Russia’s central bank goes to war: Is cryptocurrency a friend or foe?

In January 2022, the Central Bank of Russia (CBR) proposed a number of measures aimed at curtailing the country’s cryptocurrency market, which included a blanket ban on the use and mining of all cryptocurrencies. It pointed out risks posed by the volatile nature of cryptocurrencies to the financial stability of the country, the extensive use of crypto in illegal activity and the energy costs involved in crypto mining. However, the utility of blockchain technology didn’t escape the CBR. The following month, it announced that it had started the pilot stage of the digital ruble, its planned central bank digital currency (CBDC).

Following the Russian legislature’s decision to recognize the Ukrainian separatist states of Lugansk and Donetsk, however, the majority of Russian Duma MPs were slapped with financial sanctions by the European Union. In early March, in response to the events in Ukraine, the CBR was also hit with sanctions. It became apparent that further sanctions by the EU, United States and other Organisation for Economic Co-operation and Development (OECD) nations were likely to arise.

Sanctions-induced pivot

When formerly legal financial transactions with the West were criminalized, speculations as to the future of cryptocurrency in Russia abounded. According to Stanislav Tkachenko, a professor of international affairs and economics at St. Petersburg State University who has written extensively about monetary regulation, there had already been interest among policymakers in the future promotion of both the CBDC and existing cryptocurrencies.

Tkachenko pointed out that Russia was looking at how China was approaching the introduction of a state digital currency and believed that Russia would simply copy what China was doing. He noted that the Russian switch to partnering with China in bilateral trade would probably lead to higher transaction costs, as the commodities Russia sells are most commonly priced in dollars in international markets, and China prefers the exclusive use of renminbi for its own market. Traditional transactions would have to take place in rubles, dollars and Chinese yuan.

Tkachenko was optimistic about the prospects for cryptocurrency mining in the immediate future, as global sentiment toward Russian energy has soured, resulting in both sanctions and proposed additional sanctions. These, he explained, were driving global energy prices up but also left Russian energy producers without a global market to cater to. This could lead to both a more lenient attitude toward crypto mining within Russia and further attempts to restrict Russian access to the cryptocurrency market abroad.

CBDC problems

Any central bank digital currency has several major drawbacks, and a few more can be added in Russia’s case. First, the utility of anonymous transactions is lost. While the potential use of anonymous transactions for money laundering and the financing of terrorism has worried CBR regulators for decades, a CBDC would inevitably be targeted.

In the U.S. and the EU, operations carried out by six major Russian banks have been blocked: VTB, Novikombank, Sovcombank, Otkritie, PSB and Bank Rossiya. It is now impossible to transfer dollars and euros from their accounts to any country in the world, and the Visa and Mastercard cards issued by any Russian bank do not work abroad. However, the elimination of dealings with Russian banks hurts existing foreign business, which is something that couldn’t be said for a new state-issued cryptocurrency.

Another is that the Russian “brand” has fallen in value elsewhere in the world, with crypto exchanges being compelled to shut down coin wallets held by Russian individuals. While regulators have long feared that Bitcoin (BTC) would be used to pay for illegal darknet transactions, the association of the CBDC with Russia would render all usage suspect.

In 2017, President Nicolas Maduro announced the creation of the state-backed petro cryptocurrency in sanctioned-hit Venezuela,…