Five Years of Crypto and Blockchain Life in Russia

Svetlana Hardisty, CEO of—a Russian blockchain developer in the energy, finance, and manufacturing sectors—made a brief overview of the history of cryptocurrencies in Russia.

The country took several years to realize that blockchain is not so much a threat of replacing “traditional money” with a cryptocurrency, but a technology that can radically change the world.

Indeed, blockchain and cryptocurrency are so closely related that sanctions against one can automatically lead to repression of the second. And that almost happened. Five years ago, in most ministries and departments, blockchain was for some reason associated exclusively with cryptocurrency. Some suggested prohibiting, restricting, regulating, and penalizing the circulation of the “cryptos” and even criminalizing it; what they also suggested was paying taxes from the sale of crypto. Others have several times raised the issue of creating their own cryptocurrency in particular and the development of blockchain technologies in general.

Perhaps, things had relatively quieted down only towards the end of last year.

2014–2015: Cryptocurrency as Money Substitute

In Russia (as elsewhere) blockchain began with Bitcoin. The “official” launch turned out to be quite tough. Already in early 2014, the central bank of Russia responsibly stated that it intended to consider the exchange of Bitcoins associated with money laundering and the financing of terrorism. And it considered Bitcoin and other cryptocurrencies to be money substitutes. Separate outbreaks of understanding were present here and there, though. For example, the head of Sberbank, German Gref, spoke in an enthusiastic manner about the technology, and not about Bitcoin. At that time, however, Bitcoin and blockchain were on equal footing as terms. Even at the first Russian blockchain event, the Moscow Blockchain Conference that was held in 2014, cryptocurrencies were discussed exclusively along with the problems of their storage and how to pay with them.

The substitution of concepts was finalized. Quite quickly, the ministry of finance, on behalf of the first vice-premier of the Russian government, Igor Shuvalov, developed a draft law on administrative responsibility for the production of substitutes, software for mining, the exchange of cryptocurrencies, and even the dissemination of information about it. The fines began from 5 thousand rubles for citizens and ended with 1 million for legal entities.

They wanted to introduce criminal responsibility, but after thinking a bit, they refrained from the idea.

The affair faded as quickly as it had risen. The bill disappeared in the depths of the federal portal, only to reappear after a while.

This disturbing background, however, influenced the general state of the blockchain industry. For example, the Russian blockchain project of the cryptocurrency Emercoin, launched at the very end of 2013, did not display its token on the exchanges for more than two years, developing “in the shadows.”

In 2015, they talked again about the topic of cryptos and blockchain, as before, without optimism, but without categorical denial. The head of the central bank, Elvira Nabiullina, already delineating the concepts of the technology and its derivative, cautiously stated that cryptocurrencies could be used for questionable operations, and again referred to money substitutes. And German Gref noted that his company was not averse to trying blockchain and introducing it into work processes. By the way, it is well-known that there were attempts by Gref to invest in Bitcoin (apparently, successful ones at that) and even buy T-shirts using this cryptocurrency. In 2011, it cost him 12 BTC (at the rate of $0.38 per 1 BTC).

Meanwhile, the Qiwi platform decided to form a special department without waiting for any official opinion. Later, the department was transformed into a full-fledged company that began implementing the technology to start their own payment system. They even announced the launch of the development of their own digital currency, the bitruble, which was going to be sent into circulation in 2016.

But things went awry. The issue still had to be coordinated with the central bank, which did not express its final opinion but created a working group to study blockchain.

While the regulator was studying the technology, Roskomnadzor began blocking crypto exchanges, trading platforms, and sites connected with cryptocurrencies.,, were blacklisted. A decision of the St. Petersburg court blocked several dozen more exchanges.

“Black” 2016

At the very beginning of 2016, the head of the Russian investigative committee, Alexander Bastrykin, expressed his attitude to Bitcoin and other cryptocurrencies unequivocally. In short, it could be expressed as “Imprisonment!”

Bastrykin, just like the central bank, considered cryptocurrencies as substitutes, and next suggested that “interested agencies” together with him should develop a model of criminal responsibility for the issuance and turnover of cryptocurrencies. The Committee was concerned about the sharp increase in the Bitcoin rate (about 1,000% at that time) and the fact that crypto money was not backed by liquid assets. As if “normal” money was.

“The turnover of ‘money substitutes’ in the country has already reached 1% of GDP,” the investigative committee reported, fearing a further increase in turnover, and, as a consequence, a financial crisis and depreciation of the ruble.

Apparently, Bastrykin’s words received a lively response from the ministry of finance, because, by the spring of 2016, he had prepared a draft law on criminal liability, referring to article 72, paragraph 1 of the Constitution, “The monetary unit in the Russian Federation is the ruble. Monetary emission is carried out exclusively by the central bank. The introduction and issuance of other money are not allowed.”

The ministry of finance approached the problem radically. At the same time, with criminal responsibility, the ministry proposed to impose a ban on issuance and turnover of cryptocurrencies (amendments to the law on the central bank) and administrative responsibility (amendments to the Administrative Offences Code of the Russian Federation) in their project was already higher than previously planned in the form of a fine of up to 3–5 million rubles or suspension of activities for up to 90 days.

Then things got even more interesting. Suddenly, the idea of a state cryptocurrency resurfaced. This time, it was put forward by Rosfinmonitoring (an agency whose task is to counter money laundering). Pavel Livadnyi, deputy director of financial monitoring, told that negotiations were underway about emission. The release of the Russian cryptocurrency was to be entrusted to specially selected organizations, but with the beginning of its introduction into the circulation, the circulation of all other cryptocurrencies would be banned.

The Wind of Change from the State Duma

When faced with such a picture, experts became worried and said that the ban on cryptocurrency meant, in fact, a ban on the prospective blockchain technology. And that that would seriously slow the development of the technology in the country as a whole since it would discourage potential investors.

By that time, it became already clear to many that blockchain was not a cryptocurrency only. The Waves blockchain platform had declared itself as a crowdfunding system and held an ICO, during which it raised more than $15 million. Other projects developed. A scientific approach to the technology started forming, for example, at the Perm State National Research University, and they even set up a laboratory to study and improve the technology.

In the fall of 2016, State Duma deputy Andrey Lugovoy spoke about how to arrange regulation through the need to develop a concept of turnover of cryptocurrencies. The concept had to include mandatory identification of users, licensing of crypto exchanges and crypto exchangers, and the process of currency turnover had to be controlled in accordance with world standards in the field of combating money laundering (FATF standards).

The Federal Tax Service Holds . . .

At the end of 2016, the tax authorities finally spoke on the topic of cryptocurrencies. The federal tax service said that, firstly, there were no definitions for cryptocurrency or monetary substitutes in the legislation. Secondly, there was no ban on operations with cryptocurrency. Thirdly, transactions with the purchase and sale of cryptocurrencies were currency operations, but there were no control systems over them, and they still needed to be created. Someone considered the position of the federal tax service as an official statement; some considered that they were not generally against cryptocurrencies. There was still no clarity on the matter.

2017. And There It Goes

In 2017, when Bitcoin was preparing for its leap to $20,000, the authorities started talking about legalization openly, separating the terms cryptocurrencies and blockchain.

In March 2017, Prime Minister Dmitry Medvedev instructed the two ministries to conduct an analysis on the use of the blockchain technology in the state administration. In the summer, a working group on the use of the blockchain technology in public and corporate governance was established under the leadership of First Deputy Prime Minister Igor Shuvalov, and later another working group (for estimating risks of turnover of cryptocurrencies) was organized by the State Duma.

Deputy Finance Minister Alexey Moiseev announced the possibility of legalizing cryptocurrencies in the fight against illegal money transfers. Moiseev called cryptocurrencies “other property” and “financial assets” and stated that only qualified investors should work with them and only on the Russian exchanges. The exchanges are needed “to protect the rights of sellers and buyers,” and it turned out that the Moscow Stock Exchange had already begun to work on developing an appropriate infrastructure for trading.

If You Can’t Beat Them, Join Them!

Speaking in general, from the second half of 2017 the government of the Russian Federation has followed the principle “if you can’t beat them, join them.” In October, President Vladimir Putin instructed the government, together with the central bank, to deal with the cryptocurrencies. The approach itself has changed. It turned out that the legal status should be received not only by a cryptocurrency, but also a smart contract, a token, a distributed ledger, that is, all the key elements of the blockchain technology. Mining is planned to be legalized and taxed. In this case, it is specially stipulated that the ruble remains the only legal tender in the Russian Federation.

Prior to the establishment of the rules, the central bank was instructed to create a special regulatory platform (“sandbox”) on its base in order to carry out approbation of “innovative financial technologies, products, and services.” All of the above is done as part of the implementation of the state program “Digital Economy” which should be completed by July 1, 2018.

In the meantime, another ministry, the ministry of communications, joined the discussion about cryptocurrencies, and it immediately came up with the initiative of taxing sales of “digital money” by citizens under personal income tax rates. The ministry of finance, of course, supported the idea and even made an official explanation of its position. The financiers referred to the fact that some special taxation regime for cryptocurrency has not been established; therefore it is necessary to apply personal income tax on their sales in accordance with general rules.

By the end of 2017, the first version of the draft law “On Digital Financial Assets” was presented. In January 2018, it was amended and is expected to be corrected more than once. Too many opinions have to be taken into account.

Meanwhile, the market turnover of blockchain projects in Russia, according to some estimates, was already approaching the volume of 1 billion rubles.

The Ministry of Finance: The Third “Cryptocurrency” Revelation

In early 2018, it became known that the ministry of finance had already once again drafted a bill on criminal liability for the turnover of “money substitutes,” recalling that the only means of payment in Russia is the ruble. “Sanctions for settlements in cryptocurrencies are tough,” Moiseev warned.

Before that, the topic of the cryptoruble resurfaced, and the initiator was the deputy of the State Duma from the Communists, Rizvan Kurbanov, who introduced the draft law “On the National Mining System” to the parliament, where, among other things, the cryptoruble was mentioned as a medium of exchange on the territory of Russia.

The blockchain technology is spreading rapidly and seems to be coming into fashion. All-Russian Centre for the Study of Public Opinion is using blockchain at exit polls, the federal antimonopoly service and Sberbank began exchanging documents on blockchain, the federal service of state registration, cadastre, and cartography (Rosreestr) started implementing blockchain when registering equity participation agreements in construction, and so on. Blockchain-powered projects are in demand among non-state actors of all sizes as more companies are studying the blockchain development and beginning to offer their services. It is no wonder as even communal services and Russian Railways have recently announced the use of blockchain in settlements for housing and communal services.

Preliminary Results of the “Crypto Battles”

As of March 2018, the official status of cryptocurrencies has not yet been defined, so there are neither conditions for its turnover nor responsibility for violating these conditions. Attempts to determine Bitcoin and other digital money as “money substitutes” did not yield any results as there is no definition of such a substitute yet. This was confirmed by judicial practice as, in February 2018, the Moscow Arbitration Court refused to include cryptocurrencies in the bankruptcy proceedings of an individual debtor.

Meanwhile, the central bank and the ministry of finance are closely engaged in law drafting, and the ministry of communications, in February 2018, published on a draft government resolution “On the Accreditation of Organizations That Provide the Opportunity to Issue Digital Tokens.”

Despite the fact that blockchain, as a technology, is growing and the number of blockchain projects is intensively multiplying, the absence of legal status for cryptocurrencies and other elements of the system is clearly hampering their full development.

It is expected that this status will be developed by July 1, 2018. Therefore, we have to keep an eye on the draft law “On Digital Financial Assets,” the “cryptocurrency” projects of the ministry of communications and other ministries, and keep monitoring all incoming amendments.

“Official” Attitude to Cryptocurrencies and Blockchain in Quotations

“Blockchain will revolutionize all industries without exception, from agriculture, ending with banks.”

2014, head of Sberbank, German Gref

“Money substitutes, in any case, are prohibited. I wanted to clarify that we are not prohibiting crypto technologies, we are studying them. Still, there is a big difference between cryptocurrencies and crypto technologies.”

2015, head of the central bank of Russia, Elvira Nabiullina

“Our goal is to exclude the circulation of cryptocurrency on the territory of Russia.”

2016, Deputy Finance Minister, Alexey Moiseev

“Experience has shown that virtual cryptocurrency is often used to finance terrorism, and cryptocurrencies do not have a centralized issuer, a single transaction control center, and are characterized by the anonymity of payments. In addition, as a result of the widespread distribution, these currencies can displace legitimate money from the market, which threatens the financial stability of the state. With this in mind, it is proposed to criminalize the illegal issuance and turnover of cryptocurrencies, as well as other monetary substitutes.”

2016, head of the investigative committee of the Russian Federation, Alexander Bastrykin

“We believe that for Russians, as for businesses, investing in cryptocurrencies involves a high degree of risk. We do not have the right to allow direct and easy access to such dubious assets for non-professional investors.”

2017, deputy chairman of the central bank of the Russian Federation, Sergey Shvetsov

“Cryptocurrencies cannot be closed in a chest and hidden under lock and key.”

2017, Deputy Prime Minister of the Russian government, Igor Shuvalov

“Blockchain for us is not the ability to generate the equivalent of banknotes, and in particular, maybe even in the first place, it is a mechanism that will provide a very professional, transparent, and fast public service.”

2017, Deputy Prime Minister of the Russian government, Igor Shuvalov

“The use of cryptocurrency as a money substitute is actively proposed for the sales of goods and services. In our opinion, this has a risk of undermining the circulation of money, and, of course, we will not allow the use of cryptocurrency as a money substitute.”

2017, head of the central bank of Russia, Elvira Nabiullina

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