It is said that the truth is the first victim of any war. The same can be said of finances – an average person’s finances become hostages of the conflicts waged by politicians. The narrative currently emerging as a result of the conflict between Russia and Ukraine is a perfect demonstration of how and why cryptocurrencies should be adopted on a broader scale as a means of payment.
The Russian Federation and its citizens account for around 12% of the global cryptocurrency market, with holdings amounting to over $200 billion. Such metrics and the widespread development of blockchain-based projects in Russia indicate that cryptocurrencies are gaining considerable adoption inside the country. However, the situation with cryptocurrencies in the Russian Federation as a whole resembles a rather intricate mosaic of important factors that have to be taken into account when evaluating the future of digital assets and cryptocurrency mining in the country.
The Financial Factor
Cryptocurrencies are an important financial instrument in 2022, one that is being seriously considered by the Russian government in light of recent events. However, Russia’s stake in cryptocurrencies and the rapid change in regulatory stance adopted by the State Duma are strongly correlated with other events developing on the broader global financial market.
The situation in Ukraine had a dramatic impact on the Russian stock market, with the shares of major companies like Gazprom, Lukoil, VTB, Nornickel, and others plummeting in the double digits after the start of military operations on February 24th. However, finance has proven to be extremely tethered to politics yet again, as the same stocks rebounded in modest double-digit figures the very next day after US President Joe Biden reiterated in his speech that he will not be sending any troops into the conflict theater, inspiring confidence in risk-wary and panicky investors. Bitcoin responded to the news by growing to over $39,000 the same day, dragging the rest of the crypto market up the charts in meager digits, but into the green nonetheless.
Another factor that will be decisive in the question regarding the adoption of cryptocurrencies in the Russian Federation is the action of European countries regarding the Swift financial system. If European leaders stay true to their threats and sanctioned Russian banks are disconnected from Swift, Russian businesses will be cut off from an important financial gateway. However, European institutions may suffer the brunt of the sanction. While Swift is a system catering to European users, the Russian Central Bank has already deployed its own analog of the system for processing transactions in Russian Rubles. The adoption of cryptocurrencies will open another gateway that Russian businesses can rely on for unimpeded transacting worldwide.
The position of the US Dollar on the global market as a reserve currency is also of immense importance in the question of cryptocurrency adoption. Considering the fact that the Russian Welfare Fund sold off all 35% of its portfolio stored in US Dollars – around $40 billion – and redistributed it into the Chinese Yuan, the weakening of the position of the US Dollar on the global financial arena cannot be disregarded. This, coupled with the fact that China is preparing to field its crypto Yuan in direct opposition to USDT – the most dominant stablecoin on the crypto market as of now – is making it evident that the country intends to remain relevant in cryptocurrency-related matters in the upcoming future. many countries around the world will start diverting to the Yuan as a reserve currency and a force to be reckoned with in cryptocurrency-related matters.
Regulation And Legality Factor
The Russian government’s stance on the regulation of cryptocurrencies was close to stagnant over the last few years, with no real action being taken apart from several drafts tossed into the long drawer of the State Duma. However, events suddenly accelerated in the middle of February, when the Russian Ministry of Finance submitted the federal law “On Digital Currencies” to the government. The document consolidates the concept relating to crypto regulation in Russia.
The bill will allow Russian citizens to legally invest up to 600 thousand Rubles in cryptocurrencies annually, after passing a test on the proper knowledge of investments. Failure to pass the test will limit investments to 50 thousand Rubles. Qualified investors and legal entities will be freed of any investment limits. And although the document approves investments in cryptocurrencies, they will not be considered as a legal means of payment inside the country. The bill also establishes requirements for cryptocurrency exchanges, exchangers, and operators like banks, relating to reporting, information storage, internal control and audit, risk management system, and the amount of funds stored.
In a further development, Minister of Finance Anton Siluanov proposed the legalization of exchanges of cryptocurrencies for Russian Rubles, with the appropriate law already being drafted. Siluanov’s words resonated with an ensuing event on the 18th of February made by the world’s largest cryptocurrency exchange, which announced that it achieved recognition by Russian banks and entered the Association of Banks of Russia.
Events developed rapidly in parallel with the Central Bank of Russia preparing amendments to the federal law “On Digital Financial Assets, Digital Currency and on Amendments to Certain Legislative Acts of the Russian Federation”, which will include a ban on the dissemination of information about private cryptocurrencies. The Central Bank therefore seeks to limit the rights of entities facilitating the issuance or circulation of private digital currencies and place a ban on transfers to their accounts, as well as set fines for violations.
The looming and inevitable regulation and adoption of cryptocurrencies in Russia in light of impending financial sanctions comes as neighboring Ukrainians rushed to stock up on USDT. The price of the stablecoin soared past the 36.97 hryvnia ($1.23) mark on February 24, fearing for their savings and their depreciation amidst military activities and chaos in the country. Russian users mimicked the actions of their Western neighbors, as on-chain metrics showed increased demand for stablecoins. This happened despite the fact that recent surveys showed that 35% of Russians are afraid of investing in cryptocurrencies, another 36% saw them as favorable assets for investments, and 28% are already investors.
With the military campaign progressing, some users in Ukraine have launched anonymous fundraising campaigns using cryptocurrencies. However, any transfer of funds to an adversary state on the part of Russian citizens will be subject to Russian Federal Law Article 275 entailing“High treason”, which includes espionage, the transfer of information constituting a state secret abroad, or otherwise assisting a foreign state in activities directed against the security of Russia.
Russia occupies third place in terms of Bitcoin mining, which is valuated at around $5 billion in the country. Russia reached 12% of all global Bitcoin extraction in late 2021, up 6% on a year-to-date basis. Average monthly on-chain indicators in Russia have increased from 5.2 to 13.6 Eh/s in 2020, and by another 2.9 Eh/s from June to August 2021.
Considering that over half of Bitcoin’s hashrate comes from the US, Kazakhstan, and Russia, the growing share of Russian miners in the Bitcoin network is attributed largely to the country’s electricity production and favorable climatic conditions. Much of Russian Bitcoin mining is powered by native natural gas and hydroelectric powerplants in Siberia, with the average cost per kilowatt-hour in the country in 2022 standing at just 4 Rubles/kWh.
The recent events have had virtually no impact on Bitcoin mining in Russia, proving the resilience of decentralization to geopolitical turmoil.
The last two years have seen the global economy suffer a great downfall. They are proving the vulnerability of fiat and the traditional financial system. With nations worldwide being affected by sanctions regimes and the use of financial instruments as weapons, it is high time that cryptocurrencies take on the role of a global means of payment, transcending borders, nations, and political aspirations.