The Bank of Russia is preparing to ban the circulation and mining of cryptocurrencies and introduce fines for violators

The Central Bank of the Russian Federation has launched a round of public consultations to ban operations with cryptocurrencies in Russia, including trading and mining. Liability for violating these prohibitions is also discussed.

In a report for public consultations, the Bank of Russia presented its vision of the potential risks posed by the spread of cryptocurrency assets for Russian citizens, as well as the financial stability and economic security of the state. The consultation period will last until March 01, 2022, after which a joint decision can be expected with other departments.

Assessment of the state of the cryptocurrency market by the Central Bank of the Russian Federation

The authors of the report draw attention to the fact that despite the negligible share of payment transactions in cryptocurrencies in Russia, compared with the indicators of traditional payment systems, they are actively used for settlements in the framework of illegal activities (money laundering, drug trafficking, financing of terrorism, etc.).

The regulator expresses high concern regarding the interest in trading in derivative financial instruments and units of exchange-traded funds (ETFs) associated with cryptocurrencies, as well as the development of decentralized finance (DeFi) ecosystems. According to the Central Bank, the volume of transactions of Russian citizens with crypto assets reaches a level within $5 billion per year.

It is stated that Russian citizens are among the most active users of cryptocurrency platforms, and the country is one of the leaders in terms of global mining capacity. At the same time, according to the regulator, due to insufficient financial literacy, Russian market participants do not take into account the fact that the rapid growth of the market value of crypto assets is determined primarily by “speculative demand, has the characteristics of a financial pyramid and leads to the formation of a financial bubble.”

Grounds for the ban

The Bank of Russia believes that it “has no right to ignore the threats to the well-being of Russian citizens due to the loss of a significant part of financial investments and an increase in debt load as a result of cryptocurrency trading using borrowed funds.”

The massive spread of cryptocurrencies (cryptoization of the economy) significantly limits the sovereignty of the country’s monetary policy, as a result, to curb inflation, it will be necessary to maintain a higher key rate on an ongoing basis, which will reduce the availability of loans not only for citizens, but also for businesses.

The report of the Central Bank indicates another level of danger, which is that cryptocurrencies contribute to the withdrawal of citizens’ savings beyond the perimeter of the Russian financial sector and, as a result, reduce the opportunities for financing the real sector, which indirectly reduces the number of jobs and the potential for income growth of citizens.

The authors of the report believe that the actions of the Central Bank of Russia are consistent with the global approach of regulators to ban or introduce limited circulation of crypto assets and cryptocurrency mining (China, India, Iran, etc.)

What transactions does the Central Bank plan to ban?

Summarizing the above, “in order to reduce the threats caused by the spread of cryptocurrencies”, the Bank of Russia proposes to amend the current legislation by banning most transactions with decentralized cryptocurrencies:

• Establish liability for violation of the legal ban on the use of cryptocurrencies as a means of payment for goods, works and services sold and bought by legal entities and individuals – residents of the Russian Federation.

• Introduce a ban on the organization of the issuance and (or) issue, organization of the circulation of crypto-currencies (including exchanges, exchangers, P2P platforms) on the territory of the Russian Federation and establish liability for violation of this ban.

• Introduce a ban on investments by financial organizations in cryptocurrencies and related financial instruments, as well as on the use of Russian financial intermediaries and Russian financial infrastructure to carry out transactions with cryptocurrencies and establish liability for violation of this ban.

• When preparing regulatory documents, take into account that cryptocurrency mining operations in Russia carry significant risks for the economy and financial stability, since this activity increases the involvement of the population and the economy as a whole in the cryptocurrency market. It also creates unproductive energy consumption, jeopardizing the energy supply of residential buildings, social infrastructure buildings and enterprises, as well as the implementation of the environmental agenda of the Russian Federation. In this regard, according to the Bank of Russia, the best solution would be to introduce a ban on cryptocurrency mining in Russia.

In conclusion, the regulator draws attention to the fact that the Bank of Russia, like the central banks of many countries, is actively implementing fast payment systems. They fully cover the needs of citizens and businesses in instant settlements. The Bank of Russia also reminded that it is developing its own digital currency (CVCB). Thus, the advantages of cryptocurrencies that make them attractive as payment instruments can be realized on its basis.

The regulator invites all interested parties to dialogue, and also asks to send their comments and suggestions on the report until March 1, 2022 inclusive.

Clarifications from the representative of the Central Bank

Elizaveta Danilova, director of the financial stability department of the Central Bank, was asked about the possibility of introducing criminal liability for the circulation of cryptocurrencies and mining in Russia. She assured that the introduction of criminal liability is not yet envisaged and fines will be introduced. However, their size is still unknown.

“You are asking this question too early, we still see liability in the form of fines, but we will need to discuss this issue with other interested parties,” Danilova replied.

According to the representative of the Central Bank, there are no plans to prohibit citizens from owning and storing cryptocurrencies, as well as trading on foreign exchanges outside the Russian financial system. Thus, crypto-currency activities in Russia will be able to exist before going into fiat money, since the exchange for rubles will be prohibited or significantly limited.

It will be possible to buy and sell cryptocurrencies abroad and withdraw fiat currencies to foreign bank accounts. But in this case, the issue of taxation remains unclear. Also, trading in Russia with shares of cryptocurrency companies and ETFs for cryptocurrencies, which have already been approved in several countries, may also be banned.

In line with the old policy

Since 2014, the Bank of Russia has been taking a tough stance on cryptocurrencies, and until now, controversy has arisen mainly in the degree of severity of the ban. However, other departments generally take a softer position and agree to discuss the regulation of cryptocurrency transactions, subject to the control and identification of users.

Recall that on December 20, 2021, the head of the Duma Committee on the financial market, Anatoly Aksakov, called for an end to the issue of regulating cryptocurrencies, his position at the hearings in the State Duma was supported by the Deputy Chairman of the Central Bank Vladimir Chistyukhin.

Chistyukhin explained that the Bank of Russia plans to legislate the rules for the circulation of cryptocurrencies. Russian companies and citizens have the right to buy and store digital assets, but without the participation of domestic financial infrastructure or intermediaries.

“The report will contain our approaches related to what place we see for cryptocurrency in the Russian financial market. I give a hint – we do not see a place for cryptocurrencies in the Russian financial market, ”said the Deputy Chairman of the Central Bank.

Thus, the proposal of the Central Bank published today brings together earlier initiatives, expanding them with a possible ban on mining and a complete ban on the exchange of cryptocurrencies for rubles, which was not previously expected. However, the current proposals are only a consultation document and have no legal force; they do not constitute a draft law. Nevertheless, there are serious doubts that the Central Bank will listen to the opinion of the community and even other state bodies, since the Bank of Russia has long been the only “mega-regulator” in the financial sector. It is also not entirely clear how the new bill, if it appears, will fit in with the already existing Law on CFA and Digital Currencies.