Interpretation of Russia's New Legislation: Starting in September, Cryptocurrency Will Be Allowed for Cross-Border Transactions and Exchange Trading

Author: Aiying 艾盈

On July 30, 2024, the State Duma of Russia passed a law in its second and third readings, allowing the use of digital currencies in cross-border transactions and exchange trading starting from September 1, 2024, as part of an experimental legal regime (ЭПР). This includes Ethereum (ETH) and stablecoins (such as USDT), not limited to central bank digital currencies (CBDC). This marks a significant shift in Russia's attitude towards cryptocurrencies and provides an experimental platform for the feasibility and risk control of digital currencies in practical applications. Aiying 艾盈 will analyze the evolution of Russia's cryptocurrency policy in detail, combining historical context, and explore future development directions.

I. The Origin and Initial Attitude of Russia's Cryptocurrency Policy

Before 2017, the Russian government and central bank held a very cautious attitude towards cryptocurrencies. Cryptocurrencies were considered to carry extremely high risks, mainly due to concerns about their use in illegal activities such as money laundering and terrorist financing. The central bank repeatedly warned the public against investing in cryptocurrencies like Bitcoin, pointing out their high price volatility and financial risks.

II. Formation of the Initial Regulatory Framework

In 2019, Russia began exploring how to effectively regulate cryptocurrencies. The Ministry of Finance and the central bank had differing opinions on this issue, with the Ministry advocating for more lenient regulation, while the central bank preferred strict control or even a ban on private cryptocurrencies (The Moscow Times). In 2020, Russia passed the "Digital Financial Assets Law," which recognized cryptocurrencies as property but prohibited their use for the payment of goods and services. This marked an important step in Russia's legal status regarding cryptocurrencies, but specific regulatory measures still needed improvement.

III. Further Refinements and Policy Conflicts in 2021

After the passage of the "Digital Financial Assets Law," cryptocurrency exchanges and wallet service providers were required to register with Russian financial authorities and comply with strict anti-money laundering (AML) and counter-terrorist financing (CFT) standards. However, significant disagreements remained between the central bank and the Ministry of Finance on how to further regulate cryptocurrencies. The central bank proposed a complete ban on private cryptocurrencies, while the Ministry advocated for a more lenient regulatory approach. In 2022, President Putin intervened, calling for a compromise between the two sides and emphasizing Russia's competitive advantage in cryptocurrency mining.

IV. Recent Policy Developments and Experimental Legal Regime

The bill released yesterday ensures the operation of the ЭПР mechanism in the field of digital innovation in financial markets. At the same time, the Bank of Russia has been assigned the functions of the supervisor and regulatory authority in the ЭПР field. Additionally, the document clarifies that the central bank needs to consult and obtain approval from the Federal Financial Monitoring Service (Росфинмониторинг), the Federal Security Service (ФСБ), and the Ministry of Finance in certain cases regarding the ЭПР program. The central bank will monitor the activities of ЭПР initiators to identify risks that may harm national defense and security, as well as risks of money laundering and terrorist financing. Once these risks are identified, the central bank must notify the Federal Security Service and the Federal Financial Monitoring Service within no more than 10 days.

Current regulations prohibit the use of digital currencies in the settlement of goods (work, services). The new law has made amendments to allow the use of cryptocurrencies as a means of payment for foreign trade activities within the ЭПР framework. The ЭПР program must clarify the rights and obligations of participants, as well as the responsibilities of foreign exchange control authorities and agents.

In the second reading, the State Duma supported a series of amendments, including allowing cryptocurrency trading within the ЭПР framework. The ЭПР program must specify the procedures for entering (exiting) cryptocurrency transactions, clarify the requirements for organizers, and the circumstances under which trading systems conduct such transactions.

The Bank of Russia has been granted the possibility of creating an electronic platform for digital currency operations based on the national payment system (НПС), establishing its operational rules, and requirements for its operators within the ЭПР framework.

Therefore, unlike the initial version, the Bank of Russia will be able to conduct three experiments starting from September 1 of this year: using cryptocurrencies for foreign trade settlements, conducting cryptocurrency exchange trading, and creating an electronic platform for digital currency operations based on the national payment system.

V. The Status of the Cryptocurrency Market in Russia

According to the data currently collected by Aiying 艾盈:

• Number of Cryptocurrency Holders:
• In 2024, the estimated number of cryptocurrency holders in Russia is 3.02 million, accounting for 3.6% of the total population. This indicates that despite the global popularity of cryptocurrencies, their penetration rate in Russia is relatively low.
• Exchange Data:
• Data from Exmo, one of Russia's largest cryptocurrency exchanges, shows that the platform's trading volume reached $3 billion in 2023, a 25% increase from 2022. This reflects a growing demand for cryptocurrency trading in the Russian market.
• Mining Data:
• In 2023, Russia became the second-largest cryptocurrency mining country in the world, with its computing power accounting for 13% of the global Bitcoin hash rate, second only to the United States. Russia's mining industry benefits from the country's abundant energy resources and cold climate, which help reduce mining costs and improve efficiency.
• Tax Revenue:
• The Russian Ministry of Finance estimates that starting in 2023, tax revenues from cryptocurrency trading and mining activities could reach 2.5 billion rubles (approximately $34 million) annually. This tax revenue provides Russia with a new source of finance, which is particularly important in the context of international sanctions.

In the current context of international sanctions, Russia's push for cryptocurrency policy is of significant importance. Due to multiple rounds of economic sanctions imposed by the U.S. and its allies, Russia's position and operations in the international financial system have been severely affected. These sanctions include restrictions on international transactions by Russian banks, asset freezes, and greatly limit Russia's financial operations in the global market. Aiying 艾盈 will continue to monitor the development of the cross-border payment market in Russia after the sanctions and the innovative payment solutions for breakthroughs, so please stay tuned for account updates.