The Russian Central Bank has been making headlines over the last few days with reports of a possible nationwide ban on cryptocurrency and crypto mining.
These reports come as a result of the Director of Financial Stability Elizaveta Danilova’s call to ban crypto. The central bank has since released a 37-page report outlining the reasoning behind this proposal.
Politics are local, laws are national, and currency/value is international, and therein lies the inherent problem with the outlined proposal.
The Report in a Nutshell
A key criticism within the report was the market volatility of cryptocurrencies, highlighted on page 23. However, in this context the central bank fails to address activities such as gambling or stocks with the same level of scrutiny. This is the common underlying theme throughout the document, along with several other key points with similar shortcomings. The report paints crypto as one of the main destabilizing threats to the Russian economy, while loosely aided by the idea that people would invest all of their hard-earned money into Bitcoin, a high-risk asset. While the report goes into further detail, no projections or supporting documents were provided to validate such claims.
The report goes on to mention that Bitcoin and crypto transactions in general are often used for illicit activities, on page 27. However, the reality is that any form of monetary transaction can be used for such purposes. In fact, it was recorded that in 2021, only 0.15% of crypto transactions were used for illicit purposes. This contradicts the claim that crypto undermines monetary policy, not to mention that it doesn’t align with Russia’s civil code, which recognizes crypto mining as a form of entrepreneurship.
Additionally, the report raised concerns associated with crypto mining’s high energy consumption and its negative effect on the environment. This point is heavily used throughout the report as a backbone for reinforcing its stance on the crypto ban, while entirely ignoring the possibilities of exploring green and renewable energy solutions that could be researched and funded by Russia’s crypto mining industry.
The report also seemingly throws around various claims, such as that 0.1% of all miners control over 50% of the Bitcoin mining industry in the country (page 23) without citing any credible sources for such information, and failing to acknowledge that some of the biggest miners in the country are publicly traded companies. There are a plethora of other false statements as well, including that stablecoins are not backed by anything and aren’t regulated (page 24), when in reality stablecoins like Circle USDC are fully regulated and legally redeemable.
What is the goal of the ban?
The proposed ban has no intent to ban crypto outright. "We note that we do not suggest that holding cryptocurrencies by citizens be banned," Danilova stated according to TASS, Russia's state media, adding that there are fraud risks, as well as difficulties in asserting rights when acquiring cryptocurrency on foreign crypto exchanges.
What the ban is targeting instead is to prohibit the issuance of tokens, crypto mining, trading activity that uses the country’s existing financial infrastructure, and prohibiting institutional investors from investing in crypto.
Russia is currently the world’s third biggest crypto miner by hashrate, just behind the US and Kazakhstan. As mentioned earlier, crypto mining is defined and officially recognized by its civil code, and has immense potential for stimulating a significant economic growth for the nation, should it be embraced.
Panic Amidst Misunderstanding
To make matters worse, a number of sources have contributed to the spinning of this story by saying that Russia is banning crypto, including an article by Forbes that incorrectly states (and spells) that “Russian is the third nation to crackdown on cryptocurrencies over the last year, following China and Kazakhstan.” The Forbes commentary isn’t true, and while Kazakhstan did face nationwide power disruptions, it in fact did not crack down on mining and crypto and, as of today, neither has Russia.
What does it boil down to?
While the report by the Russian Central Bank’s head of financial stability is 37 pages long, it in itself is just a proposal based on one’s fears and assumptions fueled by misinformation around issues that either do not exist or are not likely to happen.
For such reasons, it is highly unlikely that the Russian government will take Elizaveta Danilova’s proposal seriously, as it simply lacks solutions and fails to outline any concrete next steps, not to mention that it would put the country on a backward trajectory seeing as Russia has just legalized cryptocurrencies in 2020. If such a ban were to go forward, it would reverse this legislation (which took nearly 10 years to pass), not to mention that it would take several years to implement.
Such a decision would be counterintuitive, especially in light of recent calls by the US and its allies to disconnect Russia from SWIFT in the event of its invasion of Ukraine. The hypothetical situation has received widespread media coverage, and Russia’s exclusion from the international payment system would have catastrophic effects on its economy. This would in turn push Russia into mass crypto adoption. Should such events take place, it is highly unlikely that Russia would want to transact in CBDC (China’s digital currency) or the Yuan, and would instead have to rely on Bitcoin to transact with the world.
It is likely that the Russian government understands that it would be far more beneficial to tax the mining industry rather than ban it. Such taxation would present opportunities for infrastructure expansions and reinvestments into green and renewable energy sources. Taxation could also come in the form of utility, or the licensing of mining facilities to use a Russian sponsored mining pool that would implement a tax in real time, further reinforcing the potential for significant economic growth.
It seems that such potential is not far from being actioned on by the Russian government, with the Russian director for financial policy, Ivan Chebeskov, supporting the regulation of crypto as opposed to banning it. Chebeskov’s sentiment comes as a response to the central bank’s proposal, further indicating the unlikelihood of an outright ban. He further outlines: “We need to give these technologies the opportunity to develop. In this regard, the Ministry of Finance is actively involved in the development of legislative initiatives in terms of regulating this market.” According to Chebeskov, the ministry has prepared its own proposal, this one for the regulation of crypto and digital assets, and is awaiting feedback from the government.
Industry Experts Weigh In
“The Bank of Russia conducts its activities independently from other federal bodies of state power, regional authorities and local governments”, meaning they do not have a final say in local government activity and would have a hard time banning utility companies from providing power to mining operations.
Across the entire report, crypto mining in particular is mentioned only a handful of times and within the context of energy consumption. On page 4 of the report, a brief summary of mining is provided and then swiftly dismissed as a threat to the economy: “In this regard, according to the Bank of Russia, the best solution is to introduce these prohibitions on the mining of crypto-currencies.” No actionable solutions are provided, and the statement is followed by a summary of the Bank of Russia’s plan to develop their own digital currency.
Roman Zabuga, PR director of mining hosting provider BitRiver, called the probability of an industry-wide ban “negligible”.
A Widespread Misunderstanding
While the call for a ban on crypto mining sounds daunting, it is important to note that this is currently no more than a proposal on behalf of the Bank of Russia, which would need to be approved by the government first. Such decisions are usually time consuming and initial proposals are often adjusted through compromise, or rejected altogether.
Recent events in the industry have showcased a general lack of understanding for cryptocurrencies and mining on behalf of government bodies and other institutional leaders, as seen with Russia’s Central Bank.
A recent House hearing on energy in crypto mining is another example, prompting Grant McCarty of Bitcoin Magazine to reiterate that Congress doesn’t yet hate Bitcoin: “This hearing didn’t signal malice on the part of Congress; it signaled a lack of education. These people just don’t know enough about Bitcoin to have that strong of an opinion yet [.]”
In Conclusion
The Russian Central Bank’s proposed ban is unlikely to pass as it clearly demonstrates the need for a better understanding of crypto within government bodies in order to allow for the technological advancements and economic spurts that are made possible by this developing industry. As a result, the proposal’s lack of credible sources and solutions stems from general fear, uncertainty, and doubt.
The proposal has also prompted a swift response on behalf of Russia’s Ministry of Finance calling for proper regulation of crypto and digital assets, not a ban. President Putin has also briefly addressed this issue during a conference meeting on January 26, saying that Russia does in fact have a competitive advantage in crypto mining due to a “surplus of electricity and the well-trained personnel available in the country,” further adding to the improbability of a ban on crypto.
https://wattummanagement.com/blog/why-russia-is-unlikely-to-ban-crypto/
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