Legalization Out Of Desperation

Until recently, Russia was considering a complete ban on all cryptocurrencies and transactions with them. Now, the government has made a screeching U-turn, rapidly creating legislation for legalizing digital assets. The reason is the war and the severe international sanctions imposed on the country.

Only three months ago, the Russian leadership was rigidly opposed to cryptocurrencies and crypto transactions. The legislation being drafted at the time would have made Russia one of the most crypto-averse countries in the world – alongside China.

But then, the war broke out – Russia attacked Ukraine and found itself on the wrong end of harsh economic sanctions from the West. Among other things, they covered the financial sector and Russians’ private money. It soon became apparent that both the war and the sanctions were here to stay, and one of the few ways to mitigate their effect was through cryptocurrencies. Or, more broadly speaking, by using all the possibilities of digital assets.

At the end of February, the Russian government approved the concept of legislative regulation for digital currency circulation. It stated that cryptocurrency circulation will be controlled with thorough consideration for all market participants and an emphasis on protecting regular investors. That is, they were more willing to restrict than allow.

The turnaround happened very recently. Back in late April, the Bank of Russia and the Ministry of Finance were still completely against recognizing cryptocurrencies as a means of payment. Russian Prime Minister Mikhail Mishustin confirmed the authorities’ tough stance but added that Moscow does not want digital currencies to go into the shadows.

Mishustin also acknowledged that Russian authorities are interested both in controlling the movement of digital assets and in stimulating crypto businesses, including mining. The next day, the Ministry of Finance press service reported that an edited version of the bill on virtual currencies had been submitted to the government for consideration. The document was corrected, taking into account comments and proposals from a number of finance ministries and the Central Bank.

The bill now contained a mechanism for comprehensive regulation of the blockchain industry and mining, as well as control over digital asset operations. The ministry also noted that the law defined crypto market participants and delineated their fields of activity.

Less than a month later, all hell broke loose.

On May 17, the Russian parliament (the State Duma) adopted the bill on taxing digital currency transactions in the first reading. According to the document, resident investors will pay 13% of the difference between buying and selling; foreign citizens – 15%.

So far, it is only a bill, but it will become law soon enough since there is no longer controversy over its contents. Russian cryptocurrency holders currently have assets worth about 16.5 trillion rubles in their wallets – comparable to the country’s entire budget. And the current sanctions regime triggered by the war forces the state to look for new sources of income.

Although it is not entirely clear how they are going to monitor crypto transactions. It is possible if the money is withdrawn to fiat – then you can use bank financial monitoring. But determining after the fact when and at what price an investor bought, let’s say, BTC is a practically unsolvable task.

I also would not expect Russia to adopt cryptocurrency as a means of payment. The authorities rather see the legalization of crypto as a way to circumvent sanctions and continue to do business with the rest of the world. This path presents its own challenges, but it’s better than sitting in complete financial isolation.

On May 19, Anatoly Aksakov, head of the Russian parliamentary committee on financial market, said that authorized Russian blockchain platforms would be able to issue their first digital financial assets (DFAs) by the end of 2022. According to Aksakov, the country is now actively working in this direction: three platforms developed by Nornikel’s subsidiary, Transmashholding, and Russia’s largest bank, Sberbank, have already been registered as DFA issuers, with two more on the way.

The deputy believes the newly created DFAs will be used for financial settlements and as units of account in business relations with partners and subsidiaries. “To a certain extent, this is an alternative to the financial transactions currently based on the dollar, euro, or other currencies,” Aksakov explained.

He added that the Russian government supports the legalization of the digital asset market through strict regulation and has prepared a relevant new bill. The law he describes, “On digital currency”, drafted by the Ministry of Finance, is yet to be submitted to the State Duma.

The following day, on May 20, the Ministry of Internal Affairs of Russia agreed on finalized bills on virtual assets, which, among other things, included their proposals on the arrest of digital currency by court order, as well as the creation of an electronic wallet for confiscated assets.

The same day, a draft law was submitted to the State Duma, which would introduce the concept of NFTs into Russian legislation. The authors believe that the document will protect the rights of NFT owners, since legally the term doesn’t yet exist, leaving people to make transactions with non-fungible tokens at their own peril.

The bill says that an NFT is not a digital currency but a digital certificate of ownership, that is, an object of intellectual property, and suggests regulating it accordingly.

The proposed legal definition for an NFT in Russia describes it as “a non-fungible token of a unique digital asset (images, videos or other digital content or asset) in the form of non-fungible data stored in a distributed ledger system (blockchain)”.

What will happen next? It is hard to say, since a certain split in the leadership on the issue of cryptocurrencies remains. Russian Minister of Trade and Industry Denis Manturov recently claimed that cryptocurrency in Russia could be legalized as a means of payment – it is only a matter of time. In contrast, Olga Skorobogatova, Deputy Chairman of the Bank of Russia, advised the country’s citizens to refrain from investing in cryptocurrency. She recognized the right of everyone to “play with crypto” but suggested stave off large investments.

It is also unclear whether the legalization of digital assets will help Russia circumvent economic sanctions. In this case, the root cause of the problems lies in the political and military realm, not in economics. When you become a global outcast, legalizing crypto won’t save you.