‘The legalisation of cryptocurrencies in Russia will increase budget incomes thanks to investors’ premiums’

Photo: pixabay.com

Russians have about 2 trillion rubles of cryptocurrencies in their wallets

The Central Bank launched an initiative to totally ban cryptocurrencies in Russia: on their issue, mining and circulation. Such a harsh approach caused a wave of indignation among investors and clients of the biggest players. The prohibition will entail an outflow of specialists, layoff and budget losses of potential incomes equal to 50 billion rubles a year. The Central Bank sees cryptocurrencies as “money imitation”, which carries risks for citizens.

The Finance Ministry, in turn, did much smarter and going by the principle “chair if you cannot win” offered to regulate cryptocurrencies, which rules out a total ban. The Finance Ministry thinks that cryptocurrency transactions should be made through Russian banks, it is necessary to launch an identification system for wallet owners and divide investors into qualified and non-qualified.

According to different data, nowadays Russians have millions of cryptocurrency wallets that are worth some 2 trillion rubles. By the Russian Central Bank’s estimates, Russian natural persons’ cryptocurrency transactions reach $5 billion a year.

What does the Central Bank say?

The project of the Central Bank envisages the total ban on using Russian infrastructure for cryptocurrency transactions. We will be able to do this only in a foreign jurisdiction. In a word, the Central Bank sees cryptocurrencies as risks to financial stability, citizens’ well-being, sponsorship of crime and so on.

The main message of the Central Bank’s offers is that citizens won’t have problems when withdrawing money from cryptocurrencies but the money received will have to be declared. Thanks a lot, so to speak. In general this is an absolutely hard-line approach, judge yourself:

• a ban on using cryptocurrency as a medium of payment for goods, work, services sold and bought by Russian natural persons and legal entities;
• a ban on the organisation of the issue and the issue of cryptocurrencies, the organisation and exchange of cryptocurrencies in Russia via crypto exchanges, crypto exchange offices, P2P platforms (for transfers between natural persons);
• the creation of liability for violating the above-mentioned bans: there will be created mechanisms to detect transactions and people who make them after the introduction of the ban, instruments to block cryptocurrency purchase and sale operations for ordinary money. At the moment it is unclear who will oversee how these measures are taken;
• a ban for financial institutions on making their investments in cryptocurrencies, using Russian financial intermediaries and Russian infrastructure for any cryptocurrency transactions and financial derivative instruments (for instance, derivates):
• the creation of a plan to monitor the risks related to investments in cryptocurrencies: together with banks the Central Bank is now detecting such risks by monitoring P2P payments, which are made to buy and sell cryptocurrencies. The Central Bank intends to establish cooperation with regulators of foreign cryptocurrency exchanges to exchange information about Russian clients’ transactions to later set up information exchange with the Federal Tax Service to declare within legislation on cryptocurrency declaration, which is created.

The essence of the Finance Ministry’s proposal

The proposal of the Finance Ministry is more pragmatic, it has its own restrictions, but still.

• To make transactions with cryptocurrencies in Russian infrastructure. In the Finance Ministry’s opinion, this will provide a chance of proving proper control over these transactions and identifying all participants. For this purpose, it is necessary to introduce new regulatory subjects at the legislative level like those in the existing regulation of digital financial assets.
• To create cryptocurrency exchange operators in banks. They will control and track cryptocurrency transactions, detect transactions that are made for an illegal purpose, identify clients, store information on a deal for at least five years. Also, they will be obliged to provide requested data to the Central Bank, state financial watchdog Rosfinmonitoring, the Federal Tax Service, investigative agencies and provide banking service to participants in the deal (the client and the operator of digital currency exchange).
• The Finance Ministry offers to follow an example of the Swiss project Aximetria for clients’ complete identification. It collects the following data: name, address, date of birth, email, phone number, passport data, the client’s photo, banking account, card used to buy virtual assets, its expiration date and CVC code, etc. The Finance Ministry also offers to track information about the device transactions are made on and data on transactions themselves (data, time, sum, location).
• To divide natural persons who are investors into qualified and non-qualified. The latter will have limited sums for transactions, they will have to do a test before making transactions with complex instruments.
• To use the service Transparent Blockchain to control and track transactions with cryptocurrencies. It is an AI system analysing cryptocurrency transactions, Rosfinmonitoring offered to design it in summer 2020. The Finance Ministry offers to use such a service to detect illegal cryptocurrency transactions. For instance, to create a database of crypto wallets doing an illegal activity, financing terrorism.
• To let foreign cryptocurrency exchanges operate in the Russian market. For this, they will have to open an office in Russia, ensure technical integration with Russian banks that organise the digital currency exchange system, sign agreements with them and so on. In Russia, those exchanges registered in those countries providing a preferential tax regime or envisaging providing information on financial transactions cannot work.
• Supervisory functions are offered to be distributed among the Central Bank, Finance Ministry, Rosfinmonitoring, the Federal Tax Service and the Prosecutor General’s Office.
• A cover letter to the concept, the Finance Ministry also offers to determine key parameters for cryptocurrency mining. According to its information, Russia ranks third in the world in mining.
• The project of the Ministry of Finance also considers the concern of the Federal Security Service: the regulation will help to fight against criminal schemes where cryptocurrencies are used, since there is an identification system and it is much easier to find a beneficiary.
• Also, a registered account can be arrested or blocked.

To sum up, I would like to stress that the offer of the Finance Ministry is much more far-sighted than that of the Central Bank. Most interestingly, the proposal of the Ministry of Finance includes the correct regulation of cryptocurrencies that solved problems outlined by the Central Bank itself. The total ban like the absence of regulation in general can destabilise the sector, increase the illegal turnover and fraud in this sphere, complicate the work of the Ministry of Internal Affairs, Federal Security Service in the investigation of cryptocurrency crimes. The legalisation of cryptocurrencies in Russian legislation will allow raising budget incomes thanks to investors’ taxes and insurance premiums.

In general the Finance Ministry’s proposal complies with the latest international experience in the regulation of cryptocurrency markets. We will always have the time to ban it, first, it is necessary to take regulatory measures and see their results.