Bank of Russia proposes ban on issuance, circulation and mining of cryptocurrencies in Russia

The Bank of Russia has proposed introducing a ban on the issuance, circulation and exchange of cryptocurrencies, as well as on organising related operations within the territory of the Russian Federation. The regulator states this in its published report “Risks of cryptocurrencies and possible regulatory measures”.

The document focuses on stablecoins and unsecured cryptocurrencies. The Bank notes that these assets claim to replace money, but are primarily used in illicit activity.

As stated by Elizaveta Danilova, Director of the Department of Financial Stability at the Bank of Russia, during the presentation of the report, the growth in popularity of cryptocurrencies in Russia carries risks to citizens’ welfare, financial stability and the use of digital assets in illicit activity.

“The potential use of cryptocurrencies as a means of payment for goods and services creates a risk of undermining monetary circulation and loss of sovereignty of the national currency”, notes the report.

According to Danilova, the regulator is convinced that at this stage one needs regulatory measures rather than market monitoring alone.

The Bank notes that rising crypto prices are driven by hype and speculative demand, which leads to a bubble. Cryptocurrencies themselves exhibit features of financial pyramids, the regulator emphasised.

To reduce risks associated with crypto assets, the BoR proposes:

• establish liability for violating the ban on using cryptocurrencies as a means of payment for goods, works and services;
• ban the issuance, organisation of circulation and exchange of crypto assets (including by bitcoin exchanges, exchangers, and P2P platforms) within the territory of the Russian Federation and establish liability for violating this ban;
• introduce a ban on investments by financial organisations in cryptocurrencies and related financial instruments, as well as on the use of the Russian financial infrastructure for operations with them.

“We note that we do not propose to ban individuals’ ownership of cryptocurrency — this remains possible in foreign jurisdictions”, the central bank said.

The central bank emphasised the need to develop mechanisms to identify transactions involving cryptocurrencies and the persons carrying them out, as well as to block operations aimed at buying or selling crypto assets. The BoR also intends to monitor P2P payments related to acquiring digital currencies, together with banks.

To this end, the Bank of Russia intends to:

1. Engage with foreign regulators and improve international information-sharing agreements on Russian clients’ transactions on exchanges.
2. Collect information from foreign payment systems about operations by Russian residents aimed at purchasing cryptocurrencies, including via payment cards.
3. Establish data exchange between the Federal Tax Service, the Bank of Russia and Rosfinmonitoring to track cryptocurrency ownership and transactions.

In addition, the Bank of Russia called mining ban an “optimal solution” given its high energy intensity, which creates risks for the energy system and fuels demand for infrastructure to carry out cryptocurrency transactions.

According to data from the Cambridge Centre for Alternative Finance, Russia is one of the world’s leaders in the volume of computing power in the Bitcoin network.

The BoR also noted that stablecoins are used to counter volatility in crypto prices, although they are not completely safe for investors. The Bank argues that stablecoins, like cryptocurrencies, are a monetary surrogate that poses risks to citizens and financial stability.

“Particular attention should also be given to whether the actual backing of stablecoins matches its stated backing. In the absence of auditors verifying the backing, this cannot be checked”, the report says.

The BoR stressed that its proposals are not a legislative initiative, but rely on the government, the Duma and the Federation Council. The regulator intends to engage with all stakeholders.

The report is published for public discussion. Comments and proposals on it are being collected until 1 March 2022.

Amendments to the legislation based on the proposals will be ready in the coming months, Danilova said.

Regarding preparation of the document in December 2021, reported by the deputy chairman of the Bank of Russia, Vladimir Chistyukhin. He noted that the regulator “does not see a place for cryptocurrency in the Russian financial market.”

Earlier on 20 January, Bloomberg, citing two unnamed sources, reported that the FSB convinced the head of the Bank of Russia, Elvira Nabiullina, to support a full ban on cryptocurrency operations in Russia. According to the publication, authorities aim to deprive the opposition and foreign-agent media of financing.

Earlier reports in the media also appeared about plans by the Bank of Russia to ban investments in crypto assets due to risks to financial stability.

Earlier in 2021 the regulator first sent banks requests regarding cooperation with crypto exchanges in relation to P2P payments, including on the cards of front men.

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