Cryptocurrency: Investment Opportunity?
Doctor of Economic Sciences, Professor and Chief Researcher at the Institute of Economics of the Russian Academy of Sciences
The first cryptocurrency, Bitcoin, appeared in January 2009, when a chain of 14 blocks of 700 bitcoins was created over the course of a day. In 2022, cryptocurrency has already become commonplace in many countries around the world. With its help, it is possible to pay for goods and services online, purchasing almost everything – from food and clothing, to legal and financial services. However, this is not yet possible in all countries.
Cryptocurrencies are not supported on the territory of Russia – although according to experts, Russia ranks third in the world in cryptocurrency mining, More than 12 million wallets have been opened by Russian citizens, and the amount of funds in these wallets exceeds 2 trillion rubles. But nevertheless, since 2014 the Bank of Russia has stuck with one attitude, the essence of which boils down to the following: cryptocurrencies undermine financial stability, carry significant risks for citizens’ savings, are clearly speculative in nature, and cannot in any way be considered financial assets for investment.
After the entry into force of the law “On Digital Financial Assets” (No. 259-FZ) on January 1, 2021, legislative registration was given to a ban on the organization, issue, and circulation of cryptocurrencies, as well as their use as a means of payment on the territory of the Russian Federation. Any transactions related to the turnover of cryptocurrencies have acquired the status of illegal transactions connected to money laundering, terrorist financing, or proliferation of weapons of mass destruction (AML/CFT/CPF – Anti-Money-Laundering/Combating the Financing of Terrorism/Countering Proliferation Financing).
The Central Bank received the right to impose fines for organizing the turnover of cryptocurrencies within the country – in the amount of 300–500 thousand rubles for individuals and from 700 thousand to 1 million rubles for legal entities.
At the same time, the Bank of Russia recommended that Russian exchanges not permit trade in securities of Russian and foreign issuers, the payments on which depend on cryptocurrency rates, prices for foreign digital financial assets, changes in crypto asset indices, or the values of crypto derivatives and securities of cryptocurrency funds. However, for some reason these restrictions do not apply to state digital currencies such as the digital ruble (in the event of their launch), nor to digital assets issued in information systems whose operators are included in the register of the Bank of Russia. The regulator also acquired the additional right, under Federal Law No. 115-FZ, to initiate administrative cases against commercial banks that do not block customer accounts (in accordance with regulation 375-P) for owning and conducting operations with cryptocurrencies.
For the period 2020-2021, the Bank of Russia flagged about 1820 organizations, including forex dealers, cryptocurrency exchanges, online casinos, lotteries, and various other types of “financial pyramids.” These organizations were considered suspicious, since during the monitoring it was noted that their operations meet two or more criteria established by the regulator as risky. In the event of the detection of these criteria, the commercial bank was recommended to pay increased attention to the client’s operations (“from card to card,” “from wallet to wallet,” “from the account of the mobile service provider client to a wallet or card,” etc.), to block his operations in case of suspicion of money laundering, and even to terminate the bank account agreement with him.
Among the ways considered to cut off investments in digital assets, the Bank of Russia gives priority to blocking card transfers of Russians using certain MCC codes. This is a four-digit code that a commercial bank assigns to the company receiving the payment. This code contains information about the services provided by the seller (for example, banks assign the code 5411 to grocery stores). But such a step by the regulator is unlikely to be effective in stopping investments in cryptocurrency. Investors can easily find a legal workaround – for example, by opening an account in any bank outside the Russian Federation, such as in Belarus or Kazakhstan – or use “miscoding,” assigning transactions completely different codes.
Further, some Russian companies had the opportunity in 2017 to circumvent the ban by the Bank of Russia on operations with cryptocurrency. If an organization could obtain a license from the Bank of Russia for operations with digital financial assets, then it was able to register its units in offshore zones, which meant that it was able to buy and sell goods and services for cryptocurrencies, and conduct exchange and conversion operations between cryptocurrencies and the leading currencies of the world economy (dollars, euros, pounds sterling, Swiss francs, Japanese yen, etc.). An example is the ZODIA project, sponsored by the Russian government. As part of this project, a universal financial blockchain corporation was created, which includes a monetary fund, a crypto exchange, and a payment system. This corporation received a category B banking license for offshore operations from the Comoros Authority of Finance, and opened representative offices in Gibraltar, the Isle of Man, and the British Virgin Islands.
Currently, Russian citizens and companies can also make money on cryptocurrency trading with the help of the RevenueBot marketplace service, which provides an opportunity to create trading bots on the largest cryptocurrency exchanges in the world: Binance, Bittrex, Bitfinex, Exmo and others. Creating a bot is free, and the service will not take commissions until the moment when the client begins to profit from trading the bot. With the help of deep settings of the bot, the clients of the service can implement trading strategies that are problematic to try in ordinary trading. At the same time, the bot does not have access to clients’ funds on the exchange, but trades using API keys – that is, the client’s account will always remain out of access. Now RevenueBot has over 37 thousand clients who earn money using trading bots.
Today, the Ministry of Finance of the Russian Federation is proposing to permit non-residents to purchase cryptocurrencies on Russian and foreign exchanges, subject to the subsequent withdrawal of these funds through authorized banks of the Russian Federation. In this case, the agency predicts an influx of foreign investors into the Russian market in order to “acquire newly-created cryptocurrencies from Russian miners.” At the same time, to protect investors, the Ministry of Finance is also considering the possibility of limiting the list of cryptocurrencies traded in the Russian Federation, making it possible, according to the ministry, to reduce the risks of financial instability – by offering Russian citizens access only to the most mature and established cryptocurrencies, for which tools and procedures have been developed for AML/CFT/CPF (Anti-Money-Laundering/Combating the Financing of Terrorism/Countering Proliferation Financing).
There is an idea that Russia is able to use cryptocurrencies to circumvent sanctions – if it transfers part of its foreign currency reserves and cross-border settlements to cryptocurrencies, primarily bitcoin and ethereum. The Ministry of Finance of the Russian Federation partially agrees with this position, noting that without the leading cryptocurrencies and stablecoins, the system of cross-border settlements cannot be revived.
To put it another way, today in the Russian Federation it is necessary at the legislative level to legalize settlements in cryptocurrency and stablecoins in the market of cross-border operations as soon as possible. This will save from bankruptcy many Russian companies that have nothing to do with the sanctions, allowing them to build new logistics chains with foreign trade and industrial counterparties. At the same time, the recommendations of the international FATF (Financial Action Task Force on Money Laundering) on the implementation of cross-border operations will not be violated by anyone, since foreign companies accepting payment in cryptocurrency will be able to carry out legally all the necessary procedures related to the verification of Russian companies.