Report of the Central Bank of Russia for public consultations
On January 20, 2022, the Central Bank of the Russian Federation published a report on its official website, in which it argues for the need to ban mining and cryptocurrency turnover. There are several reasons that the country's main financial regulator calls, justifying the need for a ban.
Among the reasons mentioned are the massive purchase of cryptocurrencies by our citizens, which can lead to an outflow of capital from Russia and a sharp weakening of the national currency and electricity consumption, which threatens the energy supply of residential buildings, social infrastructure buildings and enterprises, as well as the implementation of the environmental agenda of the Russian Federation.
At our request, Glagol Internet media expert Evgeny Lebedev analyzed the document of the Central Bank and shared his conclusions with our audience.
Evgeny Lebedev, advisor of the WATT ME cryptoservice, has experience in the cryptocurrency industry since 2016.
The report begins with a summary that contains information about the subject of the report:
- The subject of the report is cryptocurrencies (unsecured cryptocurrencies and stablecoins) - digital currencies in accordance with Russian legislation, as well as digital financial assets that can be used in a foreign jurisdiction for payments (monetary surrogates).
As well as information about the market:
- In the last year, there has been a rapid growth of the cryptocurrency market in the world. The total volume of their capitalization in December 2021 reached $ 2.3 trillion, which corresponds to about 1% of global financial assets.
The summary contains an assessment of the Russian segment of the global crypto industry: the volume of transactions of Russian citizens with cryptocurrencies reaches $ 5 billion per year. Russian citizens are active users of Internet platforms that trade cryptocurrencies. In addition, Russia is among the leaders in terms of global mining capacity.
Then we learn about cryptocurrency:
The purpose of creating cryptocurrencies is to provide a convenient means of payment, potentially attractive from an investment point of view, to create the possibility of anonymizing payments and circumventing regulatory restrictions by eliminating intermediaries (banks and payment systems) and transferring the verification function of transactions to a distributed registry system.
The report identifies risks for citizens of the Russian Federation:
The spread of cryptocurrencies creates significant threats to the welfare of Russian citizens, the stability of the financial system, and also creates threats related to the maintenance of illegal activities with cryptocurrencies:
- The high volatility of the exchange rate and the significant prevalence of fraud in cryptocurrency trading create risks for citizens of losing a significant part of the invested funds, and when trading with borrowed funds, the risks of remaining a debtor.
- The transfer of funds to cryptocurrencies, as well as to foreign currencies, limits the sovereignty of monetary policy, as a result of which, in order to contain inflation, it will be necessary to maintain a higher level of the key rate on an ongoing basis. This will reduce the availability of credit for citizens and businesses.
- The spread of cryptocurrencies leads to the withdrawal of citizens' savings outside the Russian financial sector and, as a result, to a reduction in its ability to finance the real sector and reduce the potential growth of the economy, which reduces the number of jobs and the potential for income growth of citizens.
- Cryptocurrencies are actively used in illegal activities (money laundering, drug trafficking, terrorist financing, etc.). Their distribution creates favorable conditions for criminal operations, extortion and bribery and is a challenge to the global system of countering money laundering and terrorist financing (AML/CFT). It is impossible to ensure the necessary transparency of the circulation of cryptocurrencies. To reduce the threats caused by the spread of cryptocurrencies, the Bank of Russia proposes to make the following changes to the legislation:
- Establish responsibility for violating the legislative prohibition on the use of cryptocurrencies as a means of payment for goods, works and services sold and purchased by legal entities and individuals who are residents of the Russian Federation.
- Introduce a ban on the organization of the issue and (or) the issue, the organization of the circulation of cryptocurrencies (including crypto exchanges and P2P platforms) on the territory of the Russian Federation and establish responsibility for violating this prohibition.
- Introduce a ban on investments of 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 responsibility for violating this ban.
Separately, about the mining of cryptocurrencies in Russia, which, according to the Central Bank, carries significant risks to the economy and financial stability:
- This creates unproductive electricity consumption, endangering the energy supply of residential buildings, social infrastructure buildings and enterprises, as well as the implementation of the environmental agenda of the Russian Federation;
- Creates demand for infrastructure for conducting operations with cryptocurrencies, which increases the negative effects of the spread of cryptocurrencies and creates incentives to circumvent regulation.
In this regard, the Central Bank concludes that the optimal solution is to introduce a ban on mining cryptocurrencies in Russia.
In conclusion, the experts who prepared the report reported that cryptocurrencies have the characteristics of financial pyramids: the growth of their price is supported by speculative demand from newly entering the market participants. Owners who "come out" of the pyramid sell their investments at a profit at the expense of newcomers who purchase cryptocurrency in the hope of increasing its price in the future and stimulate its growth by their own demand. At the same time, the concentration of a large number of individual cryptocurrencies in the hands of a small circle of investors creates opportunities for price manipulation.
The Central Bank identifies three main threats to the risks of the spread of cryptocurrencies in Russia:
- threat to the welfare of citizens;
- threat to financial stability;
- threat of expanding illegal activities.
Therefore, the Central Bank believes that the growing interest of Russian citizens, a significant amount of investments and high risks of transactions with cryptocurrencies described above create potential systemic threats. The status of the Russian ruble, which is not a reserve currency, does not allow for a soft approach in Russia and ignoring the increase in risks.
And offers additional measures on the following points:
- Introduction of liability for violation of the prohibition on the use of cryptocurrencies as a means of payment for goods, works and services sold and purchased by legal entities and individuals who are residents of the Russian Federation.
- The introduction of a ban on the organization of the issue and (or) the issue, organization of circulation and exchange of cryptocurrencies (including crypto exchanges and P2P platforms) on the territory of the Russian Federation and the establishment of liability for violation of this prohibition.
- The introduction at the legislative level of 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 financial market infrastructure to carry out any operations with cryptocurrency (acquisition, making payments and transfers, alienation of cryptocurrencies) and to facilitate the implementation of such operations (including the provision of storage services or risk-taking assistance through derivatives).
I have not heard anything new in the six years that I have been developing and using digital services, including those working in the crypto industry. Back in 2015, they wanted to introduce criminal liability for the turnover of cryptocurrencies, then prohibit the purchase of cryptocurrencies, later they fought with mining, exchangers, private transfers allegedly for the purchase of bitcoin. The result is the same. The report looks more like a planned PR of the Central Bank of the Russian Federation for some kind of a longer game.
I remember how in 2015-16 I looked through the bill that the deputies submitted to the State Duma. They just took an article of the Criminal Code of the Russian Federation on drug trafficking and replaced the phrase "narcotic drugs" with "cryptocurrency". It was essentially not applicable. And so it turned out that nothing happened with this bill.
These swings: we forbid - we allow, they swing constantly. Of course it gets into the media. Of course, this gets on the nerves of crypt holders, investors, those who have been in the crypt recently.
I will note that the fact that the exchange rate is falling now does not depend on the statements of the Central Bank, this is a global trend.
And in general, there is nothing new in the report: as they were not allowed to sell goods in Russia for crypt, they repeated once again that it is impossible to buy crypt for large sums, but this is already the case – unqualified investors cannot buy more than six hundred thousand of anything: neither crypt, nor stocks, nor gold…
In fact, this report is just an informational occasion. However, immediately after the release of the report of the Central Bank of the Russian Federation, Binance (ed. Binance is the world's largest cryptocurrency exchange) stated that they were ready to provide, at the request of the Central Bank, all information on transactions conducted by citizens of the Russian Federation. As I see it, this is just a game for the public, and the target audience here are the largest exchanges with representative offices in Russia, which now refuse to provide information about Russian users. It kind of worked – Binance is an example of that.
The discussion of the Central Bank's report is just beginning and, most likely, the discussion will drag on for the whole of 2022. But many industry participants have already thought about the ways of withdrawal, and the option when the Central Bank gets a black market instead of a controlled cryptocurrency one is quite real.