Strategy Note /

Russia shifts its crypto stance as sanctions loom: Regulation not prohibition

  • Russia is one the world’s top crypto markets. Regulators had previously considered a ban but now prefer legalisation

  • Other countries may follow suit: banning cryptocurrency does not stop its use but rather pushes activity underground

  • With the spectre of Ukraine-related sanctions, Russia’s crypto usage could rise, allowing actors to avoid punishment

Russia shifts its crypto stance as sanctions loom: Regulation not prohibition
Rahul Shah
Rahul Shah

Head of Corporate & Thematic Research

Rabail Adwani
Rohit Kumar
Tellimer Research
15 February 2022
Published byTellimer Research

Russia is one the world’s largest crypto markets, with around 12mn cryptocurrency accounts holding US$27bn of assets. It has 11% share in global crypto mining, ranking third globally, behind the USA and Kazakhstan. The asset class has hitherto been unregulated and as recently as last month, the Russian central bank had indicated a preference for banning the asset class on the grounds that it could be used for illegal activities. However, there seems to have been a recent change of heart, with a central bank discussion paper last week suggesting that the government regulate, rather than ban, the industry.

Cryptocurrency adoption is booming across the globe. The popularity and penetration of the asset class has continued to increase despite the efforts of regulators in many jurisdictions to curb its use by issuing warnings, creating restrictions, or implementing outright bans. India's recent move to regulate cryptocurrency is a further signal that regulators are increasingly accepting that the asset class is here to stay. Instead, the focus is shifting to regulations that permit innovation but also require actors to comply with transparency and disclosure requirements (for example, in relation to ant-money laundering regulations).

In this note, we discuss cryptocurrency penetration in Russia, how the government seeks to regulate this asset, what prompted the country to change its stance and the broader implications of this move.

Cryptocurrency mining share by country

The cryptocurrency market in Russia

According to Russia's central bank, there are about 12mn cryptocurrency accounts in the country worth an aggregate US$27bn. As per Chainalysis, Russia ranks 18th worldwide in terms of cryptocurrency adoption (adjusted for purchasing power parity and internet penetration) and third in terms of crypto value sent to international addresses, indicating that individuals and businesses are using crypto for international remittances, trade and capital withdrawals. In terms of mining, Russia is also a leading crypto country, with 11% mining share, ranking third globally behind the USA and Kazakhstan, according to the Cambridge Centre for Alternative Finance.

Proportion of international cryptocurrency transactions

How Russia plans to regulate crypto

Russia's crypto regulation plan, as recently indicated by the central bank, includes the following key steps:

  • All crypto-related transactions over RUB600k (cUS$8k) would have to be reported to the Federal Taxation Service.

  • Banks would be allowed to operate as intermediaries between users and crypto exchanges.

  • Institutions involved in crypto transactions would need to verify users' identity and check for any illicit activities.

  • Institutions will also need to use Transparent Blockchain, a transaction-tracking tool by state-owned anti-money laundering agency Rosfinmonitoring. The tool will help link crypto transactions to users.

Why has Russia changed its stance on cryptocurrency?

In January 2022, the Russian Central Bank had indicated that it was considering imposing an outright ban on cryptocurrencies as they are volatile and widely used for illegal activities. Mining activities were consuming energy for non-productive uses, while cryptocurrency usage added to the challenge of effective monetary policy implementation; crypto was being used to take money out of the economy. However, based on its more recent communications, the central bank now thinks a ban might not be the right course of action. While the initial reasons supporting a ban remain valid, it also accepts that banning cryptocurrencies would not stop the activity but merely push it underground into the shadow economy.

Threat of sanctions may have influenced Russia's thinking

In recent months, leading western nations have indicated that any move by Russia to invade Ukraine would be met with severe economic sanctions. Potential measures could exclude Russian banks from the global financial system for example, by restricting access to the SWIFT payments network, or preventing them from transacting in US dollars. Specific financial institutions, companies and individuals could also be blacklisted. International assets could also be seized.

The anonymity afforded by many cryptocurrencies could allow Russia to bypass or at least mitigate the impact of some of these sanctions. For example, a recent United Nations report indicated that North Korea, which has been subject to strict international sanctions for many years, had stolen cryptocurrency to fund its nuclear missile programme. Chainalysis estimates that north Korea stole US$400mn digital assets in 2021. And a US citizen, Virgil Griffith, last year admitted to assisting North Korea use cryptocurrency to evade sanctions.

With news reports suggesting an invasion of Ukraine is imminent, the ability to use cryptocurrency to mitigate the impact of international sanctions could also have played a role in Russia's recent decision not to seek an outright domestic ban of this asset class.

Other countries may also pull back from full cryptocurrency bans

The recent moves from Russia and India point to the reality that banning cryptocurrency does not actually stop its growing popularity but only pushes the activities underground. Other countries might also follow this approach and consider legalising and regulating crypto activities.

Below we highlight the regulatory stance on cryptocurrency in top crypto-adopting nations; some of these countries still have a ban on cryptocurrency or advise against using it, while a few have legalised it by formulating regulations that allow better oversight.

Top cryptocurrency-adopting nations and their regulatory stance

Related reading:

How regulators are struggling to turn back the cryptocurrency tide

Why Pakistan’s crypto ban won’t work