Author: Deng Tong, Golden Finance
After the 805 mining difficulty, the cryptocurrency market was shrouded in gloom: the price of Bitcoin plummeted from over $70,000 at the end of July to below $50,000. The panic and greed index even dropped to 17 at one point, shifting from fear to extreme fear. People once doubted, "Is the bull still here?"
However, starting from August 8th, the cryptocurrency market seemed to have a sudden spring breeze, with cryptocurrencies rising across the board. In the early hours of August 9th, Bitcoin even reached $62,394.50, a 25.33% increase from the low of $49,781.93. One of the major factors behind the significant rebound in the cryptocurrency market is closely related to Russia's newly passed legalization policy for mining.
What does the new mining regulation in Russia say?
On August 8, 2024, Russian President Putin signed a law legalizing cryptocurrency mining in Russia.
The signed law introduced new concepts, including cryptocurrency mining, mining pools, mining infrastructure operators, address identifiers, and individuals organizing mining pool activities. Mining itself was recognized as part of turnover, rather than the issuance of cryptocurrency.
Only registered Russian legal entities and individual entrepreneurs have the right to engage in mining. Individuals consuming energy within the limits set by the Russian government are not required to register to engage in cryptocurrency mining.
According to the document, foreign digital financial assets can be traded on the Russian blockchain platform, and if the Russian Central Bank finds that individual issuances pose a threat to Russian financial stability, it has the right to prohibit their issuance.
Previously, Putin discussed the introduction and use of digital currencies at an economic issues meeting with the government. He pointed out that this is a promising economic field, and Russia must "seize the opportunity" to quickly establish a legal framework and regulations, develop infrastructure, and create conditions for the circulation of digital assets.
The new mining regulatory policy will be the responsibility of the Russian Central Bank, Ministry of Finance, and the Russian government cabinet, who will formulate more precise regulatory content in the coming months. The law also prohibits large-scale cryptocurrency advertising within Russia.
The law will take effect ten days after its official announcement, except for provisions specifying an effective date.
Signs of Russia's mining legalization were already evident
The new mining legalization bill in Russia had already been foreshadowed.
As early as December 14, 2023, the Russian Ministry of Finance proposed a new bill seeking to legalize BTC mining and establish a mechanism for selling the mined currency. The bill included provisions to ban cryptocurrency advertising and required cryptocurrency sales to be conducted through foreign platforms, excluding the use of Russian information infrastructure. Both the Ministry of Finance and the Russian Central Bank supported recognizing cryptocurrency mining as an industry and supported using cryptocurrencies for foreign economic activity within an experimental framework. According to the proposed bill, cryptocurrency miners could acquire digital currency through foreign systems or a dedicated platform established for the experiment. In either case, miners were required to report these transactions to the Federal Tax Service. The Central Bank suggested that the sale of mined cryptocurrencies be limited to non-residents and only be conducted through foreign infrastructure.
On May 6, 2024, Anton Gorelkin, Chairman of the Financial Market Committee of the Russian State Duma, stated that he did not support a complete ban on the circulation of cryptocurrencies in Russia. In a post on Telegram, he explained that the restriction was not intended to prohibit the use of all cryptocurrencies, but to regulate the establishment of cryptocurrency exchange platforms within the legal framework of Russia. Gorelkin also believed that the establishment of a legal cryptocurrency infrastructure in Russia was influenced by geopolitical realities, which needed to consider factors related to international relations. He further added that allowing such infrastructure might subject Russian companies to Western sanctions. Additionally, Gorelkin pointed out that the impact on many over-the-counter cryptocurrency services in Moscow was still uncertain.
In July 2024, Russia considered incorporating the theme of stablecoins into an upcoming bill, allowing for the formal use of stablecoins for cross-border payments. Alexey Guznov, Deputy Governor of the Russian Central Bank, announced that a proposal had been submitted and was currently under discussion. The Ministry of Finance also confirmed this.
On July 13, 2024, BITCOINLFG revealed on the X platform that sources said Russian President Putin might make a major statement on Bitcoin and cryptocurrencies in the coming days.
On August 3, 2024, Golden Finance reported that Anatoly Aksakov, Chairman of the Financial Market Committee of the Russian State Duma, had predicted that at some point in the future, citizens would be able to exchange Bitcoin and digital rubles, requiring a P2P market based on digital rubles to achieve this goal.
In summary, Russia had laid the groundwork for the introduction of the new mining bill. The introduction of the new regulations was within expectations.
Turning point: Russia-Ukraine conflict, sanctions, and national competition
In the early years, Russia's cryptocurrency asset regulation was not very conducive to industry development. So, what caused Russia's attitude towards cryptocurrencies to shift from "unsupportive" to "legalizing mining"?
On December 10, 2020, Putin signed a decree prohibiting certain Russian officials from holding any cryptocurrency. In December 2021, the Russian Central Bank warned of the risks associated with digital assets and even proposed a comprehensive ban on cryptocurrency mining and trading.
However, on February 24, 2022, the Russia-Ukraine conflict erupted, which can be seen as a turning point in Russia's attitude towards cryptocurrencies.
According to the BBC, after the outbreak of the Russia-Ukraine conflict, the United States, the United Kingdom, the European Union, as well as countries such as Australia, Canada, and Japan, imposed more than 16,500 sanctions on Russia.
Their main target was Russia's funds—foreign exchange reserves worth $350 billion (£276 billion) were frozen, accounting for about half of Russia's total foreign exchange reserves.
The EU stated that about 70% of Russia's bank assets were also frozen, and some banks were excluded from the Swift international financial messaging system, which provides secure and efficient communication services for financial institutions.
According to data from the International Monetary Fund, Russia's GDP growth rate was -2.1% in 2022. In 2023, Russia's GDP growth rate was 3.6%. In 2021, before the start of the Russia-Ukraine war, Russia's GDP was 4.7%.
It is evident that within the centralized international financial system, Western sanctions indeed caused Russia to experience an economic winter. Faced with multiple rounds of economic sanctions, Russia ultimately chose to embrace cryptocurrencies.
In 2022, Putin believed that Russia had some advantages in cryptocurrency mining and should tax and regulate cryptocurrency mining, supporting the restriction of mining to areas with excess electricity, such as Irkutsk, Krasnoyarsk, and Karelia.
On February 13, 2022, Russia amended the "Digital Currency" law to restrict non-qualified investors from purchasing cryptocurrencies, requiring them to pass an exam before making a purchase. Qualified individuals could purchase a maximum of $7,000 worth of cryptocurrencies annually, while unqualified individuals were limited to $600. The law also defined digital currency as property, providing a legal basis for cryptocurrency payments.
On April 20, 2023, Elvira Naiullina, head of the Russian regulatory agency, stated that the Central Bank of Russia was developing a law that would introduce an "experimental legal regime" allowing cryptocurrencies to be used specifically for import and export transactions. As part of the regulation, new tax laws would be introduced for miners. The Central Bank's plans included establishing specialized organizations responsible for cryptocurrency mining and processing payments for cross-border trade agreements.
In November 2023, Russia developed a tool to help cryptocurrency miners evade sanctions, which would assist Russian companies in conducting cross-border payments. Anton Tkachev, a member of the Information Policy, Information Technology, and Communications Committee of the Russian State Duma, stated that the country's Ministry of Industry and Trade had successfully developed "a tool for conducting industrial mining activities." He claimed that cryptocurrencies could help Russian companies evade Western sanctions when conducting overseas transactions.
The Russian Central Bank recently suggested that businesses use cryptocurrencies and digital assets to mitigate the impact of Western sanctions following the Ukraine conflict. Elvira Nabiullina, the head of the Russian Central Bank, acknowledged the importance of payment issues to the Russian economy and emphasized the role of new financial technologies in creating unprecedented solutions.
Due to sanctions against major financial institutions in Russia, the country's trade relations with multiple nations have faced difficulties. Nabiullina stated, "New financial technologies create opportunities for plans that did not exist before. That's why we have relaxed our stance on using cryptocurrencies in international payments, allowing the use of digital assets in such payments."
On the other hand, the United States is beginning to fully embrace cryptocurrencies, with the SEC approving Bitcoin spot ETFs and Ethereum spot ETFs, and presidential candidates expressing support for cryptocurrencies. The competition among nations regarding how to deal with cryptocurrencies is becoming increasingly intense.
US Response to Russia's Use of Cryptocurrencies to Evade Sanctions
On one hand, Russia has found a way to evade Western sanctions through cryptocurrencies. On the other hand, the United States will begin to worry about Russia's use of crypto means to evade sanctions.
In July 2024, Congressman Brad Sherman (D-CA) questioned Janet Yellen about Russia's use of cryptocurrencies and stablecoins to evade Western sanctions. "The Russian Central Bank is urging the use of cryptocurrencies to evade Western sanctions. Stablecoins have no particular advantage because they are stable, you can't make money by holding them, and they usually don't pay interest—certainly not the interest you get in money market funds. Their only advantage is evading our sanctions and other laws, including tax laws. I hope you won't promote this by promoting stablecoins when imposing sanctions on Russia."
Yellen responded: "We are very concerned about the use of cryptocurrencies and stablecoins. We don't think what Russia is doing is a big deal, but as our sanctions become more severe, this becomes a worrisome issue."
Conclusion
Russia's new mining regulations are an important step towards breaking through Western economic blockades. Indeed, Western sanctions have had a serious impact on the Russian economy, but Russia has chosen to embrace a decentralized world. In this emerging financial realm, the spirit of equality and freedom behind Bitcoin may bring hope for the rebirth of the Russian economy. The participation of the "polar bear" in the crypto world will also give it a more practical significance, showcasing the fascinating appeal of the crypto punk world.
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