With the law signed by Russian President Vladimir Putin on July 15, 2022, severe restrictions and prohibitions on making payments with crypto assets were introduced in Russia.[1] Russian State Duma approved the relevant law on July 8, 2022. Thus, using digital securities, including crypto assets, as a means of payment while purchasing goods and services is prohibited.
Essentially, the Central Bank of Russia favors a complete ban on the use of crypto assets. Because in its current form, buying crypto assets in Russia is not a crime. Purchasing other goods and services with the related crypto asset is illegal. Therefore, on January 20, 2022, the Central Bank of Russia proposed on banning the mining and use of crypto assets within Russia’s borders. The rationale for doing this is the possibility that crypto assets use and mining could pose a potential threat to Russia’s financial system, harm citizens, increase the energy consumption of crypto-mining and violate Russia’s monetary sovereignty.
As far as it is known, in countries with solid centralist tendencies, such as Russia and China, the use, mining, and even purchase of crypto assets recorded by distributed data-keeping ledgers, which are difficult for the state to control, may be prohibited in order not to compromise monetary sovereignty and capital controls.
After Russia’s military intervention in Ukraine, the country’s economic and financial isolation led to many attempts to overcome the sanctions. At this point, many manipulations have been made about what Russia’s attitude towards crypto assets will be. On March 24, 2022, State Duma Deputy Pavel Zavalny declared that Russia could sell gas to Western countries in exchange for Russian rubles or gold and pay in national currencies or bitcoins to “friendly” countries such as China and Türkiye.[2] There were fluctuations in the price of Bitcoin immediately after this statement. From this, it can be deduced that in cases where Russia cannot trade with the US dollar and the euro, it attributes a reserve value to gold and the ruble, and then to bitcoin, respectively. Nevertheless, bitcoin is an asset that will be used, when necessary, among these alternatives for Russia.
In September 2022, the Russian Ministry of Finance and Undersecretary of the Central Bank Alexey Moiseev stated that crypto assets must be legally adopted for international payments.[3] Emphasizing that the current attitude of the Moscow administration towards crypto assets is very harsh on the Russia-24 TV channel, Moiseev stated that it would be possible to make international money transfers with crypto assets. Still, crypto assets must be placed in a legal framework.
Stating that the Central Bank of Russia will review its attitude towards crypto assets due to the new financial isolation of Russia, Moiseev said that the first step to be taken is the legalization of crypto assets in the country where it is currently prohibited to used and pay many types of crypto assets. Thus, it may become possible for crypto assets to be used when making international value transfers in Russia. Moiseev also stated that anti-money laundering regulations should be kept strictly in the legalization process.
Based on Moiseev’s statement, it can be argued that Russia may turn to the use of crypto assets with the thought that it will facilitate international payments. To understand the reason for this, it is necessary to examine the technology of crypto assets. They are electronic assets that can be carried or transferred in digital networks created using distributed data retention technologies.
Most crypto assets operate on a distributed data holding technology called a “blockchain.” Blockchain consists of three elements: (1) A distributed ledger, (2) encryption or cryptography prevents the manipulation of the data recorded in the ledgers, (3) smart contracts or smart computer codes automate the entire system’s operation.
Providing data processing to the blockchain, the element that acts as “blood” in the system is “crypto assets.” If a blockchain requires an official authority or company to provide the registry to access the ledger, or if an official authority or company needs approval to become one of the transaction validators on that blockchain, that is the blockchain that “must go through the approval process.” However, suppose the registry in that blockchain can be accessed directly over the relevant network, and every computer on the blockchain can be a validator. In that case, that is a “public”, “global” or “free” blockchain.
Here, Bitcoin and Ethereum blockchains are “permissionless” blockchains. In other words, even if the intervention of a state can reduces the value of crypto assets in blockchains, that blockchain or crypto asset transfer cannot be prevented entirely because a network node in El Salvador or Nigeria can automatically approve a transaction request sent from Russian territory.
Likewise, the transaction of bitcoins sent to an “anonymous” bitcoin wallet that Russia will open can reach Russia’s wallet with confirmation from any geographic region outside the domain of the states imposing sanctions on Russia. Therefore, it is complicated to censor transactions in a seriously decentralized blockchain network. Similar to physical gold delivery, it is doubtful to be blocked. Therefore, Moiseev wants Russia to soften its prohibitive stance on crypto assets.
In addition, besides taking advantage of the assets on blockchains and the existing liquidity of those crypto assets, states can use a private blockchain network among themselves. However, the liquidity provided by institutions and individuals in Western countries will not be included in such a blockchain network. This will enable Russia to make more efficient and error-free transactions in financial transactions with other states.
Crypto asset transfers may be censored if they are made through traditional financial intermediaries. The prevention of money laundering is done precisely in this way. Because only authorized intermediary institutions can perform value transfers. These intermediary institutions also prevent transactions that the state envisages to be stopped to avoid legal sanctions. However, crypto-asset transfers are complicated to censor when they occur directly through unauthorized and decentralized protocols in the distributed data holding network, not through the wallets of traditional financial intermediaries.
If Russia uses crypto assets to circumvent sanctions, it aims to use uncensored protocols and, therefore, decentralized and permissionless. Using crypto asset transfers over these protocols is like a double-edged sword. Because if an individual or institution in the country converts a value or asset into a crypto asset and can deliver it to an uncensored crypto asset wallet, that asset will be sent to any point in the world with elementary digital coding. This situation is like a plane passenger carrying that asset out of the country by carrying cash and gold up to the specified limit. However, there is a difference here. Assets worth millions or even billions of US dollars can be issued with a simple transaction, as there is no physical space for crypto assets. However, making such large capital transfers abroad through crypto assets is impossible. However, the financial and political benefits of using crypto money for international payments to Russia may be reversed because the same technology may cause capital outflow from the country.
As a result, Russia is against using crypto assets as a means of payment in the trade of goods and services, as it follows a centralized monetary policy that does not compromise economic sovereignty. Because centralized states cannot control cryptocurrencies with a high level of decentralization and anonymity. However, due to the sanctions, there have been fluctuations in Moscow’s attitude towards crypto assets. Exposed to severe financial and economic isolation, Russia announced that it would accept payments in gold, rubles, and then bitcoin in order of importance in return for its energy exports to other countries. Almost 6 months after this stance, with the law that entered into force with Putin’s signature, the use of digital assets, including crypto assets, as a means of payment in the trade of goods and services was prohibited. However, buying crypto assets is not forbidden in the country. Based on the latest developments, it can be said that the Kremlin may use crypto assets to solve the problem of international financing and payments, which has become more difficult due to sanctions.
[1] “Yasama No: 138674-8”, Duma, https://sozd.duma.gov.ru/bill/138674-8#bh_histras, (Date of Accession: 08.09.2022).
[2] Stephen Alper, “Russian Lawmaker Suggests Nation Could Accept Bitcoin for Oil Payments”, Coindesk, https://yhoo.it/3DiIbXc, (Date of Accession: 08.09.2022).
[3] Petr Kovalev, “Минфин заявил о возможной скорой легализации трансграничных расчетов в криптовалютах”, TASS, https://tass.ru/ekonomika/15646955?utm_source=cointelegraph.com&utm_medium=referral&utm_campaign=cointelegraph.com&utm_referrer=cointelegraph.com, (Date of Accession: 08.09.2022).
