Russian Central Bank proposes a ban on cryptocurrencies

As Spain, Singapore and the UK have been taking steps to regulate the rules around advertising cryptoassets (read more), last week the Russian Central Bank took a step further, publishing a consultation paper which proposes a ban on the issuance, use and mining of cryptocurrencies in Russia. According to the consultation paper, the value of Russian citizens’ transactions with cryptocurrencies has reached $5 billion per year, and Russian individuals have become active users of international online cryptocurrency trading platforms. Following the ban on crypto mining in China, Russia has become one of the global leaders by mining capacity so the proposal has serious implications for the fintech sector.

However, even if the Central Bank manages to push through its position and finally comes up with a draft law addressing all the suggested bans, the Russian legislative process is a rather long and complex one and the results may be quite unpredictable.

The story so far

Russian law officially recognised cryptocurrencies as a legitimate asset on 1 January 2021. It legalised the use of cryptocurrency as an investment tool or a payment method, but at the same time expressly banned Russian legal entities and individuals from advertising and using cryptocurrency as a means of payment inside Russia.

An implementing law which would set out procedures for the issuance and circulation of cryptocurrency in Russia was also expected last year, but its adoption was delayed, largely due to the ongoing debate between various state authorities as to the optimal approach to the regulation (read more in the Russia section of our Fintech Global Year to Come 2022, Year in Review 2021).

What bans are proposed?

In its consultation paper, the Central Bank proposes:

• to prohibit the issue and/or circulation of cryptocurrency inside Russia (including through cryptocurrency exchanges and the like);
  
  
• to prohibit Russian financial institutions, financial intermediaries and the country's financial infrastructure from trading cryptocurrencies and creating related financial instruments;
  
  
• to prohibit cryptocurrency mining in Russia; and
  
  
• to establish liability for the violation of the existing restriction on paying with cryptocurrency between Russian nationals inside Russia and of the new proposed bans.

There is currently no plan to ban Russian citizens from holding cryptocurrencies or from trading cryptocurrencies abroad through their offshore accounts, as Elizaveta Danilova, the head of the Central Bank’s Financial Stability Department, said in a briefing. However, the system of regular monitoring of cryptocurrency transactions is likely to be enhanced, including via cooperation with foreign regulators, in order to obtain information about Russian citizens’ operations in foreign cryptocurrency markets.

Key reasoning

The key reasons cited by the Central Bank for introducing these bans are perceived threats to citizens' wellbeing, financial stability, monetary policy sovereignty and risks of widening of the illegal activities (money laundering, drug trafficking, terrorist financing, etc.) as a result of the growing use of cryptocurrencies. In the regulator’s  opinion, cryptocurrencies show signs of a financial pyramid and their use may eventually lead to the formation of a bubble in the market.

As for cryptocurrency mining, the Central Bank’s view is that it creates unproductive consumption of electric power which threatens the social infrastructure and the implementation of Russian environmental agenda.

The Central Bank also believes that the global trend for growing popularity of cryptocurrencies will soon be reversed against the backdrop of swiftly developing faster payments systems and emergence of central bank digital currencies – from the regulator’s perspective these may represent a better  alternative to the cryptocurrencies as they have many similar advantages such as high speed, convenience, blockchain protection and relatively low cost.

What’s next?

The  proposal represents a view of just one, albeit the key, regulator in the area. The Central Bank position could still face some resistance among other state authorities and lawmakers. For instance, during the last few months there have been quite a few statements by a number of high-ranking Russian officials in the press in support of legalising crypto mining activities which would allow to introduce the respective taxation regime and thereby boost the Russian economy.

Currently the Central Bank proposal is at a very early stage, we have only seen a consultation paper which is aimed at fueling a discussion in the market. We will be following developments closely.