Russia has long had a love-hate relationship with cryptocurrency. Authorities have been wrangling with exactly how to regulate the sector for over three years.
And uncertainty over the nature of the legal status of digital currencies, blockchain and products using DLT tech has deterred entrepreneurs from opening up in the country. But that might all be about to change.
On 28 January 2021 the new Law on Digital Financial Assets and Digital Currency comes into force.
This long-delayed legislation gives cryptocurrency legal status as an asset, but bans their use as a payment mechanism. As Oxford University’s faculty of law asks: does this move represent a step forwards, or another step towards greater restrictions? One thing is for sure. It has opened the floodgates to a legal industry and legal challenges to government and central bank policy.
During the 2017 to 2018 ICO boom, it’s clear that Russian crypto entrepreneurs lead the world. According to research by Quartz, Moscow-based CEOs and founders far outweighed those based in Silicon Valley, London or SIngapore. But innovative startups in Russia have not enjoyed the same kind of backing from their government or regulators as elsewhere in the world.
Until now, there has been no fintech regulatory sandbox, for example, where digital asset, cryptocurrency or blockchain companies can test their products in a live market environment without falling foul of shifting regulations.
But opening a new regulatory sandbox was an explicit part of the third bill adopted as part of the Law on Digital Financial Assets and Digital Currency.
This is should be exciting news for Russian blockchain and fintech firms. While fintech itself gets no specific mention, in favour of medical devices, online goods, transport, and architecture, there is an opening in the addition of financial markets to the sandbox list.
The law has allowed authorities to crackdown more aggressively on perceived breaches.
In August 2020 the first shot across the indsutry’s bow came when telecoms regulator Rozkomnadzor blocked BestChange.ru, an aggregator of over 400 cryptocurrency exchanges. At the time it was one of Russia’s largest crypto-focused websites with over 3.3 million users a month.
It is still possible for private citizens to hold cryptocurrency as a personal investment, but they are limited to a relatively small 600,000 rubles (£6,000) per year. Cryptocurrency remains more popular than gold as an investment tool, recent surveys suggest.
Then in October, popular Finnish peer to peer exchange LocalBitcoins was banned from view by Russian IPs. While, of course, sites like this are still available by using VPNs, these kinds of moves indicate a desire by the Russian state to bring the crypto industry under stricter centralised control.
The situation in Russia echoes that of India. President Vladimir Putin, his central bank, the courts, and the State Duma Parliament have gone back and forth over how the country should treat cryptocurrency. So, just like in India, business owners have had to battle with the dual and competing issues of a massive potential market but a highly sceptical government.
And just as in South Asia, the Russian Federation has kicked the can down the road repeatedly on forming solid laws. As such, entrepreneurs have been left to lobby the government and central bank and watch for tiny clues as to which side of the fence regulators will come down on.
So when the Duma finally agreed the letter of the law, it was a time for cautious industry celebrations. That’s because certainty is more important even than a government’s explicit support in order to effectively grow a business.
And while explicit terminology on cryptomining or security tokens remains notably absent from the Law, at least now with some regulations laid down in black and white, and the prospect of a regulatory sandbox, Russian crypto companies can start to work within the rules in order to grow their sector profitably.