Russia Legalizes Crypto Mining and Payments Amid Sanctions

Rebeca
Moen

Sep
06,
2024
08:50

In
response
to
Western
sanctions,
Russia
has
enacted
legislation
legalizing
cryptocurrency
mining
and
international
payments,
a
strategic
pivot
aimed
at
mitigating
economic
pressures.

In
response
to
mounting
financial
pressures
from
Western
sanctions,
Russia
has
enacted
significant
legislation
legalizing
cryptocurrency
mining
and
permitting
the
use
of
cryptocurrency
for
international
payments.
The
bills
were
signed
into
law
on
August
8th
by
President
Vladimir
Putin,
with
crypto
payment
trials
slated
to
start
this
month,
according
to
a
Bloomberg
report.

This
legislative
shift
marks
a
significant
departure
from
the
government’s
previous
stance,
where
the
Central
Bank
of
Russia
(CBR)
had
pushed
for
a
complete
ban
on
cryptocurrencies
as
recently
as
2022.
The
new
laws,
set
to
take
effect
in
September
for
cross-border
payments
and
November
for
crypto
mining,
will
enable
Russian
businesses
to
engage
in
international
trade
using
cryptocurrencies
and
authorize
approved
entities
to
mine
digital
assets.

Putin
has
called
on
Russia
“not
to
miss
the
moment”
in
regulating
cryptocurrencies,
emphasizing
their
growing
role
in
global
payments
and
potential
to
reduce
reliance
on
the
U.S.
dollar.
Key
officials,
including
bill
author
Anton
Gorelkin
and
CBR
Governor
Elvira
Nabiullina,
have
specifically
acknowledged
that
this
legislative
change
is
aimed
at
mitigating
the
impact
of
sanctions
and
facilitating
international
payments.

Russia’s
Evolving
Attitude
Towards
Cryptocurrency

Despite
the
recent
legislation,
Russia’s
ban
on
using
cryptocurrencies
for
domestic
payments
remains
in
place.
Nevertheless,
this
has
not
dampened
the
widespread
use
of
cryptocurrency
within
the
country.
In
fact,
Russia
consistently
ranks
among
the
top
countries
in
the
Global
Crypto
Adoption
Index,
consistent
with
the
observation
that
blanket
bans
on
cryptocurrency
are
often
ineffective,
as
they
do
not
significantly
curb
usage
but
rather
push
it
into
informal
or
less
regulated
channels.

Concurrently,
crypto-linked
banking
services
have
also
been
on
the
rise
in
Russia
prior
to
the
recent
legislation.
Rosbank,
owned
by
Russian
billionaire
Vladimir
Potanin,
paved
the
way
for
cross-border
cryptocurrency
payments
for
businesses
in
June
of
last
year,
according
to
Vedomosti,
with
several
other
banks
subsequently
introducing
similar
services.

Sanctions
Evasion
Through
Cross-Border
Payments

The
CBR
is
spearheading
the
initiative
to
integrate
cryptocurrency
into
Russia’s
financial
system
for
cross-border
payments,
creating
an
experimental
infrastructure
that
allows
approved
Russian
businesses
and
entities
to
use
digital
currencies
for
international
trade.
Approved
mining
entities
will
also
be
allowed
to
use
crypto
to
settle
trades,
according
to
official
statements.

These
recent
crypto-forward
legislative
efforts
are
part
of
Russia’s
broader
efforts
to
develop
alternative
payment
mechanisms
to
alleviate
Western
sanctions
pressure
while
decreasing
dependence
on
the
U.S.
dollar,
which
has
been
a
long-term
goal
for
Russia
especially
amidst
increasing
geopolitical
tensions.

The
Central
Bank
of
Russia:
New
Scope
of
Regulatory
Power

The
new
legislation
consolidates
the
CBR’s
control
over
cryptocurrency
within
Russia,
enabling
it
to
regulate
and
monitor
these
transactions
closely.
While
the
CBR
is
still
testing
its
central
bank
digital
currency
(CBDC)
with
the
digital
ruble
projected
to
launch
in
2025,
this
legislation
allows
the
use
of
existing
cryptocurrencies
with
central
bank
oversight.

Russia
has
been
exploring
various
methods
to
circumvent
the
U.S.-dominated
financial
system,
including
blockchain-based
initiatives
with
the
BRICS
community
and
the
potential
launch
of
a
gold-backed
stablecoin
with
Iran.
The
Financial
Messaging
System
of
the
Central
Bank
of
Russia
(SPFS)
—
Russia’s
alternative
to
the
SWIFT
financial
messaging
system
—
is
another
key
component
of
this
strategy,
although
its
use
remains
limited.

Exchanges
That
May
Process
International
Transactions

Per
the
Bloomberg
report,
authorities
are
exploring
ways
to
legalize
crypto
exchanges.
“We
haven’t
found
a
solution
yet
on
how
to
do
this,”
said
Finance
Minister
Anton
Siluanov.
Nevertheless,
according
to
reporting
by
Russian
news
outlet
Kommersant,
Russia
is
moving
forward
with
plans
to
launch
two
new
crypto
exchanges
in
St.
Petersburg
and
Moscow.
The
exchange
in
St.
Petersburg
will
reportedly
be
supported
by
infrastructure
from
the
St.
Petersburg
Currency
Exchange
(SPCE),
though
SPCE
has
denied
involvement
according
to
the
state-run
news
agency
Interfax.
Despite
the
regulatory
ambivalence,
Russia
is
already
home
to
a
thriving
cryptocurrency
ecosystem.

Some
of
Russia’s
largest
non-KYC
exchanges,
such
as
Tetchange,
100btc,
Bitzlato,
Suex,
and
Garantex,
have
been
housed
in
or
near
Federation
Tower,
a
two-skyscraper
complex
located
within
the
Moscow
International
Business
Center,
also
known
as
Moscow-City.
While
some
of
these
services,
like
Suex
OTC,
have
seen
a
decline
in
activity
following
their
designation
by
the
U.S.
Treasury
Department,
others,
such
as
Garantex,
have
maintained
a
steady
level
of
operations.

Garantex
is
a
central
player
in
Russia’s
crypto
market
and
likely
to
remain
instrumental
despite
its
designation
by
the
Office
of
Foreign
Assets
Control
(OFAC)
and
Office
of
Financial
Sanctions
Implementation
(OFSI)
in
the
U.S.
and
UK,
respectively.
This
centralized
exchange
(CEX)
has
processed
a
substantial
volume
of
transactions
by
designated
actors
in
Russia
and
Iran,
demonstrating
its
utility
for
sanctions
evasion.
Under
the
new
legislation,
the
Russian
government
could
officially
or
unofficially
leverage
services
like
Garantex,
given
its
deep
liquidity
across
major
blockchains.
Although
Garantex
has
processed
nearly
$100
billion
in
transactions
since
2018,
this
large-scale
activity
does
not
necessarily
equate
to
state-sponsored
sanctions
evasion
at
scale
and
should
be
assessed
with
caution.
It’s
important
to
note
that
not
all
Garantex
users
are
Russian
nationals
or
Russia-based,
nor
do
they
operate
on
behalf
of
the
Russian
government.
Additionally,
a
great
deal
of
sanctions
evasion
activity
occurs
outside
official
government
channels
and
takes
place
through
traditional
off-chain
methods,
such
as
private
investment
vehicles
and
offshore
shell
companies.

Another
exchange
that
could
be
leveraged
for
crypto-based
sanctions
evasion
is
Exved,
which
has
worked
closely
with
InDeFi
Bank,
co-founded
by
Garantex
founder
Sergey
Mendeleev
and
former
KGB
officer
and
media
tycoon
Alexander
Lebedev.
Exved
has
been
facilitating
imports
and
exports
even
before
the
new
legislation.

Cryptocurrencies
That
Could
Be
Used
for
Payments

Russia
is
planning
on
launching
Chinese
Renminbi
(RMB)
Yuan
and
BRICS-based
stablecoins,
according
to
Kommersant,
supported
by
the
new
crypto
exchanges
in
development
in
St.
Petersburg
and
Moscow.
Additionally,
the
use
of
centralized
stablecoins
like
USDT
and
USDC
might
also
be
considered
given
their
liquidity
and
widespread
global
popularity,
but
their
centralized
control
and
regulatory
responsiveness
pose
risks
of
disruption.
The
digital
ruble
could
also
play
a
role
once
launched,
but
given
the
heavy
economic
sanctions
against
Russia,
its
desirability
to
other
countries
remains
uncertain.
Finally,
entities
permitted
to
mine
probably
would
do
so
in
bitcoin,
which
remains
deeply
liquid
and
popular
worldwide.

Scaling
Challenges
of
On-Chain
Sanctions
Evasion

Russia’s
move
to
integrate
crypto
into
its
financial
system
may
improve
its
ability
to
bypass
the
U.S.-led
financial
system
and
to
engage
in
non-dollar
denominated
trade.
However,
on-chain
sanctions
evasion
at
scale
remains
highly
improbable,
given
Russia’s
total
foreign
exchange
reserves
are
just
under
half
a
trillion
dollars,
with
approximately
$300
billion
in
dollars,
euros,
and
British
pounds
still
frozen.
As
explored
previously,
current
crypto
markets
simply
do
not
have
the
liquidity
to
accommodate
such
large-scale
transactions.

While
large-scale
sanctions
evasion
at
the
national
level
is
unlikely,
smaller-scale
sanctions
evasion
on-chain
can
still
have
meaningful
implications
for
national
security,
compliance,
and
investigations.
Government-affiliated
actors
who
might
seek
to
leverage
the
new
developments
include
fundraisers
supporting
pro-Russian
militants
in
Ukraine,
facilitators
helping
oligarchs
and
other
politically
exposed
persons
engage
in
capital
flight,
or
Russian-language
instant
exchangers
with
no
KYC
requirements,
servicing
on-
and
off-ramping
activities
for
sanctioned
Russian
banks.
These
smaller-scale
activities
can
have
major
repercussions,
highlighting
the
broader
security
and
compliance
risks
associated
with
such
transactions.

Russia’s
about-face
on
cryptocurrency
represents
a
calculated
response
to
Western
sanctions,
setting
sights
on
an
alternative
financial
system
less
dependent
on
the
U.S.
dollar.
The
success
of
this
initiative
will
depend
on
how
effectively
Russia
can
navigate
regulatory
obstacles,
manage
sanctioned
entities,
and
build
the
necessary
infrastructure
and
foreign
partnerships
to
support
these
transactions.

Implications
of
the
Crypto
Mining
Bill

Beyond
bolstering
the
economy
in
wartime,
Russia
is
positioning
itself
in
an
attempt
to
surpass
the
United
States
as
the
global
leader
in
cryptocurrency
mining.

The
recently
passed
crypto
mining
bill
introduces
a
structured
framework
for
cryptocurrency
mining,
creating
a
register
that
allows
Russian
legal
entities
and
entrepreneurs
to
engage
in
mining
activities.
This
framework
is
designed
to
regulate
mining
operations
with
significant
volumes,
while
smaller
mining
businesses
under
a
set
energy
consumption
limit
will
remain
unaccounted
for.
The
removal
of
language
contained
in
an
earlier
draft
of
the
mining
bill
suggests
that
the
authorities
may
have
sought
to
avoid
taking
action
that
would
adversely
affect
Russia’s
robust
cryptocurrency
ecosystem.
In
particular,
the
Kremlin-aligned
Russian
news
outlet
RBC
has
reported
that
a
proposed
ban
on
organizing
cryptocurrency
trading
was
removed
from
the
law’s
final
version,
avoiding
a
potential
shutdown
of
Russian
CEXs
and
providing
a
legal
pathway
for
miners
to
monetize
their
activities.

Miners
operating
under
the
new
law
will
be
required
to
report
their
activities
to
the
local
financial
monitoring
service,
Rosfinmonitoring,
and
to
provide
their
wallet
addresses
to
the
security
services,
effectively
legitimizing
their
operations
under
state
oversight.
This
regulatory
move
raises
important
questions
about
the
classification
of
crypto
mining
outside
Russia
as
well,
particularly
in
light
of
broad
U.S.
sectoral
and
European
sanctions
against
Russia’s
energy
sector.
Russia’s
authorization
and
oversight
of
crypto
mining
suggests
a
strategic
alignment
with
national
interests,
despite
the
ongoing
international
sanctions
targeting
Russia’s
energy
resources.

What’s
Next:
Implications
for
Authorities,
VASPs,
and
TradFi

Although
these
legislative
changes
are
likely
to
enhance
Russia’s
ability
to
engage
in
international
trade
through
cryptocurrency,
they
are
also
likely
to
heighten
vigilance
among
U.S.
and
EU
authorities
—
particularly
concerning
counterparty
risks
and
connections
to
some
of
Russia’s
more
important
trade
partners,
like
China
and
Iran.
As
these
bills
increase
connectivity
in
global
trade,
Western
authorities
will
likely
remain
focused
on
monitoring
and
mitigating
risks
associated
with
the
financial
activities
of
sanctioned
entities,
on-
and
off-chain.

More
broadly,
many
heavily
sanctioned
countries,
from
Venezuela
to
Russia
to
Iran,
have
historically
attempted
to
use
alternative
payment
mechanisms,
including
cryptocurrency,
to
bypass
sanctions
—
an
approach
fraught
with
challenges.
The
transparency
of
blockchain
technology
allows
investigators
to
monitor
and
disrupt
the
movement
of
funds
in
real-time.
Wallet
addresses
associated
with
CEXs,
mining
services,
and
other
on-chain
entities
can
be
identified,
attributed,
and
potentially
sanctioned.
Moreover,
the
liquidity
limits
of
the
cryptocurrency
market
mean
that
attempting
to
move
large
amounts
of
assets
on-chain
could
either
draw
attention
from
blockchain
observers
or
destabilize
the
market
altogether.

For
virtual
asset
service
providers
(VASPs)
and
traditional
financial
institutions,
these
developments
underscore
the
importance
of
enhanced
due
diligence
on
counterparties
of
Russian
mining
entities.
Overall,
these
changes
make
dealing
with
Russia-based
entities
even
more
challenging
for
CEXs,
aligning
with
the
broader
trend
of
de-risking
and
debanking
Russia
since
its
full-scale
invasion
of
Ukraine.

Chainalysis’
on-chain
data,
monitoring,
and
suite
of
investigative
tools
enable
investigators
and
compliance
professionals
to
proactively
monitor
these
networks
and
take
disruptive
actions,
making
it
increasingly
difficult
for
designated
entities
to
abuse
cryptocurrency
for
sanctions
evasion.

Image
source:
Shutterstock