Russia mulls cryptocurrency ban

Russia could impose tough restrictions on cryptocurrencies, according to a report published Thursday by the Central Bank. When China banned cryptocurrencies last year, there was an exodus of miners to neighboring states, and Russia suddenly found itself the world’s third-largest bitcoin miner after the U.S. and Kazakhstan.

What happened?

The Central Bank report on the crypto-market recommended:

• A ban on the issuance (including mining), circulation and exchange of cryptocurrencies (including stablecoins). This would affect crypto-exchanges and peer-to-peer (P2P) platforms.
• A ban on banks investing in cryptocurrencies or related financial instruments, and a block on using Russia’s financial infrastructure for any crypto-operations. This means a halt to all the operations of exchange-traded funds (ETF) for cryptocurrencies, as well as customer payments to crypto-exchanges.
• Penalties for companies and individuals that make crypto-payments. Miners are likely to be dealt with separately, but no specific punishments were proposed for them.
• NFTs and digital currencies issued by Central Banks remain unaffected. Importantly, the Central Bank does not intend to ban ownership of cryptocurrencies nor investing in them via foreign jurisdictions.

At present there are no restrictions on cryptocurrency mining in Russia (although the authorities are planning to raise the energy price for those taking advantage of subsidized electricity to produce crypto at home). Officially, it’s forbidden to use cryptocurrency when buying or selling goods or services, but this is not usually punished in any way.

The Central Bank stands alone

It’s far from certain that the Central Bank’s proposals will become law. About nine agencies are involved in regulating the crypto-market, including the Finance Ministry, the Federal Tax Service, financial watchdog Rosfinmonitoring and the Federal Security Services (FSB). Only the Central Bank is insisting on a strict ban, according to The Bell’s sources.

For example, Rosfinmonitoring just wants to control the flow of funds from crypto to traditional assets, while the Finance Ministry wants to protect unqualified investors.

A complete ban on cryptocurrency in Russia is supported by the FSB as it seeks to block funding for opposition groups and independent media, according to reports from news agency Bloomberg. However, The Bell’s information suggests otherwise. Crypto regulation has been under discussion for some years and The Bell’s financial market sources have never said the FSB takes a hard line — there have even been hints that security officers who control informal money flows may have their own reasons to want to avoid strict regulation.

What’s it for?

The Central Bank gave a long list of reasons why it wants such tough measures. The big one is the risk to individual investors, who have already purchased cryptocurrency at a rate of $5 billion a year. Crypto-investments are easily lost due to volatile exchange rates, fraud, hackers or market manipulation and there’s no protection for investors. An increased role for cryptocurrency in the economy could render the Central Bank’s monetary policies less effective, pushing up interest rates, which would slow the growth of stock markets and destabilize banks. Finally, large-scale crypto-purchases represent an outflow of capital, which weakens the ruble.

A Central Bank source familiar with the discussions on this issue told The Bell that the regulator is concerned that, if Russia makes it easy to purchase cryptocurrency, then it will become available to people who understand nothing of the risks involved. Then, if the value of cryptocurrencies collapse, it will be the Central Bank that is left to clear up the mess — and deal with all the financial and political consequences.

Would a ban work?

Given that Russia is a world leader in terms of cryptocurrency penetration, the Central Bank is probably too late, according to The Bell’s sources. Even the Soviet Union’s brutal persecution of currency speculators could not subdue a shadow market in the U.S. dollar and in modern Russia it will be impossible to ban cryptocurrencies, Yury Pripachkin, the president of the Russian Association of Crypto-economics, told media outlet RBC.

Market participants were surprised that the Central Bank seems keen to push Russian crypto-investors into foreign jurisdictions where they can no longer be controlled. As a result, the Central Bank’s forecasts about the criminalization of crypto-transactions will become a self-fulfilling prophecy: when everything happens on the gray or black markets, the regulator can no longer track who is buying tokens and how they are transferring them.

Why the world should care: News of the possible ban was not followed by any immediate price moves for bitcoin, but the currency crashed Friday and had lost more than 10 percent in a 24-hour period by Saturday. Russia accounts for at least 11 percent of Bitcoin’s computing power (hashrate), and if that were lost it could lead to a spike in costs for crypto-miners and a wave of crypto-migrations.