage them from mining activities.

The bill also prohibits advertising of digital currencies and the organisation of their circulation.

Control over crypto

Under the new law, Russian miners will be obliged to report total amounts of the crypto they have mined to the tax service, also providing crypto addresses to which the mined currency has been deposited.

The aim of this stipulation is to eliminate the possibility of using these funds "for money laundering, financing of terrorism or other criminally punishable acts," legislators claim. Also, authorities will have the right to totally ban crypto mining in the country's specific regions.

In the summer of 2023, Russia's ministry of finance already proposed to prohibit the organisation of the circulation of cryptocurrencies with the exception of stablecoins and the sale of coins by miners.

However, the initiative was blocked by Russia's secret service FSB and the investigative committee.

The current bill was introduced in the State Duma some time ago but appeared to be a lower priority for legislators. Now, however, Russian authorities are rushing the bill to take over control over crypto circulation amid problems with settlements in foreign economic activity, which arose due to sanctions imposed after the outbreak of war in Ukraine.

The finance ministry, the central bank and the country's financial monitoring service have said that they expect the law to be passed before the end of the State Duma's spring session.

"The purpose of the bill is to make the cryptocurrency market in Russia civilised, admitting only bona fide participants, those who do not raise questions with the regulator," Anatoly Aksakov, chairman of the State Duma's committee for financial markets, was quoted as saying by the Russian edition of Forbes.

"It is also important that lacunas in the legislation prevent cryptocurrency from being used in Russia for dubious financial transactions, payment for drug trafficking, terrorism financing and so on," he added.

According to data from the Russian finance ministry, Russia ranks third in the world in terms of crypto mining capacities. The total value of the main two cryptocurrencies, Bitcoin and Ether, mined in the country in 2023 is estimated to be about $5bn. The operation of crypto miners under government control would bring significant revenue to the country's budget.

More power for the regulator

Another reason why the State Duma is rushing the bill is the Russian central bank's plans to use crypto in international payments. In a situation when Russian banks are hit by sanctions following the invasion of Ukraine in February 2022, international payment with crypto looks like a promising direction to explore, and the regulator plans to launch a test platform for such payments soon.

The regulator's deputy chairman Olga Skorobogatova said earlier that according to the adopted law, digital assets can be used in cross-border settlements without experimental legal regimes and the regulator has already received three applications from businesses that would like to try it.

According to Aksakov, the new crypto regulations will improve Russia's system of international payments, hit by Western sanctions.

Meanwhile, the central bank seems to be eager to embrace crypto payments.

"We have long agreed to use digital currencies for foreign economic settlements," the regulator's head Elvira Nabiullina said in her address to the State Duma last month. "I think it would be desirable for us to adopt this regime faster, to work it out, to see what can be introduced into the legislation and what cannot."

Issues with proposed regulations

Observers and the Russian crypto community have reacted to the crypto bill critically, expressing fears that it will hamper the development of a legitimate crypto segment in Russia, while pushing the existing operators into the grey area and users to foreign exchanges.

"Business has a general doubt about the need for such a bill," Andrey Mikhailishin, a board member and CEO of the company Digital Payments, told Forbes. "Alternative proposals from industry representatives were also discussed at the State Duma's expert council meeting."

According to Mikhailishin, alternative proposals stipulated introducing licences to enable cryptocurrency companies and individual entrepreneurs to legitimately operate in Russia, paying applicable taxes. He added that industry standards should be established by its representatives through self-regulation, but no one from the crypto community was even invited to discuss the current version of the bill.

Meanwhile, the law contains some technical irregularities that may hamper the execution of some of its clauses.

For example, the requirement to provide wallet identifier addresses does not take into account the fact that many such addresses can be generated for any wallet, said Mikhailishin.

Moving forward

The bill is coming as good news for electricity companies which have so far struggled to prove that Russia-based crypto miners for commercial purposes. The creation of the crypto miner registry is likely to close this issue. However, the inability to take advantage of cheap electricity any longer may drive some crypto miners out of business or force them to relocate to another country.

Still, these new regulations are likely to deal a hard blow to the crypto exchange infrastructure, which has been active in Russia for years.

All kinds of "independent exchanges and exchangers" physically located in Russia will definitely come to an end, Giorgi Okrochemdlishvili, a senior analyst ITSWM, was quoted as saying by Forbes Russia.

Similarly, the ban on advertising may seriously hamper crypto infrastructure companies' ability to openly attract new clients and subsequent investments in crypto innovation.

Russia has an estimated 20mn private owners of cryptocurrency wallets, mostly owned by economically active, financially secure citizens. The inability to use the Russian crypto infrastructure any longer would force them to switch to foreign crypto exchanges. However, since Russia's invasion of Ukraine in February 2022, several major global crypto exchanges have introduced restrictions for Russian residents.