Russia's new crypto law is less than a week away — Here’s what we know so far

Feb 15, 2022, 09:53 IST

Russia isn't banning cryptocurrencies, but its regulation is still a work in progressBI India

By the end of the week, Russia is expected to roll out new laws to govern cryptocurrencies in the country.
According to Russian media and the current draft of the laws, cryptocurrencies are most likely going to be treated as foreign currencies.
This means that while cryptocurrency transactions will be allowed, it’s unlikely to be legal for day-to-day transactions like buying a pizza or online shopping.

There’s less than a week to go before new regulations to govern cryptocurrencies in Russia get finalised, according to Russian media. The country is planning on regulating cryptocurrencies as ‘an analogue of currencies’ rather than a ‘financial asset’ — a switch over from the earlier Russian law, which came into effect in January, last year.

Simply put, cryptocurrencies will likely be treated as a foreign currency.

There is one catch. According to the head of the Russian Union of Industrialists and Entrepreneurs (RSPP), Alexander Shokhin, one won’t be able to use cryptocurrencies for payments. “If we are talking about prohibitions, then that is rather about a ban on the use of cryptocurrency as a means of payment, while other aspects are subject to regulations,” he told reporters.

Transactions and payments — what’s the difference?

The draft prepared by the government, envisions regulation of “cryptocurrency providers” to protect investors. They would need to apply for licences, have adequate capital and liquidity, while operating under full client identification and anti money-laundering laws.

After the new law comes into force, only licensed providers will be able to accept crypto transactions, to avoid fines. Since it will be treated a foreign currency, licensed providers are allowed to accept transactions, but when it comes to day-to-day transactions, any token will have to be converted into rubles.

Even after crypto trade and investments become officially legal, the chance of being allowed to, say, pay a fraction of an Ethereum coin to pay their taxes or buy pizzas, is almost zero.

Any cryptocurrency transactions valued at over 600,000 rubles — around ₹6 lakh — will have to be declared to tax authorities, else it will be a criminal offence.

Unanswered questions around Russia’s new crypto laws

Any country that’s looking to regulate cryptocurrencies wants to put in measures to protect investors. Russia seeks to decrease activity in the ‘shadow economy’ and reduce ‘fraud cases’ — rug pulls, pump and dumps, and the proliferation of get rich quick scams.

However, the draft is silent about how existing entities and transactions will be treated in the new regime. The draft, which discusses “mechanisms for organising the circulation of digital currencies” also does not define cryptocurrency, but calls it a “high-risk financial instrument.”

Nationalised blockchain monitoring service

Amid all the conversation of whether cryptocurrencies should be banned altogether or not, Russia seems to be particularly concerned with the privacy of its citizens when it comes to overseas-based blockchain monitoring tools.

For the purpose of monitoring cryptocurrency transactions, licensed entities have been instructed to use ‘Transparent Blockchain’, an AI tool to track transactions and link them to users, developed domestically by the Lebedev Physical Institute for Science Research — and only that, no other software.

That means tools like Chainalysis or Crystal Blockchain, which are used to track trends and trace hacker trails will be out of bounds for Russian banks and crypto exchanges. The brief reason noted in the draft by the finance ministry is that, foreign services “store requests generated by users.”

Size of Russia’s crypto economy, and tax potential

Even if cryptocurrency cannot be circulated as ‘real’ money just yet, the government stands to gain real money with taxes. As things stand, only large crypto transactions of over 600,000 rubles (₹6 lakh) will need to be formally reported to tax authorities. So, it’s possible that most small-time traders will be spared the bureaucracy.

The Russian government is, however, aware of how large their golden goose is. The draft prepared by its Finance Ministry says Russia ranks third in crypto-mining, and has over 12 million crypto wallets, with an estimated holding of two trillion rubles ($26.7 billion).

Estimates by Bloomberg in January indicated that Russians hold 12% of the world’s crypto assets, with Google Trends indicating a high degree of interest in NFTs in Russia.

An internal governmental policy brief offered more recent data, valuing the Russian crypto market at $214 billion. In an analysis by TheBell, a Russian publication, even a simplified tax rate of six percent would yield estimated tax revenues of $12 billion a year from crypto trades – without accounting for the value generated by crypto mining.

Economic upside

Acknowledging crypto already holds two benefits for Russia — bringing it into the open with regulations and a multi-billion dollar tax potential.

Ancillary industries are a draw as well. An encouraged crypto industry is likely to generate high-paying jobs and attract talent, to further Russia’s high-tech ambitions. A domestic crypto industry could also accelerate the country’s domestic computing attempts, and prevent centralisation of computing infrastructure production.

The icing on the cake would be a highly profitable cryptocurrency mining sector, which draws enormous amounts of electricity, and has the money to pay for it – thus enabling public utilities to stay afloat and even generate a power surplus for use by other industries.

Right now, cryptocurrency mining is being blamed for power cuts all over the country. However, the head of Russia’s Ministry for Energy has proposed classifying mining consumption from residential consumption, to keep them from taking advantage of subsidised rates.