Russia’s plan to legalize bitcoin: meaning and implications

Introduction

The Russian government and the Central Bank of Russia have agreed to accept bitcoin as a currency. This is coming barely four months after El Salvador also adopted bitcoin, but as a legal tender. According to the announcement by the Russian government, “[t]he purpose of the regulation is to integrate the mechanism for the circulation of digital currencies into the financial system and ensure control over cash flows in the circuit of credit institutions”. 

This development is coming just a few weeks after the Central Bank of Russia proposed a ban on cryptocurrency trading, mining, and usage in January 2022. Back in 2020, cryptocurrencies were granted legal status but they were not approved for payments. One of the concerns by the government was that cryptocurrencies can be used for illegal acts and therefore should be regulated.

The country’s central bank has now agreed to effect amendments in the existing relevant laws and recognize cryptocurrency as a medium of exchange, which is in line with Russia’s aim to categorize cryptocurrencies standard currency, in the same way as the Ruble, but not as the country’s legal tender. 

Russia will require that cryptocurrency transactions that are higher than 600,000 rubles (approximately $8,000) be declared. Failure to declare will be treated as a criminal act.

The Russian authorities involved in this regulatory engagement are the Ministry of Finance, the Bank of Russia, Rosfinmonitoring, the Federal Security Service, the Ministry of Internal Affairs, the Federal Tax Service, the Ministry of Economic Development, and the Prosecutor General’s Office.

What does this decision by the Russian government and the Central Bank of Russia mean?

According to the announcement by the Russian government, “[t]he purpose of the regulation is to integrate the mechanism for the circulation of digital currencies into the financial system and ensure control over cash flows in the circuit of credit institutions”. 

With Russia’s acceptance of bitcoin as currency, licensed operators will be allowed to declare their income in line with the country’s banking system, and in compliance with other legal requirements. 

The central bank will also establish rules for the circulation of cryptocurrencies, and employ control measures to minimize possible threats to the stability of the financial system, as well as reduce the use of cryptocurrencies for illegal purposes. This, according to the regulator, is due to the fact that complete ban on their circulation is not achievable.

As reported by FX Street, “[a]nalysts believe that the regulatory progress seen in cryptocurrencies over the past few years could be one of the main drivers for adoption. The legal and oversight frameworks that are being put in order worldwide could solidify cryptocurrencies as investable assets.”

Between bitcoin as an asset for investment and bitcoin as a currency for payments

While it is clear that Russia will be legalizing and regulating bitcoin in its financial system, what is not clear is whether Russia will be legalizing and regulating bitcoin as a currency or an asset. This is because while the announcement made by the government of Russia emphasizes the need to protect the rights of ordinary investors and dividing investors into qualified and unqualified the report as published by the Russian newspaper, Kommersant, which also posted on Twitter, states that a draft law would be prepared to recognize cryptocurrencies as “an analogue of currencies, and not digital financial assets”: 

“The government and the Bank of Russia have agreed on a future regime for the circulation of cryptocurrencies in Russia. Before February 18, they will prepare a draft law on the circulation of digital currencies in the Russian Federation, in which cryptocurrencies are recognised as an analogue of currencies, and not digital financial assets.”

If you ask me, it looks like the Central Bank of Russia prefers to treat bitcoin as a currency so the power to regulate it would be absolutely that of the central bank. Knowing the central bank’s initial hostile position on cryptocurrencies, would such regime benefit the crypto industry? In the next few months, the world will be closely following developments in Russia to see how the proposed regulation eventually evolves. The devil, they say, is in the details.

The Implications of Russia’s proposed regulation

With the proposed regulation, the Russian regulatory authorities may bring the crypto industry to limelight in the country by giving it a legal status, and thereby removing the uncertainties surrounding its regulation. Some countries, such as Nigeria, Kenya, among others, have placed (what has been termed) “implicit ban” on cryptocurrencies, rendering it unclear whether it is an actual ban or not. In such countries, cryptocurrencies on the one hand, do not have a legal status, and consequently no regulatory regime; and on the other hand, the government does not outrightly ban them. According to the Russian government, this “will bring the digital currency industry out of the shadows and create the possibility of legal business activities”.

The acceptance of bitcoin as legal by Russia is expected to give way to crypto-related business activities to be legally transacted in the country. Businesses can now accept payments in bitcoin, when it is finally adopted. 

More adoption and the eventual rise in the global market capitalization of cryptocurrency, particularly bitcoin, is expected. It is a natural consequence that the government’s approval of cryptocurrencies occasion increased participation of people, and its ban results in a decline in participation. Russia’s proposed adoption of bitcoin therefore is expected to boost the cryptocurrency’s market size. At the time of this report, Bitcoin’s price was $44,832.68 and market cap, $849.75B.