‘The Central Bank stuck in the paradigms of the past, it should learn the experience of countries in cryptocurrency legalisation’

Not everybody in the government shares the Central Bank’s opinion about the ban on cryptocurrency

As early as January, the Central Bank launched an initiative to totally ban cryptocurrencies in Russia — the issue, mining and circulation of cryptocurrencies. Such a hard-line approach caused a wave of indignation among investors and clients of the biggest players. The ban will entail an outflow of specialists, a fall in jobs and losses of potential incomes of 50 billion rubles a year for the budget. The Central Bank sees cryptocurrencies as money imitation, which carries risks for citizens.

The Finance Ministry, in turn, was much smarter and following the principle “lead if you cannot win” offered to regulate cryptocurrencies, which rules out the total ban. The Ministry of Finance thinks cryptocurrency transactions should be made via Russian banks, it is necessary to introduce an identification system for wallet owners and divide investors into qualified and non-qualified.

For reference, according to different data, nowadays Russians hold about 12 million cryptocurrency wallets, which total about 2 trillion rubles. By the Central Bank’s estimates, the amount of cryptocurrency transactions of Russian natural persons reaches $5 billion a year.

In February, the battle of ideas went on. After examining the proposal of the Finance Ministry, the regulator didn’t agree with the concept of legalisation of cryptocurrencies because this compromise, from its point of view, didn’t cover the mentioned risks. The Central Bank isn’t ready to depart from its firm stance and prepared two bills that prohibit issuing, using and owning cryptocurrency in the country by considering fines for violating the bans. The drafts were sent to the Ministry of Finance for review. The case is that the Central Bank doesn’t have the right to legislative initiative, the Russian government holds this right. This can be for the good because the majority in the government doesn’t share the Central Bank’s opinion about the complete ban.

The first bill (amendments to the law On Digital Financial Assets) obliges banks to deny clients to transfer money to those people who are known to do an activity related to cryptocurrencies — the issue, organisation of issue regardless of the geographical location of these people. There imposed a ban on banks and other organisations — pawnshops, insurance companies, clearing organisations, security market players — and subjects of the payment system from owning cryptocurrencies. Any advertising of cryprocurrency is not permitted.

The second bill (amendments to the Code of Administrative Offences) envisages the imposition of fines depending on the type of violation for natural and legal persons. In particular it is offered to fine (legal entities) up to a million rubles for owning cryptocurrency. The Central Bank holds the authority to launch and consider cases on an administrative offence when this ban is violated.

The Central Bank stuck in the paradigms of the past

As we see, the situation is complex enough. The Bank of Russia continues its campaign against digital currencies intending to destroy them as a class in our country. First Vice Chair of the Central Bank Ksenia Yudayeva recently voiced the idea that when using cryptocurrency as medium of payment the ruble will be replaced as the currency of Russia, which will lead to an expansion of the grey economy, a decrease of taxes.

The Bank of Russia fears that investments in digital assets will entail a withdrawal of savings from the real sector of the economy, stock market, banking sector outside the Russian financial sector, which in turn will reduce the possibilities of the sector to finance other sectors of the economy, especially companies that were imposed sanctions. All this will weaken the growth potential of the economy, will impact the labour market and rise in citizens’ incomes. Besides this, investments in cryptocurrency are investments in highly speculative instruments, which are, in fact, Ponzi schemes, thinks the Central Bank.

The Bank of Russia is going by the textbook that has no room for such novelties as digital currencies. The Central Bank is stuck in the paradigms of the past, perhaps it should learn the experience of central banks from the countries that already legalised cryptocurrencies.

The Russian Central Bank believes that financial institutions; own investments in cryptocurrencies will raise market risks, falls in cryptocurrency rates and fraudulent schemes can seriously undermine the stability of these organisations by creating a threat for banks and depositors. The integration of cryptocurrencies into the financial system will lead to the creation of a parallel financial scheme, which doesn’t obey the rules for financial organisations in Russia. All this carries systemic risks, the regulator assumes.

This opinion was voiced in reply to an offer to regulate the cryptocurrency market prepared by State Duma deputy Anton Gorelkin. His offer, I think was very reasonable and was a result of lasting discussions of all market players and interested sides. It is in particular offered to provide tax concessions and support measures to infrastructure projects and manufacturers of equipment and software, provide the possibility of free conversion of cryptocurrencies into rubles, introduce a concessionary taxation regime of digital assets, support the creation of Russian cryptocurrency exchanges. The latter in general became trendy in the light of imposed sanctions when holders of Russian bank cards cannot use the infrastructure outside Russia. Perhaps, is it time to have our own? Why not.

The approach of the Central Bank is too conservative

The Ministry of Industry and Trade considers the initiatives of Gorelkin topical and backs them. Together with the Ministry of Construction, it offered to establish a special legal regime for mining, the so-called “regulatory sandbox” and give Russian equipment a priority for mining.

For reference, the regulatory sandbox is a special experimental legal framework for innovative projects that allow refusing some legal requirements impeding innovation development. Thanks to special conditions of sandboxes of a company developing new products and services as well as power representatives can test them without a risk of violating the current legislation. Consequently, if the testing proves to be successful, it can enter the market. As a result, new legislation in this sphere is created as a result of sandboxes.

In conclusion, we can just be glad that three serious ministries don’t share the Central Bank’s hawkish views in the government. The Bank of Russia can be understood — globally, it is in guard of financial stability, but its approach is too conservative, which means wrong in essence in our rapidly changing world. Private cryptocurrencies will exist regardless of the Central Bank’s wish. And such regulation that will allow our country to get advantages is needed.

A total ban on cryptocurrencies doesn’t meet the state’s interests — it will bring an outflow of high-tech companies, investments, IT specialists, block the development of some useful technologies (like Blockchain), create a grey market. In fact, the imposed bans can yield a reverse result — the whole turnover of cryptocurrencies will become illegal.

It is necessary to introduce regulation based on the best international practices — deal transparency, the introduction of principles “know your client,” regulation of mutual settlements so that the ruble is not replaced by cryptocurrencies.