Bank of Russia wants to ban crypto and launch a CBDC

By Raffaele Redi
• Updated

The bank issued a consultation paper on cryptocurrency risks and possible regulatory measures

The Bank of Russia, the central bank of the Russian Federation, has issued a consultation paper on cryptocurrency risks and possible regulatory measures, suggesting the Kremlin should ban cryptocurrencies and crypto mining in light of the advent of the e-ruble, the Russian Central Bank Digital Currency (CBDC).

“The Bank of Russia believes that the current scale and further spread of cryptocurrency mining in the Russian Federation entails significant risks for the economy and financial stability,” said the institution.

In particular, the bank suggested prohibiting the circulation of cryptocurrencies and crypto-related organisations, including exchanges and P2P platforms, as well as prohibiting financial institutions from investing in cryptocurrencies and related financial instruments, while stipulating liability for violating these bans.

The central bank also proposed a ban on crypto mining, as such activity “creates unproductive consumption of electric power, which threatens the power supply of residential buildings, social infrastructure and enterprises and the implementation of Russia’s environmental agenda.”

The final proposal

Lastly, the bank suggested the government should track all crypto transactions and operators to obtain information about Russian clients’ operations in foreign markets, while continuing to develop a Russian CBDC that would take the place of all other cryptocurrencies.

“The Bank of Russia plans to enhance the system of regular monitoring of cryptocurrency transactions, including via cooperation with the home country regulators of foreign cryptocurrency exchanges, in order to obtain information about Russian clients’ operations in foreign cryptocurrency markets,” said the paper.

“The benefits of cryptocurrencies which make them attractive as payment instrument for operations other than money laundering and other illicit activities, namely high speed, convenience, relative low cost, could be realised and are already being realised through creation and development of faster payments systems and by national digital currencies (CBDC) in the future.”

“The potential of cryptocurrencies as an investment instrument can be further implemented more efficiently through the use of State-issued digital financial assets […] that are an innovative investment instrument and, in contrast to cryptocurrencies, guarantee investor protection,” said the institution.

The race against dollarisation

In the light of China’s ban on cryptos, several small crypto miners migrated to the Russian Federation to continue their activities – rendering Russia one of the world leaders in the crypto mining industry by hash rate, which was standing at 11% last year.

However, according to the Bank of Russia, cryptocurrency activities undermine an already weak ruble (RUB) – currently trading at $0.013 against the USD – as the Russian economy deals with RUB volatility and inflation risks.

“Potential risks to financial stability provoked by cryptocurrencies are significantly higher for emerging market economies, including Russia, particularly due to a traditionally higher propensity for dollarisation and insufficient level of financial literacy,” said the central bank.

“Just as dollarisation, crypto-isation limits monetary policy sovereignty, which might force central bank to permanently maintain a higher key rate in order to contain inflation. This will reduce the affordability of credit to both households and businesses,” said the institution.

Kremlin more cautious

The Kremlin, on the other hand, seems to be considering the opportunity to benefit from current developments in the crypto environment, as Russian president Vladimir Putin appeared to wink at cryptos in a recent plenary session of the Russian Calling! Investment Forum, held in November 2021.

“Regarding gold and digital currencies, some countries use cryptocurrencies, and others have a ban on them. I believe their use is prohibited in China and three or four other countries. They are not backed by anything and are highly volatile, which implies huge risks,” said Putin.

“I believe that we should listen to those who are pointing to these huge risks. On the other hand, cryptocurrencies are being increasingly widely used in some countries and economies. Maybe the future belongs to cryptocurrencies, but we should closely monitor the process of their development,” he said.

Gazprom begins crypto mining

Interestingly, the majority state-owned multinational energy company Gazprom, the largest supplier of natural gas to Europe and Turkey, is developing its own crypto mining facility in Siberia.

In 2020 the St Petersburg-headquartered company recently launched a project through Gazprom Neft, building an APG (associated petroleum gas) power plant and offering miners the chance use the electricity generated to mine cryptocurrencies. The project aims to offer IT giants and mining companies electricity at an attractive price.

“Energy from APG can power data centres and mining farms. So we will increase the percentage of rational use of raw materials. This is especially true for remote areas of Siberia and the Arctic, where the transportation of associated gas from fields is unprofitable,” said Alexander Kalmykov, head of the Gazprom Neft blockchain technology centre.

Vekus IT group became the first local buyer of electricity from processed gas, delivering a container with 150 Antminer S9 ASIC devices to the field for test mining. During the month, the equipment used 49,500 cubic meters of associated gas and produced 1.8 BTC, according to Gazprom Neft.

RACIB’s reaction

The paper released by the Russian central bank prompted an immediate reaction from the Russian Association of Cryptoeconomics, Artificial Intelligence and Blockchain (RACIB), with RACIB president Yuri Pripachkin saying, on the RACIB Twitter account, that the proposal is “unprofessional and unrealisable”.

The president pointed out that the Russian central bank “did not allow the issuance of cryptocurrency, and therefore cannot prohibit it”.

Moreover, “Industrial mining is what RAKIB is fighting for. If it is legalised, miners will be ready to invest in infrastructure and pay taxes on it,” said Anton Filimon, RACIB’s head of development for digital financial institutions.

The association recently released a call to miners migrating from China, in a bid to combat US dominance in crypto mining activities.

Russian crypto environment

According to some estimates reported by the Central Bank, Russian citizens’ cryptocurrency transactions total as much as $5bn per year.

“Russian individuals are active users of online cryptocurrency trading platforms. Moreover, Russia is one of the global leaders by mining capacity,” explained the institution in its paper.

On the other hand, the Russian mining environment is constellated by many small crypto miners, sometimes operating illegally.

Recently, according to leading Russian miner BitRiver, Russian authorities attributed a massive increase in retail energy consumption to underground cryptocurrency mining operations that take advantage of cheap retail electricity in some regions, and in so doing overload the regional grid, increasing the risk of accidents and emergencies.

“Government officials are reportedly working on new ways to differentiate tariffs between general usage and cryptocurrency mining. BitRiver fully supports this effort, and believes it could serve as a stepping stone for healthy regulation,” said the company.

Will miners migrate to Europe?

As Kazakhstan, which now accounts for 19% of the global hashrate, is recovering from the unrest that hit the country, and as several countries in eastern Europe provide energy at low costs, the possibilty of a second great migration of miners to Europe cannot be discounted, with the giant BitRiver potentially on the frontline.

As RACIB recently reported, according to the Unified State Register of Legal Entities, a new company, Bitriver-Caucasus, was registered in the Chechen Republic.

“All the necessary conditions have been created in the Chechen Republic for the implementation of an effective state policy to support business and its accelerated development,” said RACIB.

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