Paul Goncharoff

The many crises the pandemic triggered, helped along with decisions made by several countries to print their way out of immediate difficulties has influenced stock, commodity and cryptocurrency markets throughout the global economy. Because of this, defensive, classic, non-fiat assets such as gold and silver have risen and continue to rise in price. As this is the new millenium, among the risen we now include blockchain assets like cryptocurrencies and stablecoin tokens.

Not just in Russia, but across this planet more and more mainstream financial firms are admitting to a greater or lesser degree that a solution to the problem of economic recovery after the crisis will probably be the use of blockchain technologies, especially the Ethereum platform. It is felt that the distributed ledger (DLT) will occupy a key role as neutral global gateway for the interaction of financial systems, currencies and applications.

Today the majority of international transactions (+/- 80%) are carried out in US Dollars. Therefore, any increases in the USD exchange rate against other fiat currencies will lead to an increase in the cost of imported products as well as borrowed funds. At this moment just about every country holds at least some US Dollar debt to various proportions in their portfolios. Given this reality, any depreciation of the USD will hit both US consumers, and global debt holders like the EU who will certainly suffer.

Russia, on the other hand, stands to benefit if the dollar rises as the volume of US government bonds held by the Russian Federation is insignificant, and because Russia receives proceeds from the sale of raw materials mostly in the US currency, although this is changing.

In the fullness of time, what will eventually replace the US Dollar on the world’s financial stage? Thanks to the blockchain, cryptocurrencies have several advantages over traditional payment systems. For example, the speed of transactions and the reduction in associated costs. 

If one country wants to carry out transactions in a cryptocurrency, other trade partner countries must be in agreement. This would hopefully not allow unilaterally imposed sanctions to affect the use of digital assets. Therefore, trading in the cryptocurrency sphere is not an economic question, but a political one.

A possible future for cryptocurrencies, probably based on the Ethereum protocol for trans-national trade could happen if several trading partners, for example, BRICS countries, as a consortium agree on an initiative to recognize digital assets. Even if sanctions are imposed on these states from without, it will not have too nasty an impact, as maintaining trade relations within a union is realistic and possible. A likely scenario would be a group adoption of stablecoins such as a digital yuan, or digital rouble, rupee or tengiz to cross border trade settlements, not necessarily the public peer to peer crypto’s like ETH or BTC.

While the dollar is the dominant unit of account in international trade, it is not very likely to be replaced by a cryptocurrency anytime soon. First, the United States will do everything and anything imaginable, and then some, to prevent this from happening. Second, such an initiative, without the consent of most leading trade countries would be difficult without the creation of clear, mutually agreed regulation of the digital finance industry(s).

Change takes time, and often takes 3 steps forward, then 2 steps back. Russian authorities are also backing off prior attempts to control this relatively new class of decentralized technologies which are largely impervious to government regulation. At issue is that trying to shut down local nodes on the blockchain would require shutting down all nodes worldwide at the same time, which is difficult to say the least. Since the gung-ho days way back in 2017 when President Vladimir Putin threw his support behind Ethereum, a lot has evolved both positive and negative with how official Russia deals with blockchain and crypto.

Cryptocurrencies have had a jarring regulatory journey. Russia’s 2002 ‘Law on the Central Bank’ outlawed ‘monetary substitutes’ to the rouble, and until mid-2017 most of Russia’s financial bodies opposed digital currencies. The government reversed course in late 2017, after a meeting between Putin and Ethereum founder Vitalik Buterin. With an eye to regulation, Putin asked the Central Bank to define these technologies’ legal status. Russia’s Security Council and Central Bank both explicitly rejected strict regulatory measures. A March 2019 update to the civil code established new categories of digital money and rights. The Duma is considering a more extensive bill, which would legalize and regulate digital financial asset trading. Ministers have even discussed what is already being studied; a central bank issued CryptoRuble stablecoin. 

Where Russian officialdom does come together in strong support is the recognition of the transformative power of distributed ledger technology (DLT). A number of DLT applications have already been implemented in Russia and quite a few more are in the approvals pipeline. Russia is a natural home for the blockchain, DLT and crypto industry. The country, after all indisputably boasts abundant crypto talent and an infrastructure that is conducive to this field of endeavour. 

Finally, the technology’s decentralized architecture and privacy features can to a great degree circumvent the financial roadblocks in sanctioned trade. A digital currency could facilitate money transfers and lessen reliance on the US dollar. One such example happened this past February when the Central Bank approved a blockchain platform supported by oligarch Potanin, allowing investors to purchase coins (also known as tokens), fully backed by exchange-traded physical metals such as Gold, Platinum, Palladium, etc.

Not to be left behind in the neighbourhood, even Kazakhstan proposed speeding up the creation of an electronic national currency. They noted that several countries are working on state cryptocurrencies. China has advanced farthest, which started back in 2017. The PRC has already introduced the crypto-yuan, it was created by the Central Bank, it is being tested and performs all the functions that Kazakh officials in the Ministry of Digital Development are now talking about.

So, what is the latest on crypto in Russia? For one, at least the definitions are now clearer and that is a start. For example, the state Duma had its third and final reading this past July 22nd on the adopted bill ‘On digital financial assets and digital currencies.’ If all goes swimmingly, it will enter into force on January 1, 2021.

The bill introduces the concepts of ‘digital financial assets’ (DFA) and ‘digital currencies,’ as well as defines the rights and obligations of cryptocurrency owners, regulates the operation of blockchain platforms and adds legal status to the concepts of a ‘digital currency’ and a ‘digital asset.’ This now officially allows Russians to buy tokens (a digital analogue of securities) issued both in Russia and abroad.

DFA – securities, accounting and circulation of which is possible only through the blockchain. They can be a collateralized asset, purchase and sale transactions, or can be exchanged among themselves or for other digital securities. Blockchain platforms, exchanges, banks and other organizations that will issue DFA’s, buy, sell and trade them must register in a special register of the Bank of Russia. To get a license required to carry out the above operations, the authorized capital of the company must be 50 million roubles minimum.

Digital Currencies – are today’s public peer to peer BTC’s or Ethereum. By law, they are recognized as a means of payment, savings or investment, but they are prohibited from being used to pay for goods and services, since cryptocurrencies are not considered the currency of Russia or other countries. Russian companies, divisions of foreign organizations and tax residents of Russia are also prohibited from using digital currencies at this time to pay for goods and services inside of Russia.

Digital currencies can be bought on foreign exchanges and declared as property in order to gain the right to challenge transactions with them in court. There are no specific rules for such declarations yet – they will be added to the Russian Tax Code in the future.

Russian government officials are forbidden to have digital assets and cryptocurrencies issued on foreign platforms. The bill does not specify any administrative or criminal liability for operations with cryptocurrencies.

In the near future, there will be rules for declaring cryptocurrency to the tax authorities. As well as the rules for exchanging cryptocurrencies for ordinary roubles and vice versa. As it stands today, this bill has taken on a ‘glossary’ aspect related to the blockchain and cryptocurrencies, and on its basis other related bills will be written.

The document will, starting January 2021, allow conducting transactions with cryptocurrencies, but will prohibit it as a means of payment on the territory of Russia. This tracks with the current fiat law where you can’t pay for goods in euros or dollars on the territory of the Russian Federation, the main thing is one easily exchanges these fiats for roubles. The same should hold true for cryptocurrencies after the usual fits and starts. Welcome to the Brave New World.

Paul Goncharoff, Moscow July 25, 2020