​“Nothing is clear in crypto.” How Russia is trying to regulate cryptocurrencies

The draft law on the regulation of mining and the subsequent sale of digital assets, which establishes a ban on the advertising of cryptocurrency, has been submitted to the State Duma of the Russian Federation. According to the document, from January 1, 2023, it is allowed to sell mined cryptocurrency both on foreign platforms, and in Russia — through a special platform.

The creation of a Russian national cryptocurrency exchange is being discussed. In mid-November, State Duma deputies and market participants discussed the introduction of appropriate amendments to the law “On Digital Financial Assets.”

It is reported that the deputies will first prepare a document taking into account the position of the market, and then submit it to the government and the Bank of Russia. The participants of the discussions say that the parties do not plan to consider the exchange for the distribution of cryptocurrency as a means of payment within the country. The platform will rather be an exchange point, where cryptocurrencies can be exchanged and declared.

The document on the regulation of mining, which takes into account the position of the Central Bank and the Ministry of Finance, was submitted to the State Duma on October 27. It prohibits the use of cryptocurrencies as a means of payment within the country. The Bank of Russia also supported in official statements the draft law on the regulation of mining previously submitted to the State Duma, but it has not yet reached the adoption of legislatively fixed decisions.

“Our attitude towards specifically for that draft law is rather neutral. In its essence, the draft law has a rather formal content and is aimed at adding the concept of “mining” to the legal plane of the country,” comments Nikita Zuborev, senior analyst at Bestchange.ru. Of the innovations in the draft law appears only a ban on the advertisingof Russian crypto projects, which previously existed de facto in the media, the expert adds.

Zuborev believes that all the initiatives, including the original law on DFAs, are harmful to the industry and prevent the development of one of the fastest-growing high-tech areas of the world: “As a result, we get an outflow of specialists and change of jurisdictions for IT companies instead of the declared support for IT specialists and a tax inflow from high-margin activities.”

What a national crypto exchange is needed for

Obviously, legislative initiatives related to mining are aimed at taking control of the growing cryptocurrency mining industry, believes ENCRY Foundation co-founder Roman Nekrasov. “Let me remind you that Russia has very favorable climatic and energy conditions for PoW mining, which is characterized by high energy consumption. And every year the amount of computing power in Russia, involved in mining, is growing. It is no longer some kind of fun, but a full-fledged multibillion-dollar industry,” Nekrasov explains. According to Nekrasov, the government wants to get taxes from this industry, to know where and who is engaged in mining, and to control the sale of mined coins.

The launch of a national crypto exchange, where Russian miners would sell mined coins, has been discussed “for five years, or maybe more,” Nekrasov continues. “The authorities want, first, to count all the miners, forcing them to register their activities, and second, to oblige them to sell coins on a controlled platform. And then these coins can be used in foreign economic activity,” the expert comments, adding that the State Duma also talked about this in light of Iran’s similar experience.

“The negative point in all this is that cryptocurrency is about the absence of borders in the financial world,” Nekrasov argues. Firstly, miners are unlikely to be willing to sell coins on a low-liquidity Russian crypto exchange. Secondly, Russian mining companies have many foreign investors. According to Nekrasov, they will definitely not like having to sell coins on a Russian crypto exchange. “And for what currency? Rubles? Why do they need rubles, and what will they do with them next? If this is mandatory, the already frozen foreign investments in Russian mining enterprises will stop altogether. Even the Chinese will not want to get involved with it,” the ENCRY Foundation representative concludes.

Politicians are absolutely not required to understand “the nuances and intricacies of the technological process and higher mathematics,” but they must gather working groups of the right experts and listen to their views. In practice, such cases in the government are the exception rather than regular practice, Zuborev believes.

The current approach of lawmakers will likely lead to a total ban on cryptocurrencies according to the Chinese scenario, the analyst adds. Among “the powers that be” there is a group of stakeholders who lobby for their interests related to specific episodes of crypto activities: mining and exchange. “But at the same time, we also understand that without banning ‘for their own,’ the government can implement some kind of licensing procedure in order to prohibit ‘economic sedition’ for ordinary private owners,” Zuborev explains.

Why laws are not being passed

The legislative framework for cryptocurrencies in the Russian Federation has not been finalized for several years. The first versions of draft laws from the Central Bank or the Ministry of Finance date back to 2014, and the rhetoric of regulators varies from a total ban and criminal prosecution of market participants to the legalization and use of cryptocurrencies in international settlements.

The Bank of Russia should be more flexible in regulating the crypto industry, as on November 24, Finance Minister of the Russian Federation Siluanov stated at a meeting with university students during the online marathon “FinZOZH.” The Minister recalled that in Russia payments in foreign currencies are prohibited, but nothing prevents owning and exchanging them, so the same rules could be established for cryptocurrencies.

“But the Central Bank, like armor, like a wall, stands to the death, does not want crypto to enter our circulation. Crypto is a given, you can buy, operate, and sell. And it’s all done abroad, not on our infrastructure. No one gets the profits. All this is obtained illegally,” Siluanov comments.

The official said that unlike stocks and other securities, on which it is at least roughly possible to calculate the dynamics of prices, “in crypto nothing is clear.” Siluanov added: “[Crypto] This is the same as a slot machine. Playing with such toys usually leads to loss of money.”

There are clearly both ardent opponents of cryptocurrencies and those who see opportunities, Zuborev commented. Looking at the public rhetoric, the Central Bank’s block is rather against “money surrogates,” while the economic block is not ready to allow the promising field to be completely banned. “So it turns out that the current legislation is born as a compromise of these two extreme positions — let’s ban cryptocurrencies, but not quite; you can buy, but not in Russia; you can mine, but sell the money only abroad,” the Bestchange.ru analyst argues.

Probably, in terms of democratic principles, it is even better than unconditional acceptance, Zuborev believes, but due to the prevalence of IT ignorance among decision-makers, the current legislation around information technology is more a prohibitionist acts with rare exceptions than a real balance.