Russia Proposes Blanket Ban On All Activities Related To Crypto Assets Including Mining

The Bank of Russia has proposed a ban on all crypto operations by cryptocurrency exchanges and P2P platforms operating in Russian territory, according to its consultation paper. The apex bank has also called for imposing penalties on the violators of this ban.

One of the reasons for the ban is the risk posed by crypto assets to financial stability, which is significantly higher for emerging market economies, such as Russia, owing to “a traditionally higher propensity for dollarisation and insufficient level of financial literacy,” as per the paper.

A summary of the report concluded that cryptocurrencies’ potential for settlements seems limited in the long run. It highlighted that crypto assets bear signs of a “financial pyramid” as the price rise is largely driven by “demand from new market participants”.

“The rapid growth of their market value is predominantly spurred by speculative demand and expectations of a further rise in their prices, which leads to the formation of a bubble in the market,” read the summary.

The market for cryptocurrencies has surged globally in the last year as its market capitalisation reached $2.3 trillion. Russia makes up a significant portion of global crypto activity as it is the third-largest base for crypto mining. The proposed set of regulations might influence other nations that are working on their own crypto regulatory frameworks

Why is the Russian Central Bank averse to crypto mining?

Crypto mining is the issuance of a cryptocurrency and/or the receipt of a cryptocurrency as a reward for validating transactions, as per the report. The report calls for a ban on crypto mining in its recommendations.

“Mining cannot be ignored in the report, since it increases the involvement of the population and the economy as a whole in the cryptocurrency market,” the report said.

It offered the following observations on crypto mining:

• Creates unproductive consumption of electric power, which threatens the power supply of residential buildings, social infrastructure, and enterprises, and the implementation of Russia’s environmental agenda.
• Augments demand for infrastructure needed which exacerbates the negative effects of the spread of cryptocurrencies and creates incentives to circumvent regulation.

Elvira Nabiullina, Russia’s central bank governor, has always been wary of cryptocurrencies, according to Financial Times.

“There are big risks of cryptocurrencies being used for money laundering and illegal operations, and we’ve spent a lot of effort on clearing the financial system of illegal and dubious operations,” she was quoted as saying.

Threats identified in the report

The Russian central bank observed that the growth in use cases of crypto assets threatens Russian retail investors. It identified the following dangers:

• Individuals risk losing their investments or stand to become a debtor in case of leveraged trading owing to volatility and proliferation of fraud in crypto trading.
• Cryptoization limits monetary policy sovereignty, which may compel the central bank to maintain a higher key rate permanently in order to contain inflation.
• People may withdraw their savings from the Russian financial sector, decreasing its capability to finance economic growth.
• Cryptocurrencies foster a favourable environment for criminal operations (such as money laundering, drug trafficking, terrorist financing, extortions, bribery, etc.), challenging the global AML/CFT system.

“It is impossible to ensure a full transparency of cryptocurrency transactions,” the bank said.

Mitigation measures floated by the Bank of Russia

The consultation paper proposes the following amendments to the Russian legislation:

• Impose liabilities upon violation of the statutory ban on using cryptocurrencies as a means of payment for goods, works and services sold and bought by Russian residents.
• Prohibit financial institutions’ investment in cryptocurrencies and related financial instruments, and impose liabilities for violations of this ban.
• Enhance regular monitoring of cryptocurrency transactions
• Increase cooperation with regulators in countries where foreign cryptocurrency exchanges obtain information about Russians dealing in foreign cryptocurrency markets.

Bank of Russia’s observations on global regulatory approaches

The paper found that there was no single approach to cryptocurrency regulation across the world and cryptocurrency transactions in many countries remain in the “grey area”. It further observed that:

• A number of countries have prohibited the use of cryptocurrencies (China) or are planning to do so (India).
• Some countries like China and Iran have also banned cryptocurrency mining.
• Many jurisdictions are tightening AML/CTF and other requirements gradually while they permit the operation of cryptocurrency exchanges.
• Major regulators have issued warnings for consumers notifying them of excessive risks inherent in an investment in cryptocurrencies.
• Regulators in the countries where stablecoins are used as an alternative to investment funds, are focused on the elimination of regulatory arbitrage.

Bank of Russia’s views on CBDCs

The paper commented that many central banks across the world are working extensively towards deploying faster payments systems to achieve instantaneous settlements. It explained that central bank digital currencies (CBDC) are being developed in this regard. It is a new payment infrastructure that will allow “people, businesses and the government to conduct instantaneous transactions with minimal fees,” the consultation paper added.

It further said that CBDCs could offer the same benefits as cryptocurrencies while keeping out money laundering and illicit activities.