On 20 January 2022, the Bank of Russia, the country’s central bank, proposed a ban on the use and mining of cryptocurrencies on Russian territory, citing threats to financial stability, citizens’ wellbeing and its sovereign monetary policy.
Amid fears that cryptocurrencies could be used in illegal activities, including money laundering, drug trafficking, the financing of terrorism, and the inability to provide the necessary transparency in the circulation of the digital tokens, Russia’s central bank proposed a ban on domestic crypto mining.
This was met with criticism from some of the country’s major figures, including Telegram CEO Pavel Durov, Leonid Volkov, Alexei Navalny’s chief of staff, and Ivan Chebeskov, director of financial policy at Russia’s Ministry of Finance.
While Russia’s ban on crypto remains mooted, what could it mean for cryptocurrency markets?
Why did Russia propose a ban?
Cryptocurrencies obtained legal status in Russia on 22 July 2020, when the lower house of the county’s parliament, the State Duma, passed a bill. However, parliament banned digital tokens’ use as a means of payment in the Russian Federation amid concerns that they could be used to finance terrorism and money laundering.
At the end of 2020, the State Duma introduced a bill that required citizens and legal entities operating in the Russian Federation to declare their cryptocurrency assets. The bill also established tax liability for unlawful failure to declare information or false information about transactions conducted in cryptocurrency.
According to CoinMarketCap, Russia is currently the world’s third-biggest bitcoin (BTC) miner, behind the United States and Kazakhstan. Data on Statista suggests that in August 2021, Russia was home to 11.23% of mined bitcoin.
Despite Russia’s big contribution to the mining process, on 20 January 2022 the country’s central bank proposed banning the use and mining of cryptocurrencies on Russian territory in order “to reduce the threats caused by the spread of cryptocurrencies”.
In an interview with InvestFuture, the central bank’s Deputy Director of the Financial Stability Department, Elizaveta Danilova, mentioned China, where a similar ban has already been imposed, and India, where one is being considered. Danilova noted that the general trend was clearly moving in the direction of tightening regulations on the use and mining of cryptocurrencies.
“Perhaps, a more conservative and tougher approach is taken by countries where the [crypto] market is emerging,” she said. “This is due to the fact that for those countries cryptocurrencies bear the greater risks associated with cryptoization and the loss in sovereignty of national currency.”
Cryptoization – term coined by the International Monetary Fund (IMF) referring to the broader adoption of cryptocurrencies resulting in them substituting national currency.
After the central bank made its proposal to ban the use and mining of cryptocurrencies on Russian territory, Bitcoin’s value fell by 17.4% within a week from $43,349.5 on 20 January to $35,802.89.
Following in China’s footsteps
China’s ban against cryptocurrencies was introduced in three stages:
On 18 May 2021, the country’s three trade bodies in cooperation with the financial regulators issued a ruling that banned banks and other financial institutions from trading cryptocurrencies but allowing the digital tokens to be used as payment. The ban also includes crypto exchanges. It was introduced due to cryptocurrency price volatility.
On 21 June 2021, the People’s Bank of China (PBOC) issued a law stopping the country’s major financial institutions from providing account opening and registration for crypto-related activities, while also banning crypto trading and mining.
Finally on 24 September 2021, PBOC issued a statement completely banning cryptocurrency use.
This led to major falls in bitcoin’s value. The crypto giant reached $34,356.25 on 19 May 2021, falling by 40.1% from $57,356.25 the previous month. The token’s value fell to $29,337.82 on 22 June 2021 from $29,337.82 the month before – a 23.47% decline.
China used to be the leading country for mining bitcoin, with over 75% of the mined cryptocurrency coming from China in September 2019. Since China’s ban on crypto mining came into force, Russia has managed to absorb a fair share of China’s miners.
India has been planning to ban crypto trading and mining since February 2019. The country’s government issued a bulletin on 23 November 2021 that underlined a move to prohibit all private entities from holding, selling, mining and transferring crypto assets.
This announcement was followed by a 6.9% decline in bitcoin’s price to $56,170.21 on 24 November 2021, a drop from $60,335.69 the month before.
Read more: Cryptocurrency ban in India
Russian crypto ban receives criticism
Bank of Russia’s proposal to ban the mining of cryptocurrencies in the Russian territory faced criticism from Pavel Durov, Telegram’s CEO and founder, who spoke out on his Telegram channel.
“The Russian central bank’s proposal to ban cryptocurrencies will lead to an outflow of IT specialists from the country and destroy a number of sectors of the high-tech economy,” he wrote.
Durov, an avid fan of cryptocurrencies who designed the TON token in 2018, added that “no developed country bans cryptocurrencies”. He noted that Russia should follow the example of neighbouring countries, including Ukraine and Uzbekistan, which adopted progressive laws in the blockchain field, allowing crypto trading and mining.
Navalny’s Chief of Staff, Leonid Volkov, also used Telegram to express disagreement with the crypto ban proposal.
Another ban critic is Ivan Chebeskov, financial policy director at Russia’s ministry of finance. He noted that Russia “cannot afford to simply ban a high-tech industry and say that it should be developed in another country”. Instead, he added that “regulation will allow transparency that is needed to protect citizens”.
During a press conference on 26 January Russia’s President, Vladimir Putin, stressed that the Ministry of Finance and the central bank must reach a conclusion on what’s next for the crypto ban proposal.
“I am asking both the government of Russia and the central bank to come to some kind of unanimous conclusion during discussions which should be held sometime in the near future,” Putin said.
While Putin himself did not reveal his stance on any ban, he noted that he understands the position that the central bank has taken, but also sees the potential in cryptocurrency mining, especially in relation to the surplus of electricity and having well-trained personnel available in the country.
What does it mean for cryptocurrency markets?
Yuya Hasegawa, crypto market analyst at Japanese bitcoin exchange Bitbank, said that Russia is unlikely to ban crypto trading and mining because of the support it received from Putin and Chebeskov.
Hasegawa noted that if Russia and India choose to go ahead with their crypto ban proposals, their actions will have a relatively minor impact on the price of cryptocurrencies because the two countries occupy a much smaller share of hash rate globally compared to China.
Is crypto banned in Russia?
As of 1 February 2022, cryptocurrency is not banned in Russia. On 20 January 2022, Russia’s central bank proposed a ban on the use and mining of cryptocurrencies on Russian territory, citing threats to financial stability, citizens’ wellbeing and its sovereign monetary policy. A formal decision has yet to be made.
Why do countries ban cryptocurrency?
Countries ban the use and mining of cryptocurrencies for a number of reasons. In Russia’s case, this was proposed amid fears that cryptocurrencies could be used in illegal activities, including money laundering, drug trafficking, the financing of terrorism and the inability to provide the necessary transparency in the circulation of the digital tokens.
China, on the other hand, introduced a ban on cryptocurrencies due to the digital tokens’ price volatility.
How is crypto regulated in Russia?
On 1 December 2021, Russia’s lower house of parliament introduced a new bill that required citizens and legal entities operating in the Russian Federation to declare their cryptocurrency assets. The bill also established tax liability for unlawful failure to declare information or false information about transactions conducted in cryptocurrency.