Updated: Sep 10, 2022
Russia's geopolitical situation has experienced numerous ups and downs since the beginning of the year, but so has its cryptocurrency policy. On one hand, some want to wipe cryptocurrencies off the map, and on the other hand, some have a more open approach and opt for lighter regulation, especially regarding miners. The decision comes at a time when the economy needs a revival and cryptocurrencies are presented as a competitive advantage and a growing sector.
Author: Carmen Rodríguez
It is quite popular to hold crypto among Russians, 17 million of them do so and the numbers are growing. The amount of transactions is also enormous with 5$ billion being exchanged yearly and 12 million accounts. Looking at the bigger picture Russia represents twelve percent of the global market of cryptocurrency. Last February the country's market was valued at 16.5 trillion rubles, or what its the same 200 billion US dollars.¹
Mining in Russia
For some years China was the leading country in the crypto industry. Nevertheless, figure 1 shows that when they declared that all crypto transactions were illegal, the United States took that place and Kazakhstan and Russia also grabbed a good piece of the cake. It comes as no surprise that Russia positioned itself so well given the price of energy and the cold weather that can substitute the expensive cooling systems. Most of the crypto farms are there for positioned in Syberia. An example of it is Irkutsk a city with more than 14.400 households mining crypto.²
In January seven planes arrived from China to Irkutsk, where the residential electricity prices can be as low as 0.01$. This attracted a lot of illegal miners according to the energy business, which started an investigation in November. Legal miners have to pay three times more than the residential price.³
The proposal from the central bank
Cryptocurrencies have had legal status in Russia since 2020, but they are not recognized as legal tender. In January Russia’s central bank shared a consultation paper stating that they considered that the stability of their financial system and the well-being of citizens were threatened. Therefore, the best option was to follow China’s lead and forbid mining, exchanges, and holding of crypto. Other reasons that were given for the new measure were that it follows characteristics of a financial pyramid and potential bubbles in the market.⁴
According to this bill, firms that provide service to crypto traders could be fined 13,000 USD and individual traders up to 6,500 USD. Even a blackout of news related to crypto was considered. Accounts linked to crypto transactions could have their funds frozen by commercial banks.⁵
Mining was portrayed as a problem for its levels of energy consumption, powered with fossil fuels, and as a result, a threat to the green agenda. Figure 2 shows data from August 2021 indicating that the amount of computer power used by Russia to connect to the bitcoin network represents 11,2% of the global scene. This concept is also known as Hashrate.⁶
The proposal from the finance ministry
The reaction didn't take much time, in February the finance ministry shared a new bill less strict and whose goal was to provide a balance of interests. One of the main changes was allowing miners to operate on the condition that they would register and take an online test. The ones that pass the test will be allowed to invest 7.500$ and those who fail 630$. They would also need to register their wallets so that the government can keep track of them.⁷
In case this proposal would be approved the effective date of entry would be January 1st, 2023. In this scenario, crypto mining would be considered a form of economic activity. All the miners would have to report their income to the federal tax service and register as individual entrepreneurs. There is an exception to the registration when the miner’s energy consumption is under the limit of a private household. Lastly, the mining centers would require a recognized Russian entity to be listed as the owner.⁸
Benefits of a soft regulation of mining
The Russian economy has always been affected by inflation and the new sanctions from the west are just exacerbating the problem. The annual inflation accelerated to 9.05% in February way above the goal of 4%. On top of that, Germany canceled the Nord Stream II gas pipeline on February, 22nd so what could Russia do with the extra energy? Mining is definitely in consideration. On a smaller scale mining represents an income to some households that are witnessing how their savings evaporate and taking also that away from them could result in more protest.⁹
Ultimately, the second biggest competitor in the mining market, Kazakhstan just announced new taxing policies. For example, taxing imported equipment. There will also be a five times increase in the price of electricity that will be translated into a decline in mining activity in that country opening the door for Russia to become the second-biggest miner country in the world. ¹⁰
Given the current situation, it is likely that Russia opts for a more flexible regulation of mining as proposed by the finance ministry. With the suggested taxing system the government would collect a significant amount of the benefits that mining offers, instead of completely shutting down the system. Of course, miners will lose some benefits but in the long term is better for both parties to coexist and collaborate together.
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Carmen Rodriguez is the executive assistant at basenode.io and community manager. Before, she worked in educational entrepreneurship for one year. Besides her degree in business administration, she holds a master's in social innovation. You can contact her via LinkedIn.