In January 2022, the Central Bank of Russia (CBR) proposed a number of measures to curtail the country’s cryptocurrency market, including a blanket ban on the use and mining of all cryptocurrencies. It pointed to the risks posed by the volatile nature of cryptocurrencies to the country’s financial stability, the extensive use of crypto in illicit activities, and the energy costs associated with crypto mining. However, the usefulness of blockchain technology did not escape the CBR. The following month, it announced that it had started the trial phase of the digital ruble, the central bank’s planned digital currency (CBDC).
However, following the decision by the Russian legislature to recognize the Ukrainian separatist states of Lugansk and Donetsk, the majority of Russia’s Duma MPs were subject to financial sanctions imposed by the European Union. In response to the events in Ukraine, sanctions were also imposed on the CBR at the beginning of March. It became clear that further sanctions by the EU, the United States and other Organization for Economic Co-operation and Development (OECD) countries were likely to follow.
Sanctions Induced Spin
When previously legal financial transactions with the West were criminalized, there was speculation about the future of cryptocurrency in Russia. According to Stanislav Tkachenko, a professor of international affairs and economics at St. Petersburg State University who has written extensively on monetary regulation, there was already interest among policymakers in the future promotion of both the CBDC and existing cryptocurrencies.
Tkachenko pointed out that Russia looked at how China was approaching the introduction of a digital state currency and believed that Russia would simply copy what China was doing. He noted that Russia’s switch to cooperating with China in bilateral trade would likely lead to higher transaction costs, as the goods Russia sells are usually priced in dollars in international markets, and China prefers to use renminbi exclusively for its own use. market. Traditional transactions should be in rubles, dollars and Chinese yuan.
Tkachenko was optimistic about the prospects for cryptocurrency mining for the foreseeable future as global sentiment towards Russian energy has soured, leading to both sanctions and proposed additional sanctions. These, he explained, pushed up global energy prices, but also left Russian energy producers without a global market to play in. This could lead to both a lenient stance on crypto mining in Russia and further attempts to restrict Russian access to the cryptocurrency market abroad.
CBDC problems
Each central bank digital currency has several major drawbacks, and in the case of Russia, a few more could be added. First, the usefulness of anonymous transactions is lost. While the potential use of anonymous transactions for money laundering and terrorist financing has been a concern of CBR regulators for decades, a CBDC would inevitably be targeted.
In the US and the EU, operations of six major Russian banks have been blocked: VTB, Novikombank, Sovcombank, Otkritie, PSB and Bank Rossiya. It is now impossible to transfer dollars and euros from their accounts to any country in the world, and the Visa and Mastercard cards issued by a Russian bank do not work abroad. However, the elimination of transactions with Russian banks harms existing foreign companies, which cannot be said for a new state-issued cryptocurrency.
Another is that the Russian “brand” has declined in value elsewhere in the world, forcing crypto exchanges to shut down coin wallets belonging to Russian individuals. While regulators have long feared Bitcoin (BTC) would be used to pay for illegal darknet transactions, the CBDC’s association with Russia would make any use suspicious.
In 2017, President Nicolas Maduro announced the creation of the state-backed petro-cryptocurrency in sanctioned Venezuela in hopes of boosting the country’s burgeoning economy. However, it has had little practical application: Venezuela used it in 2019 to make small payments to retirees and often uses it to price services or fines that are eventually paid in the local currency. Cryptocurrency is usually seen as both a speculative instrument and a medium of exchange. The petro has fallen flat on these two fronts.
The war utility of digital assets
An important utility of a potential CBDC is that it helps to prevent some of the vulnerabilities of the existing Russian banking framework during wartime. If something happens to Sberbank, VTB or any of the other banks, it would be difficult for Russians to transfer money through their respective banking apps, which are now used all over Russia.
However, much of the world can be expected to scoff at a Russian CBDC, much as they scoff at the release of the Venezuelan petro, given the government’s defaults and inability to access frozen assets abroad. .
It would be downright foolish for Russia to confine itself to a CBDC without exploring crypto mining options. While the size of Russia’s economy would not allow mining to replace regular energy exports, using excess electricity for mining could help offset inaccessible foreign reserves.
The Russian government has the ability to pursue mining opportunities without outright liberalization. Blockchain mining can be done by state energy companies but is prohibited for ordinary citizens, just as the Bahamas has gambling opportunities for foreign tourists, but Bahamian citizens are not allowed to participate. This would have the added benefit of allowing electric power producers to balance cryptocurrency production with the use of the power grid by ordinary consumers.
However, such a practice could lead to growing concerns in the West that Russia could switch to crypto as a means of evading criminal sanctions.
Russian financial policymakers’ eyes were on Beijing last month when it released the digital yuan, called the e-CNY, to Olympians and visitors to the Winter Games. However, this was only the international debut of the digital yuan. There had been test drives in about a dozen regions of the country for more than a year, involving more than 260 million people with e-CNY accounts by the end of 2021. It is clear that China’s CBDC is faring much better than Venezuela’s, as the volume of total digital transactions reached nearly 90 billion yuan, or $14 billion, according to the bank.
However, with the world’s second largest economy, China has no problem generating such transaction volumes — it’s technically only $10 per person in what has essentially already become a cashless society. And while China has faced trade restrictions, it has yet to be hit with crippling sanctions like those faced by Russia and Venezuela.
Busy from the west
Last week, US President Joe Biden signed an executive order instructing US federal agencies to study and draft a comprehensive plan that would unify government oversight of the cryptocurrency market. The mere fact that US financial regulators are trying to restrict Russia’s access to the world’s three trillion dollar cryptocurrency market could force Russian lawmakers to do the exact opposite.
The biggest short-term concern among policymakers, however, is the health of Russia’s financial system amid a shock ripping off from the West. Most of Russia’s $630 billion in foreign reserves, dubbed Putin’s “war treasury” in the Western press, has been frozen, raising fears that Russia’s foreign currency debt will go unpaid. As many suspect the worst is yet to come for the ruble, the CBR has been forced to put in place capital controls to avoid a general panic.
While Russia’s regulatory authorities may be interested in keeping money in the country, they are also ultimately responsible for allowing international trade to continue despite the West’s traditional control of most of the world’s financial markets. As a result, they must both prevent an immediate capital flight and facilitate Russia’s continued access to world markets. In order to prevent Moscow from relying almost exclusively on Beijing for this access, it is very likely that Russian regulators will act in the medium term to facilitate access to cryptocurrency rather than eliminate it.