Instead of banning cryptocurrencies, the Russian government has decided to regulate them, legitimizing a $2 trillion asset class in the world’s 11th-largest economy.
This is the second major regulatory cloud to have been lifted from the global crypto market in a month. India last week took a step toward legalization with a tax on digital asset transfers. While it carries a hefty rate (30%), the tax was seen by many as putting the fifth-largest economy on track toward legitimizing crypto.
In Russia (population 144 million), residents own over 12 million cryptocurrency accounts and about 2 trillion rubles ($26.7 billion) worth of crypto, according to the government's document (PDF in Russian).
It says the country ranks third in the world in bitcoin mining, a share the Cambridge Centre for Alternative Finance agrees with. With such a large volume of crypto, law enforcement agencies are concerned they can't adequately approach crimes involving crypto, the document said.
Yet, it stopped short of the draconian measures suggested in January by the Bank of Russia. The central bank’s report called cryptocurrencies a threat to Russia's financial stability and rife with fraud. The regulator suggested banning cryptocurrency trading in Russia, as well as mining. Instead, Russians would have access to the digital ruble, the central bank digital currency in the works by the Bank of Russia, and digital assets issued inside the country by licensed companies.
By contrast, the government’s blueprint released Tuesday says cryptocurrency purchases in Russia may take place, but only through locally registered and licensed companies so that users are fully verified and information about their transactions can be made available to government agencies. The document does not address cryptocurrency mining. Many of the stipulations require parliament to pass new laws.
Chain analysis, but no Chainalysis
All crypto-related transactions bigger than 600,000 rubles would have to be reported to the Federal Taxation Service. Failure to do so should be considered a felony, and using cryptocurrency to conduct a crime should be an aggravating factor, the report said.
The proposal suggests allowing banks to operate as intermediaries between users and cryptocurrency exchanges. The institutions would need to verify users' identities, check transactions for signs of illegal activity, provide rails for fiat transfers and keep information about transactions for at least five years. Banks should also provide users the documents necessary to report their taxes, and government agencies data about transactions on the request.
Cryptocurrency exchanges and peer-to-peer marketplaces would have to register as legal entities and join an official register of digital-currency exchange operators. They would have to open a crypto account with an authorized bank and satisfy certain requirements applying to traditional financial organizations. Foreign exchanges would be required to have an office in Russia and be registered there.
Banks working with crypto exchanges would be required to use the Transparent Blockchain transaction tracking tool developed by Rosfinmonitoring (Russia's FinCEN equivalent) not products from foreign companies like Chainalysis, Elliptic or Crystal Blockchain. According to the document, Transparent Blockchain can help identify owners of cryptocurrency wallets using open-source data, as well as information from the darknet, detect patterns of illegal usage of crypto and serve as a register of addresses related to crimes and terrorism financing.
According to the announcement, the proposal was agreed on by the Bank of Russia, Ministry of Finance, Ministry of Economic Development, Federal Taxation Agency, anti-money laundering watchdog Rosfinmonitoring and the key law enforcement bodies: Ministry of the Interior, Federal Security Service and the Prosecutor General's office. Earlier, the Bank of Russia had been a dissenting voice.
According to the newspaper Kommersant, the approach puts cryptocurrencies on a level with foreign currencies, which are regulated in a similar fashion. The new laws and directives are likely to come into force in the second half of 2022 or early 2023, Kommersant said.
Bitcoin’s price rose about 3% Wednesday morning in the U.S. Russia’s embrace might be having “some level of influence” on the bellwether cryptocurrency's price, said Armando Aguilar, an independent crypto analyst. Other market factors including KPMG Canada adding BTC to its balance sheet and the U.S. Justice Department's recovery of $3.6 billion in bitcoin from the 2016 Bitfinex hack could also be buoying prices, he said.
"We could see other governments adopting BTC in the near future with Russia making the move," Aguilar told CoinDesk in a Telegram message.
Anto Paroian, chief operating officer at digital assets investment firm ARK36, said Russia's move "reflects a broader shift in regulatory attitudes towards these assets in various jurisdictions around the world."
"The political and economic cost of banning" crypto will outweigh the risk to governments from allowing it to "coexist with legacy financial institutions," Paroian said.
In his newsletter Wednesday, crypto investor and blogger Anthony Pompliano noted that U.S. President Joe Biden's threat of sanctions against Russia – including cutting off the country's economy from much of the global financial system – might reinforce the case for bitcoin as "censorship-resistant money."
"It is weird that the central bank of Russia started to question bitcoin’s relevance in the country at the same time that it may become incredibly important to the nation state," Pompliano wrote.
Similarly, Marcus Sotiriou, analyst at the U.K-.based digital-asset broker GlobalBlock, said in an email that "aside from the huge tax revenue, Russia could be using bitcoin to hedge against aggressive U.S. foreign policy."
UPDATE (Feb. 9, 15:55 UTC): Adds context throughout.
UPDATE (Feb. 9, 17:20 UTC): Adds section on market impact and second byline.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.
Learn more about Consensus 2023, CoinDesk’s longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.