In the context of aggressive sanctions from the West, the adoption of a bill on the circulation of digital money would neutralize the negative consequences of disconnecting Russian banks from SWIFT and leaving Visa and Mastercard, experts say. However, in the government, the issue of regulating cryptocurrencies has led to one of the most high-profile disputes within the country’s financial authorities in recent years.
On January 26, Vladimir Putin’s meeting with members of the cabinet began with a topic that has been posed only occasionally at such gatherings. It was about a disagreement about the regulation of cryptocurrency circulation. The Central Bank had issued a devastating report for the business a week before, proposing to make the issuance, circulation, and mining of private digital money illegal. A few days later, the Ministry of Finance replied: the director of the financial policy department, Ivan Chebeskov, said that “it is necessary to regulate, not ban.”
“I would ask the government and the Central Bank to come to some kind of unanimous opinion during the discussion,” the president said. Putin’s request, however, has not yet been fulfilled – the Ministry of Finance and the Central Bank have presented two virtually mutually exclusive visions of the future of cryptocurrencies in Russia, where, according to expert estimates, the population has accumulated 2 trillion rubles worth of bitcoins, ether and other digital coins on digital wallets. About a month after that meeting, Russia was effectively cut off from Western financial markets. Will it speed up the legalization of cryptocurrencies in Russia?
Instead of a dollar
After the start of the operation in Ukraine, European countries and the United States imposed tough sanctions against Russia. The United States, European Union, Great Britain and Canada decided to freeze the reserves of the Bank of Russia.
The Central Bank then prohibited banks from selling cash to Russians and limited the amount of cash they could issue from their existing deposits to $10,000 until September 9, regardless of whether they were open in other currencies.
According to a March 9th Goldman Sachs research report, aggressive sanctions are likely to de-dollarize the economy in the long run (available to Forbes). While the dollar’s international role will not change overnight, analysts at Goldman Sachs believe that tough sanctions against Russia, which have effectively cut Russia off from Western financial markets, may encourage other countries to diversify their foreign exchange reserves and stop exchanging foreign currency for dollars. De-dollarization, they believe, will boost gold and bitcoin.
In November 2021, the price of bitcoin reached an all-time high of $68,000. Since February 28, when limitations on the purchase of dollars and euros in Russia were enforced, the value of the ruble has risen from around $38,000 to almost $44,500 by March 2. However, by March 14, bitcoin’s price had plummeted to $38,742. Although the first version of software for working with bitcoin was released in 2009, 2013 can be considered the year when the first “cryptocurrency fever” began: in January, the digital coin’s rate was $13, and by November, it had risen to $1145. By the end of the year, the cryptocurrency had yielded a whopping 5592%.
Now in Russia, people who are afraid of losing their savings are shifting fiat money into cryptocurrencies. Digital money can be sent to any country without taxes and volume limits.
Ethereum and bitcoin are the most popular cryptocurrencies among Russians right now. Because it is psychologically tough for investors to buy a hundredth of a bitcoin, ether is in higher demand. Stablecoins, which are a digital equivalent for US dollars, have also grown in popularity.
The legalization of cryptocurrencies in Russia could be a solution to the problem of multiple banks losing access to SWIFT and payment systems leaving the country. However, in the government, the subject of cryptocurrency regulation has sparked one of the most high-profile conflicts in recent years among the country’s financial authorities.
Regulate or Block?
When cryptocurrencies were only starting to gain traction, Elvira Nabiullina, the president of the Central Bank, advocated for their regulation. The viewpoint of the head of the Central Bank shifted, however, when it became evident that an asset that arose out of nowhere could potentially undermine central banks’ monopoly on money emission. The Bank of Russia advised the public, businesses, and banks in January 2014 against exchanging “virtual currencies” not only for commodities, but also for rubles and dollars. The Central Bank then emphasized that because cryptocurrencies are issued anonymously, its owners may accidentally be implicated in criminal activities such as money laundering and terrorist financing.
“The Bank of Russia was one of the first to touch on this topic (cryptocurrency risks), because it is we who are responsible for financial stability and protecting citizens in the financial market,” says Elizaveta Danilova, head of the Central Bank’s financial stability department. “Risks increased gradually, along with the involvement of the population.”
Disagreements between them on the question of “to regulate or prohibit,” according to a top manager of one of Russia’s banks, first surfaced in 2018 during the preparation of a bill on digital financial assets. First Deputy Chairman of the Bank of Russia, Olga Skorobogatova, argued for the Central Bank’s regulation. In 2017, she recommended classifying cryptocurrencies as a “digital good” and taxing them. Ksenia Yudaeva, the Central Bank’s first deputy chairman, supports a complete prohibition. She was first harsh on cryptocurrencies as a curator of risk regulation.
Bitcoin for export
Russia, according to Anton Gorelkin, Deputy Chairman of the State Duma’s IT Committee, is already prepared for the legalization of mining. According to him, a formal definition of mining as a distinct type of economic activity must be developed and brought into the legal realm. At the same time, Gorelkin believes that bitcoin can become a full-fledged export item.
“Because the West was the first to break all imaginable boundaries, we will play outside the economic rules.” Gorelkin stated, “We will work out the tax regime, make specific suggestions, and present them to the relevant ministries.” According to him, around 12% of the Russian population is now involved in bitcoin transactions in some way.
The neutrality of cryptocurrencies, the use of which cannot be interfered with by governments or banks, has been called into question due to a “special military operation” in Ukraine, writes Wired.
To comply with US sanctions, the bitcoin exchange Coinbase blacklisted more than 25,000 addresses associated with persons or legal entities in Russia on March 7. The majority of these locations were detected prior to the start of the operation, according to the exchange. A representative for Binance previously stated that the exchange does not intend to freeze the accounts of Russian users, as this would be contrary to the cryptocurrency industry’s concept, but that it will investigate sanctions risks and the possibility of limiting the acceptance of payments from sanctioned banks.
Even if cryptocurrency is used as a means of payment in Russia, sanctions may prevent crypto exchanges from opening accounts and crypto wallets for Russian users, says Alexander Zhuravlev, Chairman of the Commission for Legal Support of the Digital Economy of the Moscow Branch of the Russian Bar Association. According to him, this infrastructure needs to be protected and treated like a registry of Russian software: all data and software that ensure the operation of exchanges and crypto wallets should be stored and updated in Russia.
