What does the future of crypto in Russia look like and can a digital ruble really be introduced in the coming years?

After the Chinese authorities put an outright ban on crypto transactions in September by equating them with illegal financial activity, local crypto miners have given up the radar or moved to other countries to continue their business.

The United States then became the leader in Bitcoin (BTC) mining volume at 35.4%. In second place is currently the modest Kazakhstan (18.1%), bronze is secured by Russia (11.23%).

This is not surprising given that Russia has a number of advantages, which means that conducting a crypto business in the country is extremely lucrative for almost any miner. There is cheap electricity and, at least for now, friendly legislation. According to analysts, the price of electricity in Russia in the spring of 2021 was $ 0.06 per kilowatt hour for households and $ 0.08 for businesses. For comparison: in France one kWh of electricity costs 0.2 US dollars for households and 0.14 US dollars for companies, four times as expensive as in Russia. Other estimates suggest that the difference in electricity costs for Bitcoin mining in Russia and Europe is actually almost 7.5 times.

Many private crypto farms and mining companies have popped up in the country. Of course, like in the rest of the world, many Russian miners did not survive the “crypto winter” of 2018 when the price of Bitcoin fell to almost $ 3,500, causing crypto mining to fall unprofitable. But COVID-19 has forced many people to seek additional income and look for alternative ways to increase their capital.

Favorable conditions for mining have even helped state oil companies propose to mine cryptocurrencies in their fields and use the associated gas to generate electricity. Incidentally, Gazprom Neft, the largest gas supplier to European countries, opened a data center for mining at its location in Siberia in 2020.

Vitaliy Borshenko, co-founder of the industrial mining operator BitCluster, is certain that mining in Russia will be supported not only by private companies, but also by the authorities, even with high electricity consumption:

“The bitcoin mining industry is a single electricity consumer. The uniqueness results from the high flexibility of the field with regard to the location of the payment methods and the distribution of the electricity loads. Huge facilities have been built in remote areas of the country, providing tax revenue for local households and jobs for local residents. And since there is no shortage of electricity, the authorities can only help. “

Is cryptocurrency legal in Russia?

Every state today regulates the cryptocurrency industry based on its own interests and in very different ways. Some countries completely ban cryptocurrencies while others have taken steps to legalize them.

There are already rules and regulations that regulate the circulation of cryptocurrencies in the Russian market. But, like in many other countries, there are problems regulating cryptocurrencies because the industry is still very young and not all regulators are familiar with it.

Like many countries, Russia is following a global trend and 2014 saw the first signs of various legislative proposals to regulate the industry. The first clear steps towards regulation began in 2018, in 2019 the federal law “Digital Rights” came into force, which provides a process and rules for the use of digital assets and tokens. A formal law “On digital financial investments” was also discussed. In January 2021 the still very “impolite” and incomplete part of the law finally came into force. This is the first law to specifically regulate cryptocurrencies and mining, as well as levy taxes, but it still does not recognize cryptocurrencies as a means of payment. Russia’s banks and stock exchanges can carry out securities purchases and exchanges if they are entered in a special register of the central bank.

However, the state does not have a mechanism to track profits from cryptocurrencies. When it comes to applying this law to the average user who wants to store bitcoins and not tell anyone about it, they can safely do so thanks to the anonymity of the network. Anonymization occurs when cryptocurrencies are exchanged for rubles, dollars, or some other fiat currency, which allows the state to intervene in these transactions and create obstacles.

In general, regulators in Russia cannot find consensus, not only on the acceptance of cryptocurrencies, but also on how they are labeled and then regulated. Recently, the Russian Ministry of Economic Development proposed that mineral mining be understood as a business activity within the meaning of the Civil Code. The proposal was supported by the Ministry of Finance, the Ministry of Energy and the House of Commons, the State Duma.

The Department of Energy requires consumers to declare their electricity consumption for business or personal expenses. The State Duma is also proposing to raise electricity prices for miners as they do not have to pay taxes. But the Russian central bank does not support the initiative and describes mining as a “currency substitute”. In September, the central bank urged banks to slow down payments by Russian users to cryptocurrency exchanges to combat the “emotional buying” of cryptocurrencies.

For Valeriy Petrov, Vice President of the Russian Association for Cryptocurrency, Artificial Intelligence and Blockchain Economy, this shows that the central bank is lagging a crucial management step by the local industry eager to work with regulators:

“Regulation of mining is only required in two matters: recognition of its business and legalization of the sale of crypto-assets acquired outside the Russian Federation in order to organize the flow of foreign exchange into the country and the procedures for paying taxes to the. to determine state assets. The crypto community has been developing all questions for a long time. ”

Digital ruble

What if the Russian central bank wanted to get into the burgeoning and unregulated financial sector, but just became a monopoly and created its own cryptocurrency?

As early as 2020, the central bank announced that it would examine the possibility of a digital ruble. The new coin will likely be used both online and offline and will be kept in a special wallet. The regulator emphasized that their digital currency was the same as a local currency. The digital ruble is becoming a new payments infrastructure project that increases availability and reduces payment and transfer costs for people and businesses. According to the central bank, the digital ruble will completely replace cash in 10 to 30 years.

This summer, the bank made it clear that the development of a prototype of the platform for the digital ruble should be completed in December 2021. Trials of the coin are scheduled for May 1, 2022 and will take place in several phases throughout the year. After this test, the regulator sets a plan for implementation.

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In addition to the usual means of payment, the digital ruble can in future also be used to pay taxes, which in Russia can only be paid cashless.

Since the central bank has not yet released all the details about the digital ruble, some financial institutions such as the Association of Banks of Russia have raised questions and doubts. Critics cite the security of the transactions. It is not yet clear whether the regulatory authority will guarantee the security of the data in the digital ruble system and protect it from unauthorized access and data loss.

The central bank reports that payments in digital rubles will be reasonably safe and stable. In particular, by combining systems based on the principle of centralization and decentralization, the data protection of the system must be guaranteed. The regulator has outlined plans to introduce multilevel protection against unauthorized transactions and appeals for disputed transactions. A digital citizenship profile, biometrics, and other tools are believed to be used.

Security issues aren’t limited to questions about the digital ruble itself. Some see it as another monetary control over populations and businesses. The role of commercial banks in the digital ruble system is also questionable. With the growth of the digital ruble circulation, the volume of their assets may decrease. Due to the fact that they become the middleman in the system, the role of their own product can be reduced. This can lead to a decline in the overall stability of banks, which can damage the economy.

Is Russia a threat to cryptocurrencies?

It is too early to talk about the consequences of introducing the digital ruble. The Treuhandbank has not yet announced all of its plans for a new payment instrument and details of its implementation. But if this system is successfully implemented, it could seriously transform the financial sector, weaken the role of banks and tighten payment controls.

The regulator hopes that the introduction of the digital ruble will give another boost to the development of financial technology in the country and …