The State of Crypto in Russia

Hello everyone--we asked ESW's Eurasia Editor Stanislav Krapivnik to write an article debunking some of the media myths about the state of cryptocurrencies and Bitcoin mining in Russia, the world's second largest BTC mining country.

Today's article does that well and provides an update on the state of the industry regulations in Russia and how building up a sanctions-proofed homegrown fintech industry has become an increasingly strategic priority for the Kremlin, the CBRF and State Duma lawmakers. There is now a consensus among the Russian power elite that Russia can profit immensely from its massive Soviet-legacy Siberian hydropower baseload of cheap electricity inheritance. Not only via blockchains but perhaps, in the not too distant future, in the production of green hydrogen as a non-fossil fuel.

-- James Smith

Editor-in-Chief and Publisher, ExitStrategy.World

July 26, 2024

It is an unfortunate reality that the Western press has a tendency if not an active agenda to take any word of any Russian member of parliament and present it as fact. Nor is the alternative and pro-Bitcoin media immune from this tendency. This is especially true when those words are ill-thought out and negative.

So, when the Russian parliament started debating how to regulate Crypto currency, the volume of idiotic statements was worth noting. Unfortunately, as in most republics, the people’s representatives are often ill-informed and ignorant of the complexities of modern technology. When an issue of how to regulate something complex comes up, often enough there are those who would prefer to just ban everything rather than expand their limited understanding.

Photo credit: Bitcoin and rubles

Uploaded to iStock by blinow61 February 2018

This is especially true on the theme of Cryptocurrencies, which are important to the most sanctioned economy on the planet, Russia. The Russian Federation is the second biggest miner of Cryptocurrencies primarily Bitcoin and Ether, thanks to very cheap nuclear baseload and hydro-electricity, especially in the Siberian hinterlands. Russia also uses crypto to break the US Treasury’s and London's attempts to sanction and isolate Russia. Cryptocurrency is a direct threat to the deathgrip dollar hegemony exerts on the world and Russia, the second largest producer and potentially one of the largest users of Bitcoin in the world, is thus crypto-user enemy number one.

After the start of the Special Military Operation in 2022, the International Monetary Fund (IMF) already estimated that 11% of all mining earnings globally were in Russia and that legally operated miners--in the gray zone of legality the recent legislation is attempting to address--numbered in the hundreds of thousands.

U.S. Treasury Secretary Janet Yellen has stated that the US is monitoring Russia’s Bitcoin mining. What the US government is monitoring is the collapse of the financial portion of its sanctions, the only part that showed any kind of progress and results. The panic over cryptocurrency potentially aiding dedollarization in Congress, wherein just two months ago Congressman Brad Sherman (D-CA) openly labeled Bitcoin as the currency of anarcho-libertarian tax cheats and US enemies, is palpable. The Sanctions failure that has cost the EU alone hundreds of billions of euros in losses and the US economy many billions of dollars, has put whole sectors, such as EU farming, steel and paper making under the hammer, now faces collapse in the coming years. This collapse will echo into the mid-21st century, years after both the US Dollar and Euro cease to be global reserve currencies.

Thus, the fodder for Western anti-Russian propaganda was abundant, when the subject of crypto mining and economic use cases came up in the Russian parliament this spring. Lets review just a few headlines:

Russia Prepares a Crackdown on Crypto – Intel news 14 May 2024

Russia Plans to Ban Public Cryptocurrency Use: What to Know – BSC News 29 April 2024

Russia to Ban Crypto Amid Geopolitical Tensions – The Paypers 30 April 2024

Russia Plans To Ban Cryptocurrencies, Will Markets Crash? – Watcher Guru 29 April 2024

Russian “Crypto Ban” Could Come Into Force by September, Lawmakers Confirm – Cryptonews 28 April 2024

That was then, and the negative media drumbeat continued all the way up to July, up to the nuanced reality of more recent headlines. The most “concerning” headlines that were published looked like this: “Russia Regulates Cryptocurrency Mining to Address Energy Concerns” – Menafn 18 July 2024.

So what will the future bring to the Russian Crypto economy?

Being the second largest, and expanding rapidly, miner of Crypto, Russia faces two very real problems. Many of the miners are home rigs, they are using electricity at residential rather than commercial rates, which is not only unfair to the rest of society, but downright dangerous.

First, the volume of electricity often surpasses the safe voltage for the early to mid-20th century Soviet wiring in the buildings. This can lead to shorts and electrical fires. Fire is a danger that also comes from poorly designed or self-built rigs that can overheat and start to melt down, setting curtains, rugs or other objects inside apartments ablaze. There have been quite a few such incidents over the last several years as DIY home BTC mining rigs became popular across Russia.

Secondly, completely unregulated high use of electricity for BTC mining could theoretically cause brownouts, even in regions of central and eastern Siberia without much power demand outside the major cities, such as Novosibirsk, Komsomolsk-on-Amur or Krasnoyarsk. This is more than a theoretical possibility during high-volume use periods, such as Russia’s hot Continental summers in the southern steppes and the harsh Siberian winters. Thus there are real issues to be regulated to ensure society benefits without these hazards.

As a business sector earning billions of rubles per year while working and placing demands on public infrastructure, it is only fair that such outfits pay their fair share in the maintenance of the Russian power grid, for which the commercial electricity rate is designed to have industry pay more than ordinary residents. The commercial rate is about 50% higher than the residential. Considering the average Russian rate is about 8 U.S. cents per kilowatt hour (kWh), even the commercial rate is a huge savings over EU electricity tariffs.

Discussions on how to regulate, license mining are in progress. Just to understand the volumes that are involved: Crypto mining at present consumes about 1.5% of the present total Russian electricity output, or in other words, 16 billion kilowatt hours annually.

In 2020, Russia passed a law allowing Crypto as digital financial assets, however, payment for goods and services using Crypto was banned, hindering the development of a circular BTC economy in the Russian Federation. Payments could only be made by cashing out the Crypto into Russian rubles, thus Bitcoin/Ethereum to RUB and vice versa conversion exchanges bloomed in the country, acting as crypto on and off-ramps.

Russia launched a Digital Ruble in 2023. But widespread use has yet to be achieved--Russians still overwhelmingly prefer bank cards or cash. Today almost 90% of all mined coins in the RF are BTC, the rest, including ETH, represent around 10%. USD linked stable coins like Tether are in use but are not popular due to their potential targeting by American sanctions.

So what exactly is new about the latest bill in the State Duma? To begin with, one of the key signatories of the bill is the chairman of the Committee on Financial Markets, Anatoly Aksakov, who happens to be is the de facto chief architect of Russia’s crypto-related legislation.

In truth, the sector as a whole has been asking for this legislature for several year. The sector has long wanted to be legalized and thus be able to draw on foreign investors, including a growing number of Chinese, Vietnamese and soon Indian investors. Sure, there will now be registration hurdles and they will need to pay taxes as well as a slightly higher rate, but with regulation comes legalization-- and with legalization comes the ability to advertise for investors openly.

The bill will give regulatory powers to the Russian government and the Central Bank, as well as to assign the Ministry of Digital Development powers to oversee and monitor the implementation of the laws by the mining sector. Miners will have to sign up in a central registry, which will be open both to incorporated entities and to private businessmen (that is, individual businessman, a legal category in Russian commercial law between incorporation and self-employment). Small time miners who do not surpass a set ceiling on annual energy consumption, can operate legally without registering.

Circulation of crypto assets will also be regulated to avoid their use in darknets and criminal activities, especially paying operatives engaged in the ongoing campaign of NATO-aided Ukrainian espionage and sabotage. How this will be accomplished by Russian law enforcement in the FSB and the Investigative Committee remains unclear.

Miners will be responsible for reporting the amount of Crypto that they have mined and the wallet addresses where it has been stored. Suspicious addresses potentially linked to criminal or foreign influence/intelligence operations will be monitored, as well as those that may be used for money laundering or terrorist activities.

To address concerns from the Ministry of Energy, the government will have the right to curtail or ban mining in certain areas where the electricity infrastructure cannot handle the additional load. Given the growing population density of Moscow and the surrounding region with commercial and residential air conditioning demand creating peak summer load hours, the capital region is the most likely area where the bans will begin.

There has been some surprising push back on the bill from the Ministry of Finance, which wants to limit access to crypto exchanges to only a select group of investors. What is meant by select-and what criteria would be established--remains unclear. On the other hand, the exchanges that the MinFin is referring to are the main stock exchanges: Moscow Exchange, St. Petersburg Exchange, St. Petersburg International Mercantile Exchange (SPIMEX), St. Petersburg Currency Exchange (SPCE), Eastern Exchange, National Commodity Exchange, and CTS Exchange. For the crypto markets this represents a major breakthrough, as it brings transactions onto the leading exchanges in the country and will thus allow entirely legalized, major investments.

[Russia’s largest exchanges] “are already actively carrying out such work … in terms of developing the market, in terms of how to organize the corresponding work" said Anatoly Aksakov, head of the State Duma Financial Market Committee.

That of course does not mean that the Ministry of Finance is against crypto, quite the contrary. One of crypto’s biggest proponents has always been the Ministry of Finance, which is not only co-spearheading the Digital Ruble as a CBDC, along with the Central Bank, but also sees crypto as the way to break the greenback's strangle hold on reserve currency status.

As a matter of fact, it was President Vladimir Putin himself, at the behest of the Ministry of Finance who in his speech to parliament and the public, made a plea to seize the moment for the adoption of digital assets directly into the Russian economy. So the former KGB intelligence officer that the western press was staging as an enemy of crypto is actually one of its biggest proponents.

“It is important for Russia to ‘seize the moment’, as they say, to create the legal framework and regulation in a timely manner, to develop infrastructure, to create conditions for the circulation of digital assets, both within the country and in relations with foreign partners” says Vladimir Putin.

The Central Bank has even gone so far as to directly advice business to use cryptocurrencies to make cross border payments, and thus bypass US/UK/EU sanctions.

“New financial technology creates opportunities for schemes which did not exist before. This is why we softened our stance on the use of cryptocurrencies in international payments, allowing the use of digital assets in such payments" said Russia's central banker in chief, Elvira Nabiullina.

Digital Financial Assets (DFAs) are a system being developed by the Central Bank and by the MinFin that will use a blockchain-based ledger but would be issued by a financial institution and tied to a physical asset, such as gold or oil. This naturally has fueled speculation on the part of Brazilian journalist Pepe Escobar and other advocates for multipolarity that Russia will soon be rolling out a BRICS+ reserve currency as a dollar alternative alongside its closest economic partners, led by China.

Crypto market penetration in terms of business use tokens is already underway. Burger King, Russia, now uses Whoppercoins to calculate, store and redeem loyalty bonuses for its customers. This is just one of many examples of business tokens, which will be one of the hottest sectors for growth in the Russian economy over the next several years, as Russian fintech entrepreneurs return from economically imploding Western countries to the Motherland.

Another crypto related business, just as an example of the sector, is BitRiver, an outfit that helps companies set up mining in Russia. They work with a minimum investment of 10 million rubles or $90,000, so much more than what a home outfit would require. They design and setup full mining hubs in Siberia, thus speeding along the development the sector.

In the Russian system of parliament, all bills must be read three times before a quorum, from start to finish (contrast this with the US Congress where many lawmakers introduce bills they never read with thousands of pages written by lobbyists). Any changes that occur between each reading are recording in and passed on to the next reading. Between these stages, there is much wrangling and haggling over amendments. Additionally, the parliament’s official website posts the bills in their entirety and all changes proposed with full access to the general public. Unlike America’s omnibus bills that can go into thousands of pages of legalistic language and rarely get posted on Congressional websites before markup, the Russian bills are short, direct and accessible, rarely surpassing a half dozen pages or more. No riders or combined unrelated bills are allowed to be logrolled on either, so each bill requires a separate vote. While this does slow down the process of lawmaking, this also allows for a level clarity and transparency absolutely absent from an increasingly corrupt Capitol Hill in DC.

As a matter of fact, the two bills in process that will form the new framework are No. 237585-8 and No. 341257-8--you are welcome to peruse them at gosdum.ru (ignore your Western browser warning you it's not safe to visit a Russian government site).