The UC presents a commentary by Eva Jovanova. Eva is a UC Fellow who currently works for Accointing, a Swiss crypto tax startup. She shares her thougths on potential ban on cryptocurrencies in Russia.
Inspired by the Chinese crypto ban last year, on January 20, the Russian Central Bank published a so-called Consultation Paper proposing a ban on all cryptocurrency trading and mining. The Consultation Paper invites comments and suggestions until March 1, and were it to pass, its implications would be harmful both to Russian citizens and to the Russian economy.
Consultation Paper Decrypted
So far, Russia’s crypto status has been controversial. The country has neither fully legalized cryptocurrencies nor has it outright banned them. The closest the country has come to establishing a legal status of any sort for crypto assets was in 2020, with a bill that initially intended to legalize crypto. The bill was supposed to take effect in 2022, rendering crypto gains exceeding 600,000 rubles a taxable income, but prohibiting the usage of crypto as a method of payment. On several occasions, Daniil Egorov, the head of the Russian Federal Taxation Service (FTS), has stressed the country’s lack of infrastructure and capacity to tackle the challenge of monitoring and processing the enormous data volume associated with crypto transactions.
The recently proposed Consultation Paper diametrically opposes the earlier attempts to legalize crypto, build the necessary digital infrastructure to track crypto transactions and, thus, impose crypto taxes. In a 32-page paper, the Russian Central Bank proposed a ban on the issuance, circulation, and exchange of cryptocurrencies. The ban would affect both mining – an electricity-intensive process of verifying and adding new transactions on the blockchain, as well as stablecoins – cryptocurrencies whose value is pegged to the value of a state-issued currency.
The ban would also stretch to banks investing in cryptocurrencies, prohibiting them from using Russia’s financial infrastructure for any crypto-related operations, i.e. banning all the operations of exchange-traded funds (ETF) for cryptocurrencies, as well as customer payments to crypto-exchanges. The paper suggests penalties for companies and individuals trading in crypto, but mentions no specific measures against miners. Finally, it completely leaves out non-fungible tokens (NFTs) and smart contracts. Hypocritically, the Central Bank would still consider it legal to own crypto and further trade with crypto if the investments came through a foreign jurisdiction.
As stated in the press conference where the paper was presented, the reasons for the ban are the risk for investors due to the volatile nature of crypto investments and the susceptibility to market manipulation, but also because of the environmentally damaging effects of crypto mining, as well as the usage of crypto in international crime and terrorism.
Why a crypto ban would be terrible for Russia(ns)
Bitcoin – the first and most popular cryptocurrency in the world totals to around half the overall crypto market cap. In 2020, Russia’s Bitcoin trading volume on online exchanges was listed second in the world (after the US), with double the trading volume of the whole European Union. Now the country counts over 17 million crypto investors, or almost 12% of the country’s total population, putting Russia in the top three countries in the world in terms of crypto holders and second (after Ukraine) in terms of how widely distributed crypto is among the population. Overall crypto market activity in Russia is estimated at $500 billion as of 2021.
The prevalence of crypto in Russia, however, is not necessarily due to the population’s openness to innovation. It is rather a symptom of the country’s monetary volatility, as many people have experienced at least once in their lifetime a wipe-out of their savings – either during the skyrocketing inflation in the 1990s or during the ruble plummet which followed international sanctions after the Crimea crisis. In the past two decades, Russia has often been named as the world leader in mistrust in public institutions, with the latest Levada poll in 2021 noting an even further decline in trust in banks and other economic institutions.
While the Central Bank fears this mistrust and the high prevalence of crypto transactions would only further erode trust in Russia’s monetary policy, its attempts to ban it are a mere distraction from the real challenge the bank has been experiencing – the ruble’s frequent volatility. On the other hand, due to how prevalent crypto is, were it to be legalized, it could annually generate around $4 billion in taxes as of this year. To do so, however, the country would first have to first work on the digital infrastructure necessary to monitor all transactions before starting to impose taxes. On the bright side – building such infrastructure would solve another problem that the Central Bank has identified. Namely, close monitoring could help in retrieving funds from many criminal activities committed using crypto, since all transactions are kept on the blockchain.
Furthermore, one of the greatest trends Russia has seen in terms of crypto is the increase in Bitcoin mining, a process necessary for the validation of blockchain transactions. After China’s crypto ban, Russia has been responsible for over 13% of the global Bitcoin network hashrate – a measure of the total computational power used to mine new coins and process transactions. While crypto mining has gained notoriety among pro-environmentalist groups, for many Russians it has become a steady source of income.
To an amateur, crypto mining might sound like free money; however, the equipment necessary for it to be worthwhile is extremely expensive. The breakeven for most professional miners can take about a year, and even longer if taking into account the enormous electricity cost. As the number of crypto miners in Russia has rapidly grown since 2020, were this ban to be imposed, many people who have taken up the arduous task of spending tens of thousands of dollars on mining equipment won’t ever see the fruits of their investments.
Besides taxing crypto gains, a simpler way to tackle the environmental challenges that crypto mining poses would be to cut down electricity subsidies in many households that misuse them and engage in mining, or even to restrict mining exclusively to clean-energy areas. Russia is one of the few countries that do not lack regions where electricity is clean and cheap. Such a region is Bratsk, a city in Siberia that’s home to BitRiver’s mining center, one of the global leaders in mining, that allows services to international companies.
Finally, if imposed, the crypto ban would only further increase the rift between the extremely wealthy Russian crypto traders who have foreign bank accounts, and the less wealthy who have entered crypto either due to their lack of trust in the ruble, or with the intention to earn a livelihood through mining by investing in expensive equipment. This ban cannot be good news for anyone in Russia, regardless of their stance on crypto trading, as it would only aggravate mistrust in Russian institutions, leave oligarchs who have expanded into crypto (such as Oleg Deripaska) unscathed, and would further stymie innovation and would negatively affect foreign investment in the some of the most remote Russian regions.
