The turn of the "polar bear": Russia's legalization of mining is expected to reshape the new pattern of the global crypto market

Original title: "From Rejection to Embrace - What Promoted the Legalization of Crypto Mining in Russia"

Original author: Deng Tong, Golden Finance

After the 805 coin crisis, the crypto market was shrouded in dark clouds: the price of Bitcoin plummeted from more than $70,000 at the end of July to below the $50,000 mark. The panic and greed index even dropped to 17 at one point, and the level changed from fear to extreme fear. People once doubted "Is the bull still there?"

But starting from August 8, the crypto market seemed to have a spring breeze overnight, and cryptocurrencies generally rose. In the early morning of August 9, Bitcoin even reached $62,394.50, up 25.33% from the low of $49,781.93. The reason is that one of the major factors for the big rebound in the crypto market is closely related to Russia's newly adopted mining legalization policy.

What does the new Russian mining regulation say?

On August 8, 2024, Russian President Vladimir Putin signed a law legalizing cryptocurrency mining in Russia.

The signed law introduces new concepts, including digital currency mining, mining pools, mining infrastructure operators, address identifiers, and individuals who organize mining pool activities. Mining itself is recognized as a component of turnover, not the issuance of digital currency.

Only registered Russian legal entities and individual entrepreneurs are entitled to engage in mining. Individuals who do not exceed the energy consumption limits set by the Russian government do not need to be registered to engage in digital currency mining.

According to the document, foreign digital financial assets can be traded on Russian blockchain platforms, and the Russian Central Bank has the right to prohibit the issuance of individual issuances if it finds that they pose a threat to Russia's financial stability.

Previously, Putin discussed the introduction and use of digital currencies with the government at a meeting on economic issues. He pointed out that this is a promising economic field and Russia must "seize the opportunity" to quickly establish a legal framework and regulations, develop infrastructure, and create conditions for the circulation of digital assets.

The new mining regulatory policy will be the responsibility of the Russian Central Bank, the Ministry of Finance and the Russian Cabinet, who will develop more precise regulatory content in the coming months. The bill also prohibits large-scale cryptocurrency advertising in Russia.

The law will enter into force ten days after its official publication, except for provisions that specify an effective date.

Russia's legalization of mining has long been on the horizon

Russia's newly introduced mining legalization bill has actually been around for a long time.

As early as December 14, 2023, the Russian Ministry of Finance proposed a new bill seeking to legalize BTC mining and establish a mechanism for selling mined currencies.The bill includes provisions prohibiting cryptocurrency advertising and requires cryptocurrency sales to be conducted through foreign platforms, excluding the use of Russian information infrastructure. Both the Ministry of Finance and the Central Bank of Russia support the recognition of cryptocurrency mining as an industry and the use of cryptocurrencies for settlement of foreign economic activities within the framework of experiments. Under the proposed bill, cryptocurrency miners can obtain digital currencies through foreign systems or dedicated platforms established for experiments. In either case, miners must report these transactions to the Federal Tax Service. The central bank suggests that the sale of mined cryptocurrencies be limited to non-residents and can only be conducted through foreign infrastructure.

On May 6, 2024, Anton Gorelkin, Chairman of the Financial Market Committee of the Russian State Duma, stated that he does not support a complete ban on the circulation of cryptocurrencies in Russia, explaining in a post on Telegram that the restriction is not intended to ban the use of all cryptocurrencies, but to regulate the establishment of cryptocurrency exchange platforms within the legal framework of Russia. Anton Gorelkin also believes that the establishment of legal crypto infrastructure in Russia is affected by geopolitical realities. This requires consideration of factors related to international relations. He went on to add that allowing such infrastructure could subject Russian businesses to Western sanctions. In addition, Anton Gorelkin also pointed out that this restriction may be lifted in the future, stating that users can still use foreign cryptocurrency exchanges and over-the-counter trading services as before. However, the impact on many over-the-counter cryptocurrency services in Moscow is uncertain.

In July 2024, Russia considered including the subject of stablecoins in an upcoming bill, allowing the official use of stablecoins to complete cross-border payments. Alexey Guznov, deputy governor of the Bank of Russia, announced that a proposal had been submitted and the issue was currently under discussion. The Ministry of Finance also confirmed this.

On July 13, 2024, BITCOINLFG revealed on the X platform that sources said that Russian President Vladimir Putin may make a major statement on Bitcoin and cryptocurrency in the coming days.

On August 3, 2024, Golden Finance reported: Anatoly Aksakov, Chairman of the Financial Market Committee of the Russian State Duma, predicted that at some point in the future, citizens will be able to exchange Bitcoin and digital rubles, and a P2P market based on the digital ruble will be needed to achieve this goal.

In summary, Russia has laid a lot of groundwork for the introduction of the new mining bill. The introduction of the new regulations was actually expected.

Turning point: Russia-Ukraine conflict, sanctions and national competition

Russia's crypto asset regulatory policy was not very conducive to the development of the industry in the early years. So, what made Russia's attitude towards cryptocurrencies change from "no support" to "mining legal"?

On December 10, 2020, Putin signed a decree prohibiting certain Russian officials from holding any cryptocurrencies. In December 2021, the Russian Central Bank warned of the risks associated with digital assets and even proposed a complete ban on cryptocurrency mining and trading.

However, on February 24, 2022, the full-scale Russian-Ukrainian conflict broke out, and this war can be seen as a turning point in Russia's attitude towards cryptocurrencies.

According to the BBC, the United States, the United Kingdom, the European Union, as well as Australia, Canada and Japan have imposed more than 16,500 sanctions on Russia since the full-scale outbreak of the Russian-Ukrainian conflict.

Their main target is Russian funds - $350 billion (£276 billion) worth of foreign exchange reserves have been frozen, accounting for about half of Russia's total foreign exchange reserves.

The EU said that about 70% of the assets of Russian banks have also been frozen, and some banks have been excluded from the Swift international funds clearing system, which provides secure and efficient communication services for financial institutions.

According to the International Monetary Fund, in 2022, Russia's GDP growth rate was -2.1%. In 2023, Russia's GDP growth rate was 3.6%. In 2021, before the start of the Russian-Ukrainian war, Russia's GDP was 4.7%.

It can be seen that in the centralized international financial system, Western sanctions have indeed caused Russia to suffer an economic winter. Faced with multiple rounds of economic sanctions, Russia finally chose to embrace cryptocurrency.

In 2022, Putin believed that Russia had some advantages in cryptocurrency mining, and cryptocurrency mining should be taxed and regulated, and supported limiting mining to areas with excess electricity, such as Irkutsk, Krasnoyarsk and Karelia.

On February 13, 2022, Russia amended the "On Digital Currency" bill to restrict non-qualified investors from purchasing cryptocurrencies, stipulating that they must pass an exam before purchasing. Those who pass the exam can purchase up to $7,000 worth of cryptocurrencies per year, and those who fail the exam are limited to $600. The bill also defines digital currency as property, providing a legal basis for cryptocurrency payments.

On April 20, 2023, Elvira Naiullina, head of Russia's regulatory agency, said that the Central Bank of Russia is preparing a bill that will introduce an "experimental legal system" that will allow cryptocurrencies to be used exclusively for import and export transactions. As part of the regulation, new tax laws will be introduced for miners. The central bank's plans include establishing a dedicated organization responsible for cryptocurrency mining and processing payments for cross-border trade agreements.

In November 2023, Russia developed a tool to help crypto miners evade sanctions, which will help Russian companies make cross-border payments. Anton Tkachev, a member of the Russian State Duma Committee on Information Policy, Information Technology and Communications, said that the country's Ministry of Industry and Trade has successfully developed "a tool for conducting industrial mining activities." He claimed that cryptocurrencies can help Russian companies evade Western sanctions when trading overseas.

The Central Bank of Russia recently suggested that companies use cryptocurrencies and digital assets to mitigate the impact of Western sanctions following the Ukrainian conflict. Elvira Nabiullina, the Governor of the Central Bank of Russia, acknowledged that payment issues are crucial to the Russian economy and emphasized the role of new financial technologies in creating unprecedented solutions.

Russia's trade relations with many countries face difficulties due to sanctions against major Russian financial institutions. Nabiullina said: "New financial technologies have created opportunities for plans that did not exist before. That is why we have relaxed our stance on the use of cryptocurrencies in international payments, allowing the use of digital assets in such payments."

On the other hand, the United States has begun to fully embrace cryptocurrencies, as can be seen from the US SEC's approval of Bitcoin spot ETFs and Ethereum spot ETFs; US presidential candidates have expressed their support for cryptocurrencies. National competition is intensifying in how to treat cryptocurrencies.

The United States' response to Russia's evasion of sanctions through cryptocurrencies

On the one hand, Russia has found a shortcut to evade Western sanctions through cryptocurrencies. On the other hand, the United States will also begin to worry about Russia's efforts to evade sanctions through encryption.

In July 2024, Congressman Brad Sherman (D-CA) questioned Yellen about Russia's use of cryptocurrencies and stablecoins to evade Western sanctions. "The Russian Central Bank has urged the use of cryptocurrencies to evade Western sanctions. There is no particular advantage to stablecoins because it is stable, you cannot make money by holding it, and it generally does not pay interest - certainly not the interest you earn on a money market fund. Its only advantage is to evade our sanctions and other laws, including tax laws, and I hope that when you impose sanctions on Russia, you will not promote this by promoting stablecoins."

Yellen replied: We are very concerned about the use of cryptocurrencies and stablecoins. We don't think what Russia is doing is a big deal, but as our sanctions get tougher, it becomes a concern.

Summary

Russia's adoption of new mining regulations is an important step to break through the Western economic blockade. It is true that Western sanctions have had a serious impact on the Russian economy, but Russia has chosen to embrace the decentralized world. In this emerging financial gateway, the spirit of equality and freedom behind Bitcoin may bring hope of rebirth to the Russian economy. The crypto world will also be more realistic with the participation of "Polar Bears", showing the charming appeal of the crypto punk world.

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