The Cryptocurrency Market in the Russian Federation
In 2022, the Russian financial market faced unprecedented sanctions pressure. Consequently, users had to look for new types of financial instruments. To a large extent, the problem was solved by cryptocurrencies, and this applies especially to international payments. According to Bloomberg, at the end of 2022, the Russian Federation was among the top 10 countries in terms of using cryptocurrency by the number of citizens.
CP Media examined the basic laws regulating Russia’s cryptocurrency market, the government’s plans to issue a CBDC, and other details on the current state and prospects of the blockchain industry in Russia.
Cryptocurrency Market Regulation in Russia
The Ministry of Finance, the Central Bank of the Russian Federation, and other government agencies have been working on draft laws related to cryptocurrencies since 2017. The work of officials culminated in the adoption of Law No. 259, which came into force in the country from the first days of 2021. This document formulates the main definitions concerning digital assets, the regulations for their use within the Russian Federation, and some amendments to previously adopted legislative acts.
However, the document received a hefty dose of criticism from local crypto experts as it had many gaps and ambiguous definitions. For example, the law doesn’t regulate mining activities in any way. According to the adopted legislation, digital assets aren’t legal tender in Russia and should be viewed as investments.
Since the adopted law turned out to have a lot of shortcomings, local lawmakers began to refine it, establishing basic rules for miners and legalizing the general status of the industry. The new bill was submitted to the State Duma on November 17, 2022. However, the local crypto community, after studying the text of the bill, again discerned several deficiencies in it. As a result, the State Duma decided to postpone its consideration to 2023.
The Government’s Plans to Change the Legislation
Revision of the aforementioned Law No. 259 is intended primarily to regulate crypto mining in the Russian Federation in all its manifestations. Specifically, it should establish:
- basic definitions related to mining;
- regulatory guidelines for industrial mining;
- principles of operation of mining pools.
Some clauses of the draft law raised concerns on the part of the Russian cryptocurrency community. For example, mining activities will be controlled by a specially created agency. Moreover, the government intends to “impose” an additional tax on the income of individual miners, the amount of which is still under discussion.
The most intriguing clause of the bill is the instructions on how mined digital assets can be disposed of. Thus, individual miners will be forbidden to use mined cryptocurrencies on local online platforms. It’ll be possible to sell digital assets only through international platforms. Exceptions will be made, but they’re still only planned to be added to the bill.
As part of the Mining Act, as it’s already been dubbed in the local crypto community, an experimental legal regime is expected to be introduced to allow companies to make cross-border crypto payments. Businesses will be able to exchange digital assets, including those generated by mining, through online platforms. Moreover, this regime will enable companies to operate legally, but only as crypto exchanges.
So, in 2023, the Russian Federation will likely approve legislation and introduce an experimental legal regime to let businesses create and develop projects using crypto and make domestic and cross-border cryptocurrency payments. For instance, the announced project of a gold-backed banking stablecoin is “awaiting” the final adoption of the legal framework.
Release of the Digital Ruble
The release of the national digital currency in Russia (CBDC) is another thing that may happen in the next few years. In December 2022, a bill related to the issuance of the digital ruble was submitted to MPs. The document can be found in the State Duma’s electronic database. The main objectives of this bill are as follows:
- expanding the payment infrastructure by applying digital technologies by businesses, citizens, and the state;
- achieving maximum speed, safety, and availability of settlements;
- reducing the costs of money transfers.
Apart from the draft law on introducing the digital ruble, MPs plan to amend the Civil Code. The digital ruble is expected to be referred to as non-cash funds. The main operator will be the Central Bank of the Russian Federation, which will be responsible for issuing and storing the CBDC and keeping records of transactions. Customers wishing to use the digital ruble will need to enter into a digital contract with the bank and open an account.
Hence, if MPs pass the bill, the basic law about the digital ruble may take effect in April 2023. Remarkably, some banks in the country are already testing a pilot version of the digital ruble. The Bank of Russia also plans to start tests with real customers in 2023. If all trials are successful, the digital ruble could become available to ordinary users in 2025.
Sanctions Evasion and Cross-Border Payments with the Digital Ruble
Given the pressure of sanctions that the Russian Federation faced in 2022, the Bank of Russia developed several models for cross-border transfers using the digital ruble. According to the Russian newspaper Kommersant, work in this direction will begin in Q1 2023.
The first model is considered an option where countries sign bilateral agreements involving the use of certain digital platforms, which must operate within the framework of agreed standards. The second model is to connect countries to a single digital platform that would offer users access to transactions with other countries’ digital currencies.
The Russian state-owned news agency RIA Novosti reports that the country offered Cuba to launch a settlement center that would process transactions with its national digital currency. Boris Titov, Chairman of the Russia-Cuba Business Council, said this step would help Cuba protect its financial system from sanctions pressure, using Russia’s experience.
Moreover, with the present geopolitical situation in mind, China could become a real partner for implementing a model for cross-border transactions with the digital ruble. The development of the international payment system based on blockchain was also supported by Russian President Vladimir Putin.
Cryptocurrency Mining in Russia
Until the adoption of the bill designed to legalize crypto mining in Russia and given the lack of a direct prohibition by the state, businesses and ordinary users continue to mine cryptocurrencies. The Siberian Federal District is the most popular region for miners. This is due to low electricity tariffs; for example, in the Irkutsk region and Khakassia.
Kommersant reported that as of late 2022, the demand for mining equipment in Russia increased significantly. For instance, the distributor of mining equipment Chilkoot saw a 65% increase in sales over the first nine months of 2022 compared to 2021.
Current legislation stipulates that companies engaged in industrial mining are subject to a 20% income tax rate. As for ordinary users, the rate of personal income tax depends on the annual revenue. If the income is up to 5 million RUB, the rate is 13%. If it is higher, the rate is 15%.
Opportunities for Companies and Individuals
There are no direct prohibitions for entrepreneurs and companies in Russian legislation regarding crypto transactions. For example, firms may use digital assets as investments for subsequent storage or sale. If the company receives a profit from selling such investments, it’s obliged to pay a 20% income tax.
The only restriction imposed by Law No. 259 is not to use crypto as legal tender. Therefore, legal entities can’t use digital assets as a direct means of payment for goods and services.
For individuals, cryptocurrency transactions in Russia can be conducted through online and crypto exchanges. It’s also possible to use land-based exchange offices, where digital assets can be exchanged for cash. For example, one such exchange is located in the heart of Moscow, in the Federation Tower, a part of the Moscow City complex.
Users should keep in mind that in 2022, the largest payment systems Visa and Mastercard set a ban on payment transactions for bank cards from Russia. Thus, it won’t be possible to purchase digital assets with these payment systems directly. As an alternative, digital cards from providers such as ePayments or Wirex are available.
In 2023, the Russian crypto market is expected to undergo major changes. Most of all, the cryptocurrency community anticipates the adoption of a bill related to mining regulation. According to Anatoly Aksakov, Chairman of the Committee on Financial Markets in Russia, crypto may be finally legalized in the country by the end of 2023, but not as a legal means of payment.