The Central Bank of the Russian Federation proposed a ban on the circulation, exchange and mining of cryptocurrencies

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The Bank of Russia proposes to introduce a ban on the issuance, circulation and exchange of cryptocurrencies, as well as on the organization of these operations in Russia. Relevant proposals are contained in the regulator’s report for public consultations, RBC reports.

What does the Central Bank offer?

  • Introduce liability for violating the ban on the use of cryptocurrency as a means of payment for goods, works and services sold and bought by Russian legal entities and individuals.
  • Prohibit the organization of the issue and the issue itself, as well as the organization of the circulation and exchange of cryptocurrencies in Russia, including crypto exchanges, crypto exchangers, p2p platforms (platforms for money transfers between individuals). Establish liability for violation of this prohibition. To do this, it is necessary to develop mechanisms for identifying transactions and persons who carry them out after the introduction of the ban, mechanisms for blocking transactions for the purchase or sale of cryptocurrencies for fiat currency (that is, for ordinary money), and also to determine the authorities that will be entrusted with the authority to implement these measures. .
  • Introduce at the legislative level a ban for financial organizations on their own investments in cryptocurrencies and related financial instruments, a ban on the use of Russian financial intermediaries and infrastructure in any transactions with cryptocurrencies (acquisition, payments and transfers) and to facilitate such transactions, including storing or facilitating the taking of risks through derivatives (the Central Bank notes that the risks are borne not only by direct ownership of cryptocurrency, but also by investments in derivative financial instruments on it).
  • The Bank of Russia also wants to develop monitoring of risks associated with investments in cryptocurrencies. Now the Central Bank, together with banks, is identifying such risks by monitoring p2p payments that can be made to buy or sell cryptocurrencies. According to the Russian regulator, further it is necessary to build interaction with the regulators of foreign cryptocurrency exchanges, finalize international agreements on the exchange of information to include information about the operations of Russian clients on crypto exchanges, and also ensure that foreign payment systems receive information on payments made by Russian residents on a regular basis for the purpose of acquiring cryptocurrency, including using payment cards. “Currently, foreign payment systems have already implemented the marking of transactions for the acquisition of cryptocurrency,” the report explains. Another proposal of the Central Bank: to organize information exchange between the Federal Tax Service, the Central Bank and Rosfinmonitoring. For example, information exchange with the Federal Tax Service will help establish that a person owns a cryptocurrency, since the State Duma is already considering a bill on the procedure for its declaration.

According to the report, the Central Bank wants to discuss with the market whether its participants support the ban on the use of Russian infrastructure and intermediaries for transactions with cryptocurrencies, what problems they see in the implementation of these proposals, and whether there is a need to introduce an even stricter option for regulating cryptocurrencies.

What risks did the Central Bank see in cryptocurrencies

The volume of operations of Russian individuals with cryptocurrencies can reach $5 billion, the report says (this is over 350 billion rubles; for comparison, the increase in investments of Russian citizens in foreign securities in 2020 amounted to 474 billion rubles, the regulator notes). At the same time, the investments of Russian legal entities in cryptocurrencies are insignificant, most often the founders do this as individuals or trustees, the document explains. Basically, cryptocurrencies are bought for the sake of speculation, investments, transfers abroad and avoiding the requirements for combating money laundering and terrorist financing. The Central Bank came to such conclusions by interviewing banks and payment systems.

In August 2021, Russia came in third in terms of bitcoin mining, accounting for 11.23% of computing power. The share of Russian users on various crypto exchanges ranges from 7 to 14.5%, according to the statistics of the Central Bank. The authors of the report refer to research by Chainalysis, according to which in 2020 Russia ranked second in the ranking of 154 countries in the Global Cryptocurrency Adoption Index, but dropped to 18th place in 2021.

“The volume of cryptocurrency transactions in Russia in 2019-2020 relative to the population and size of the economy was very high, but in absolute numbers it is significantly less than those in the US and China,” the report says.

“Russian citizens account for a significant share of participation in the global cryptocurrency market. At the moment, the risks of financial stability associated with this are limited, however, in the event of an increase in the involvement of citizens in the cryptocurrency market, they will increase significantly, ”the Central Bank believes.

The regulator sees the following risks:

  • the massive purchase of cryptocurrencies by the population can lead to an outflow of capital from the country and a weakening of the ruble;
  • the growing popularity of cryptocurrencies increases the risk of funds flowing from bank deposits to cryptocurrencies, as the latter may seem more attractive to investors in terms of profitability. “Withdrawal by citizens of funds from deposits for the purchase of cryptocurrency threatens with liquidity risks for banks, the need to find alternative sources of financing and their rise in price and, ultimately, a decrease in the financial stability of banks,” the Central Bank warns;
  • the possibility of a complete loss of investments of private investors in cryptocurrencies, since this market is volatile, and its growth can form a bubble. Losses can also be due to fraudulent activities and cyber threats. “In the case of a massive distribution of this kind of investment, this can lead to the realization of social risks,” the authors of the report emphasize;
  • the use of cryptocurrencies as a means of payment for goods and services creates a risk of undermining money circulation and losing the sovereignty of the national currency;
  • due to the flow of capital from the traditional financial system to the cryptocurrency market, there is a risk of a decrease in the volume of financing of the real sector of the economy;
  • cryptocurrencies provide support for criminal activities, as they are used to make payments for the purpose of laundering proceeds from crime, drug trafficking, terrorist financing, etc. “Despite the open nature of the distributed ledger technology, at the moment there are no approaches that allow deanonymizing all participants in transactions with cryptocurrencies,” the report says. According to the Central Bank, maintaining anonymity allows fraudsters and traders of prohibited goods and services to significantly complicate the work of law enforcement agencies.

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