Cryptocurrency is used for cross-border transactions: will this help the Russian economy

At the beginning of November, a seemingly joyful event occurred for all supporters of the introduction of cryptocurrencies in Russia. Speaking in the State Duma, Chairman of the Central Bank Elvira Nabiullina said that the Central Bank and the Ministry of Finance managed to overcome contradictions in approaches to regulating the cryptocurrency market. “I think we have agreed on this topic. And there should be no questions on our part… We also support, within the framework of experimental regimes, the use of both crypto and mining in cross-border payments,” in particular, the head of the Central Bank said, thus putting an end to the long-term dispute between departments about the legality and rules for the use of crypto both within Russia and for international transactions.

Let me briefly remind you of the contradiction between the positions of the Central Bank and the Ministry of Finance. The parties expressed the main arguments in favor of their positions at the beginning of 2022. The position of the Central Bank was outlined in detail in the public document “Cryptocurrencies: trends, risks, measures. Report for public consultation,” which substantiated that the use of cryptocurrencies poses a number of threats to the well-being of citizens, to financial stability and provides a new tool for illegal activities. Separately, the report noted the environmental harm of cryptocurrency mining. The report emphasized that investments in cryptocurrencies pose a significant threat to citizens of losing all invested funds, since the crypto market has signs of a “speculative bubble”, is characterized by high volatility (cryptocurrency rates rise and fall several times over a short period), most cryptocurrencies are owned by a small the number of anonymous people, which makes it easy to manipulate the market, and in general, the functioning of most cryptocurrencies is similar to a financial pyramid.

In addition, it was noted that most “stablecoins” that are strictly tied to national currencies have dubious real collateral, cryptocurrency exchanges are poorly protected from cyber threats and have been hacked several times, and the possibilities for legal protection of investments in crypto are very limited. In addition, the anonymity of cryptocurrencies allows them to be massively used in criminal activities and poses a challenge to the current system of combating money laundering and the financing of terrorism.

But the third block of risks from the Central Bank’s report seems somewhat less developed, namely the risk of undermining monetary circulation and loss of sovereignty of the national currency. This risk was identified based on analogy with the already known risks of currencyization of the economy, when a significant part of the funds from the country’s economy is transferred to the currency of another state. In economics, this effect is called “Thier’s law” and in general terms it sounds something like this: “good money drives out bad money when exchange is not limited and there is no fixed exchange rate.” On the other hand, these risks can only materialize if the cryptocurrency is “better” than the ruble, at least in some aspect. Which is more than controversial, since, as stated in the report, crypto does not provide most of the functions of money at all, that is, it cannot serve as a means of storage and a measure of value. Based on the listed threats, the Central Bank proposed banning the use of cryptocurrency on the territory of the Russian Federation as a means of payment, prohibiting the issuance, sale and exchange of cryptocurrencies on the territory of the Russian Federation, prohibiting investments in cryptocurrencies and financial instruments related to them, prohibiting intermediation for transactions with cryptocurrency and introducing liability. for violation of the above prohibitions.

The Ministry of Finance outlined its position in a non-public document sent to the government, conventionally called in the press “Concept for regulating the cryptocurrency market,” in which, instead of banning cryptocurrency, it proposed a number of measures to regulate its circulation in Russia. The position against the ban was justified by the fact that the market for transactions with cryptocurrencies has already developed, and its features are such that banning transactions with cryptocurrencies, due to the properties of anonymity and the lack of a single center of issue, is more difficult than establishing rules for their circulation. According to the Ministry of Finance, a ban would not stop the crypto market, but, on the contrary, would increase the shadow segment, the amount of fraud and would complicate the work of law enforcement agencies in this area. And market regulation would provide additional jobs in the IT sector, reduce the outflow of IT specialists from the country, and lead to additional budget revenues in the form of taxes and insurance premiums. The following measures were proposed to curb the risks for investors and illegal activities noted in the Central Bank report: conducting transactions only by fully identified persons and only through Russian banks, allowing the full range of cryptocurrency transactions to be issued only to qualified investors, introducing an exam for access to crypto transactions for unqualified investors, the creation of a special “transparent blockchain” service that allows for market supervision. The position of the Ministry of Finance was supported by the FSB, the Ministry of Digital Development and Rosfinmonitoring.

On January 26, 2022, the President of Russia intervened in the dispute between the Central Bank and the Ministry of Finance. During a meeting with members of the government, Vladimir Putin asked to come to a common opinion regarding cryptocurrencies, noting at the same time that the Russian Federation has a competitive advantage in the field of mining due to a surplus of electricity.

And finally a common position has been developed. Today, both the Central Bank and the Ministry of Finance agree that Russia should create rules for mining and a mechanism for transparent cross-border payments in crypto. This agreed position is good because it cuts off a significant part of the obvious risks of cryptocurrency, while allowing you to take advantage of the advantages of cryptocurrency as an international payment mechanism. But did it take two years to develop this position? In fact, by the spring of 2022, at various events with the participation of officials, it was said that, in principle, a common language had been found by the departments and that international cryptocurrency transfers and mining would be clearly permitted. By the end of 2022, the Duma had prepared laws and amendments to laws regulating the mining market, settlements in cryptocurrency on foreign markets, issues of taxation of cryptocurrencies and liability for their illegal use. But then, according to representatives of the Ministry of Finance, it was not the Central Bank that had any complaints about the laws, but law enforcement agencies. Thus, work to harmonize laws continues.

How much Russia has lost without laws regulating activities in the field of crypto is debatable. History has no subjunctive mood. During the time spent on coordinating positions on crypto, a lot happened in the Russian and global economies, in particular, during this time the cryptocurrency market managed to once again collapse and rise again. The main thing is that, to a large extent, the forecasts regarding cryptocurrencies and their use in the Russian Federation did not come true – neither positive nor negative. The crypto market has not become “popular”. We have not seen any mass flight of private savings into crypto. Although, perhaps, cryptocurrencies have gained somewhat greater visibility in the public sphere. The lack of regulation has not led to a significant outflow of capital from the Russian Federation, cross-border transactions in cryptocurrency have a marginal weight in the total volume of international transactions, and mining is still discussed in the Russian Federation as a promising area of ​​investment and has not become a significant economic phenomenon. That is, it is obvious that today Russia can easily afford to continue discussing legislation in the field of cryptocurrencies, since the issue is not significant for the economy of our country.

Published in the newspaper “Moskovsky Komsomolets” No. 29168 dated November 30, 2023

Newspaper headline:
Crypto comrades