Russia’s Ring-fenced Approach to Bitcoin and Other Cryptocurrencies Is Intended To Boost the Profile of the Digital Ruble

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Bitcoin (BTC), the veritable ringleader among all cryptocurrencies, is currently facing a trifecta of distinct headwinds, consisting of a backlash over BTC's carbon footprint, increasingly stringent regulatory posture, and the supposed role of cryptocurrencies in undermining the sanctions regime on Russia. Collectively, these headwinds have served to dampen the overall euphoria not just in Bitcoin but also in the entire crypto space.

Of course, as we had noted in a dedicated post, a large proportion of Bitcoin miners are increasingly pivoting toward green energy sources, thereby reducing the carbon footprint of the world's premier cryptocurrency. In fact, back in September 2020, the University of Cambridge estimated that around 39 percent of Bitcoin's total energy consumption, which currently averages at 89.78 billion kWh of electricity per year, according to a recent report by Crypto Carbon Ratings Institute (CCRI), was carbon neutral. More recently, a green Bitcoin mining pilot project was launched by Block, Tesla, and Blockstream. Expected to go live in Texas later this year, the project will utilize the solar panels and the attendant energy storage technology sourced from Tesla and serve to demonstrate the economic feasibility of green crypto mining projects.

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While Bitcoin's carbon footprint issue is currently being actively tackled, the headwinds related to increased regulatory glare as well as concerns around tax evasion, money laundering, and sanction evasion persist. Against this backdrop, Russia has emerged as an interesting case study. Let's delve deeper.

Bitcoin and the Sanctions on Russia

In light of Russia's unprovoked aggression in Ukraine and the attendant western sanctions on its financial system, it is hardly surprising that Bitcoin and other cryptocurrencies are quite popular in Russia. In fact, Russia's prime minister Mikhail Mishustin recently claimed that around "10 million young Russians" have already opened crypto wallets. This equates to around 7 percent of the country's population.

Given this elevated level of crypto penetration in Russia, the concerns emanating from certain western quarters on the ability of Bitcoin and its counterparts to facilitate sanctions evasion are pertinent, even if quite erroneous.

Quite frankly, the entire crypto space, including Bitcoin, lacks the kind of liquidity that would seriously hamper the western sanctions regime. As per a recent report by the crypto analysis firm Chainalyses, the combined supply in free float – as indicated by the total value of a given crypto asset held by liquid entities – for Bitcoin, Ethereum, and Tether equates to just $296 billion. For comparison, Russian oligarchs are estimated to possess assets worth $800 billion. Moreover, given this limited liquidity profile, Chainalyses estimates that Bitcoin sales of just $1.46 billion would plunge its price by around 10 percent.

But what about mixers? As a refresher, mixers pool cryptocurrencies from varied sources and then re-distribute this pool in a random manner such that each user ultimately receives an amount equal to what was invested in the pool. However, mixer service providers again face the issue of limited liquidity, with the daily transaction metric averaging at around $30 million over the past year and recording a high of $160 million on the 05th of December 2021. Consequently, even if Russian oligarchs are using mixer services to the tune of $160 million per day, Chainalyses estimates that it would take them 5,000 days or 13.7 years to launder the entirety of their wealth. Consequently, concerns around Bitcoin and other cryptocurrencies facilitating mass sanction evasion appear to be unfounded.

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Russia's Ring-fenced Approach to Cryptocurrencies and the Digital Ruble

This brings us to the crux of the matter. Reports began to emerge last week that the Russian ministry of finance was working on a proposal to legalize payments in Bitcoin and other cryptocurrencies. However, a closer perusal of this situation leads to a markedly different conclusion. A report in the respectable Russian media outlet Kommersant provided the impetus behind a decent-sized barrage of news bulletins on this issue. However, as was recently noted by Cryptonews, the Kommersant report does not imply that Bitcoin and other cryptocurrencies are about to become legal tender in Russia. The Kommersant report noted (translated by Google):

"According to the draft law, digital currency can be accepted "as a means of payment that is not the monetary unit of the Russian Federation", as well as an investment …."

As per our understanding, the Russian ministry of finance is devising a comprehensive strategy to regulate Bitcoin and other digital assets. Given the high penetration of crypto assets in the country, Russia presumably does not want to further antagonize its population by outrightly banning these assets. However, the overarching strategy remains to limit further growth in the adoption rate by imposing a stringent regulatory regime. The Kommersant report stated:

"The document establishes the terminology associated with digital currency, the legal framework for its circulation and issue, and a number of other aspects. It introduces a large number of requirements for identification, accounting and certification …."

It then goes on to note that the proposed bill establishes stringent regulatory requirements for crypto exchanges:

"For example, the creation of a separate structural unit, the preparation of annual reports, requirements for management bodies, requirements for internal control and audit, and others. Operators must be included in a specialized register, defined as AML / CFT entities, and their activities will be licensed and controlled by an authorized body, which will be determined by the Russian government. They will also have to maintain registers of owners of digital currencies, as well as store and daily backup trading information."

In light of this harsh regulatory glare, the uptake of Bitcoin and other crypto assets is expected to remain relatively muted from here onwards. This, of course, syncs nicely with Russia's goal of introducing a digital Ruble.

The Russian Central Bank is currently conducting a pilot test of its digital Ruble initiative, with three banks already onboarded in this phase. Banking apps are currently the only gateway to access the electronic version of Russia's sovereign currency.

In light of the granular control that a state can exercise over the lives of its citizens by imposing a digital legal tender, including increased monitoring and surveillance, it is hardly surprising that Russia and a host of other countries, including China, the EU, and even the US, are moving in this direction and away from Bitcoin. For Russia though, the stakes are much higher. For instance, the Minister of State Duma, Sergei Mironov, recently urged the federal government and the central bank to make the digital ruble a part of Russia's official FOREX reserves to counter sanctions.

The fact that a digital Ruble will not have to navigate through the SWIFT network of global banks, from which Russia was ignominiously evicted a few weeks back, does give rise to the possibility of sanction evasion. However, the huge sway that the Russian central bank exercises over the currency would render it unpalatable for a wide swathe of the globe, thereby reducing the effectiveness of such a measure.

It is for this reason that we believe that Bitcoin would continue to be valued by ordinary Russians as a viable hedge against state overreach, even in the presence of a stringent regulatory regime.

The co-founder of Paypal and Palantir, Peter Thiel, recently made waves when he predicted that the price of a Bitcoin will eventually increase by "100x' to over $4 million. While not as sanguine, we do believe that the future of Bitcoin remains bright as its headwinds fizzle amid the ever-increasing focus on sovereign digital currencies in various jurisdictions and the attendant negative implications on financial independence and privacy of citizens worldwide.