In January 2022, the Central Bank of Russia (CBR) proposed a series of measures aimed at curbing the cryptocurrency market in the country, which included a general ban on the use and redemption of all cryptocurrencies. He cited the risks associated with the volatile nature of cryptocurrencies to the financial stability of the country, the widespread use of cryptocurrencies in illegal activities, and the energy costs associated with mining cryptocurrencies. However, the benefits of blockchain technology have not escaped the CBR. The following month, he announced that he had begun the pilot phase of the digital ruble, a planned central bank digital currency (CBDC).
However, after the decision of the Russian legislative assembly to recognize the separatist states of Lugansk and Donetsk Ukraine, the European Union imposed financial sanctions on the majority of deputies of the State Duma of Russia. In early March, in response to the events in Ukraine, sanctions were imposed on the Democratic Republic of the Congo. It is becoming clear that new sanctions from the European Union, the United States and other countries of the Organization for Economic Cooperation and Development (OECD) are likely.
Axis driven by sanctions
When legitimate economic transactions with the West were previously banned, there were rumors about the future of cryptocurrencies in Russia. According to Stanislav Tkachenko, a professor of international relations and economics at Saint Petersburg State University who has written extensively on monetary regulation, decision makers have already expressed interest in the future promotion of both CBDCs and existing cryptocurrencies.
Tkachenko noted that Russia looked at how China handled the introduction of a state digital currency and thought that Russia would just copy what China did. He noted that Russia’s move to partner with China on bilateral trade is likely to increase transaction costs as goods sold by Russia are valued primarily in dollars in international markets and China favors the exclusive use of the yuan for its market. Traditional transactions must be made in rubles, dollars and Chinese yuan.
Tkachenko was optimistic about the prospects for crypto mining in the near future, as global attitudes towards Russian energy weakened, leading to sanctions and the proposal of further sanctions. This, he explained, led to an increase in world energy prices, but at the same time left Russian energy producers without a global market that could absorb them. This may lead to a more moderate attitude towards cryptocurrency mining in Russia and other attempts to limit Russia’s access to the cryptocurrency market abroad.
Problems with CBDCs
Every central bank digital currency has a few significant drawbacks, and in the case of Russia, there are a few more to add to it. First, the benefits of anonymous transactions are lost. While the potential use of anonymous money laundering and terrorist financing has worried CBR regulators for decades, central bank digital currency will inevitably become a target.
In the US and the EU, the operations of the six largest Russian banks were banned: VTB, Novikombank, Sovcombank, Otkritie, Promsvyazbank and Bank of Russia. Now it is impossible to transfer dollars and euros from their accounts to any country in the world, and Visa and Mastercard cards issued by a Russian bank do not work abroad. However, the elimination of trade with Russian banks is hurting existing foreign transactions, which cannot be said about the new digital currency issued by the state.
Another reason is that the Russian “brand” has fallen in value elsewhere in the world as cryptocurrency exchanges have been forced to close coin wallets owned by Russian individuals. While regulators have long feared that Bitcoin (BTC) could be used to pay for illegal transactions on the dark web, its association with a CBDC with Russia makes any such use suspect.
In 2017, President Nicolás Maduro announced the creation of a state-sponsored cryptocurrency in Venezuela, under sanctions, in hopes of stimulating the country’s growing economy. However, it has had few practical uses: Venezuela used it in 2019 for small payments to pensioners and often uses it to determine the cost of services or fines that end up being paid in local currency. Cryptocurrency is usually seen as a speculative instrument and medium of exchange. On these two fronts, Petro failed.
Wartime Digital Asset Tools
An important important value of the potential CBD is that it helps avoid some of the shortcomings of Russia’s current wartime banking system. If something happens to Sberbank, VTB or any other bank, it will be difficult for Russians to transfer money through their banking applications, which are now used throughout Russia.
However, we can expect much of the world to scoff at Russian currencies.