Cryptocurrencies VS Economic Sanctions: Round One. Part 2

Over the past few years, I have heard about various countries across the world planning to use cryptocurrencies to circumvent economic sanctions. In most cases, it remained just an idea or turned into a farce, like with Venezuela and its Petro token. However, now we are seeing an entire country trying to salvage its economy by using the blockchain.

At this point, Russians should have realized that unofficially using crypto to circumvent sanctions is not really an option, leaving them with two possible alternatives. The first is legalizing “traditional” cryptocurrencies and all operations with them. The second would be to create and use their own digital assets. So far, Russian authorities can’t seem to make up their mind.

The decision to integrate digital currencies into the country’s financial system should be made jointly with the Central Bank, said Russian Prime Minister Mikhail Mishustin. According to him, the participation of the regulator is necessary to assess the risks crypto creates for currency circulation in Russia.

“Digital currencies will have to be integrated into the country’s financial system. Obviously, such a matter can only be addressed with the central bank’s participation,” Mishustin stressed. The Prime Minister also called for further discussion on mining regulation and mentioned the Ministry of Finance’s framework that the government approved last month, which outlines these issues in detail.

For its part, the Ministry of Economic Development supported the Ministry of Finance’s draft law “On digital currency” in concept and offered to finalize it. In their view, the definition of mining, the procedure for digital currency payments, and certain provisions for persons operating crypto exchanges and digital trading platforms required further clarification.

Pavel Zavalny, head of the parliament’s energy committee, made a suggestion that different countries could pay for Russian gas and other resources in cryptocurrency. “Gas is only the beginning, it would also affect other resources. If they want to buy something, let them pay either in hard currency or the national currency. And if it’s going to be bitcoins, we could trade in them as well,” the official said.

However, this appears to be no more than a fantasy. Earlier, Vladimir Putin demanded to sell Russian gas to “unfriendly countries” for rubles only. In their response, the European Commission refused to pay for fuel in rubles, as payments exclusively in dollars and euros are stipulated by the contracts. Those documents also don’t mention bitcoin, which doesn’t even have a clear legal status in Europe.

Other parliamentarians have put forward their own, generally more sane initiatives on promoting cryptocurrencies in Russia. Deputy Chairman of the State Duma (the parliament’s lower house) Committee on IT Anton Gorelkin proposed government support for the domestic cryptocurrency market in light of restrictions on Russian citizens by the largest foreign exchanges.

He claimed: “The emergence of the Russian national cryptocurrency infrastructure is inevitable, and eventually, we will have our own wallet and exchanges. I know of several quite promising domestic projects in this area, and I am sure the state needs to support their development. In the current conditions, it should become one of our priorities.”

And this process is now ongoing, as the Central Bank has already licensed Sberbank, Russia’s largest bank, to issue digital assets, seemingly having revised its position on cryptocurrencies in the face of the new sanctions.

On March 17, 2022, Sberbank was included in the register of operators for data systems in which digital financial assets (DFAs) are issued.

The bank has stated that “Accounting and circulation of DFAs issued on our digital assets platform will take place in a data system based on a distributed ledger using blockchain technology, which guarantees data security and protects it from data manipulation.”

For now, though, those services are not available to ordinary citizens, only legal entities. They will be able to produce their own DFAs to certify monetary claims, which is supposed to attract market investment, acquire DFAs issued in Sberbank’s data system, making it possible to invest temporarily free funds to generate income, and conduct other DFA operations provided for by the law of the Russian Federation.

Sergey Popov, director of Sberbank’s Transactional Business Division, commented on the move: “In a month, legal entities will be able to make the first transactions on our blockchain platform. We are still at the beginning stages of working with digital assets, and we realise that further development requires adapting the existing regulatory framework. To this end, we are prepared to closely cooperate with the regulator and executive authorities.”

Next on the agenda is the digital ruble. State Duma deputy Sergei Mironov called upon the government, the Central Bank, and the operational headquarters for countering sanctions with a proposal to legalize the digital ruble in Russia.

“The initiative is meant not just to introduce the digital ruble into circulation but to issue our cryptocurrency in a targeted way for specific purposes – housing construction, industrial development, and transport infrastructure. The digital ruble should become a full-fledged investment and reserve currency for Russia,” Mironov explained.

The deputy believes that controlled emission will provide the economy with funds without accelerating inflation. In addition, e-rubles cannot be withdrawn abroad or used for other purposes – a valuable property for money in the present circumstances.

As you may recall, only recently, in mid-February, the Central Bank of Russia announced the start of the first phase of digital ruble testing. Three banks were included in the pilot group at the time. Their clients opened e-wallets on the digital ruble platform through the mobile application. They exchanged rubles from their accounts for digital ones and carried out crypto transactions among themselves.

Digital ruble trials began amidst disagreements between the Central Bank, the government, and the Russian Ministry of Finance regarding the legislative regulation of cryptocurrencies.

Meanwhile, State Duma’s Alexander Yakubovsky, a member of the task force on crypto legislation, confirmed the possibility of creating Russian cryptocurrency exchanges to bypass restrictions. Yakubovsky explained that it is virtually impossible to limit crypto circulation in a country like Russia, and even extensive pressure is not likely to force the miners out: “Russian miners will not leave the market. In September last year, Russia ranked third in technical capacities used for working with cryptocurrency, primarily bitcoins. This is massive. It shows that we have all the resources for creating our own exchanges, using alternative payment systems and platforms.”

According to him, there is active work underway now to make the cryptocurrency market in Russia function for the country’s benefit: “I’m confident it could open Russia’s access to the international financial market, which is now being restricted. In addition, the competent development of digital financial assets will minimize damage from sanctions against the country.”

The question at this point is not whether to ban or allow cryptocurrencies but how to effectively regulate them for the good of the Russian people, says Yakubovsky. “The Central Bank was strict with its restrictions prior to the war the increased pressure from sanctions, but the situation has changed. Now, the initiative to regulate the cryptosphere is supported not only by the Ministry of Finance but also by the Ministry of Energy and the Federal Taxation Service,” the deputy noted. “Today, we recognize that blockchain technologies and startups are the future. Bans don’t solve anything, only make us lose the real advantage we currently have. Home and industrial mining should become distinct types of economic activity, which would require simplifying the registration process and filing reports as much as possible. Other measures would include facilitating payment of tax fees and establishing a minimum tax rate. Also, it is worth considering extending measures to support the IT industry, at least for industrial mining.”

Finally, a group of deputies from one of the parliamentary factions even proposed that Russia needs a modern electronic currency – a digital golden ruble, backed by Russia’s foreign exchange reserves, its trade, industrial, and raw material potential. In their opinion, it would allow the country to abandon dollar and euro settlements completely.

And we continue to watch this captivating epic.