Russia Tightens Control Over Bitcoin

Russia Reorganizes Mining with a New Law Effective from November. While many Bitcoin media outlets received the law positively, a guest author who knows the subject from practical experience explains why this is a misconception.

Russia has reportedly legalized crypto mining with a new law. Most media outlets simply echo this news uncritically from Russian government sources, often satisfied with a headline that’s “good for Bitcoin,” even when it involves Russia.

One of our readers, who knows more about the topic from personal experience, sees it much more critically. The new law is akin to a ban on exchanges and wallets and attempts to force the vital but also rebellious Russian Bitcoin scene into Moscow’s state agenda.

Therefore, I am publishing here a commentary jointly worked out with him.

A guest post by an anonymous reader

The Current Legal Situation

To understand what the new law, effective from November 1, entails, one must understand the current legal situation.

Firstly, Bitcoin mining in Russia has not been illegal so far. For a long time, there was uncertainty, and mining operated in a gray legal area. With the “Digital Financial Assets Law” (DFA Law) effective from January 1, 2021, mining was first defined as an entrepreneurial activity that could be regulated and taxed.

Consequently, Russia began to regulate mining more strictly, especially regarding energy consumption and taxes. Additionally, discussions and legislative proposals aimed to regulate mining more explicitly at the national level.

Buying, selling, and owning cryptocurrencies such as Bitcoin is currently legal for private individuals. However, they are not allowed to use these as legal tender. You cannot buy goods and services with Bitcoin; the Ruble remains the only official currency in Russia.

The new law, coming into effect on November 1, 2024, aims to better control the energy consumption and taxation of mining. Due to its abundant cheap energy sources, Russia has become an important location for Bitcoin mining, especially in regions like Irkutsk and Krasnoyarsk.

A Ban on Public Exchanges

To correctly assess the soon-to-be law, a critical look at the law signed by President Putin in early August 2024 (Federal Law of 08.08.2024 No. 221-FZ) is necessary. It can be read on the website for the official publication of legal acts (http://pravo.gov.ru/).

First: The new law has nothing to do with further legalizing Bitcoin in Russia, and it is not a step toward a more liberal economic order. Quite the opposite, in fact.

Russia continues to forbid its citizens to use cryptocurrencies as a means of payment or exchange for domestic transactions. Furthermore, crypto exchanges face massive restrictions in working with their Russian private customers.

The law states: „In the Russian Federation, it is prohibited to offer digital currencies or goods (works, services) to an indefinite circle of persons to organize or facilitate the circulation of a digital currency.“ Practically, this equals a ban on public exchanges and wallets.

Additionally, the law bans any advertising for digital currencies, including for goods (works, services) „to organize or facilitate the circulation of a digital currency.“

Russian citizens wishing to buy Bitcoin already face significant restrictions, as I can confirm from personal experience. Ruble deposits via bank transfer are only possible with a few providers, and this is no longer an option at most crypto exchanges.

The new law applies to all domestic and foreign exchanges offering their services to Russian citizens. Hence, it seems that any crypto exchange will be de facto forbidden to transact with Russian individuals. However, how strictly this law will be enforced remains to be seen.

Miners as Government Tools for Sanction Circumvention

Now, moving on to what the international press has reported: Mining.

Indeed, the new law allows licensed and monitored miners to mine Bitcoins from September. But this is only for use in international transactions.

In coordination with the Central Bank, the government will formulate requirements regulating mining by natural and legal persons. The government will have the power to ban cryptocurrency mining in certain Russian regions.

Legal entities and individual entrepreneurs mining cryptocurrencies, as well as operators of mining infrastructure, will need to register with a special registry maintained by the Russian Ministry of Digital Technologies, Communications, and Mass Media.

Citizens who are not individual entrepreneurs and mine cryptocurrencies will be exempt from this new regulation if their energy consumption does not exceed a certain limit. However, they must still provide the Federal Financial Monitoring Service of Russia with information about the mined currency and the identification addresses.

So yes, Russia allows mining – but under stringent regulations and thorough oversight.

Digital Financial Assets

Besides these two key sections on trading and mining, the law contains further paragraphs.

It specifies, for instance, the prohibition on using digital currencies for financial settlements. This does not apply to currencies mined by Russian miners.

There is also a clause on digital financial assets, presumably referring to „crypto-assets,“ such as bonds or other securities represented as tokens. The law allows their trade, even if they are based abroad, on Russian blockchain platforms. However, the Bank of Russia (the Central Bank) will have the authority to ban the placement of individual issues if it deems them a threat to financial stability.

The regulatory authority will be entitled to set additional requirements for foreign digital rights that can be placed within Russian systems. The Central Bank will also have the authority to set requirements for persons allowed to acquire foreign digital financial assets, while the law explicitly prohibits their acquisition by Russian citizens without regulatory approval.

In essence: This is about a regime that allows domestically monitored miners to generate “hard currency” in Bitcoin to circumvent sanctions and procure urgently needed goods (e.g., weapons, components for domestic arms production) to finance the ongoing aggressive war against Ukraine. Russia hopes to buy simple raw materials or war goods abroad using such generated crypto-assets while simultaneously fearing losing control.

This model is seen in countries like Iran: the government wants to use Bitcoin but bans it for its people. What started as a movement for people’s emancipation from the state is intended, according to the Kremlin, to benefit only the state, not the people.

Monetary Self-Defense

Indeed, the Russian government has legitimate reasons to fear Bitcoin and other cryptocurrencies. The enormous capital outflow since the invasion of Ukraine is a significant problem for the stability of the already severely weakened Ruble and, ultimately, the government. Many Russians want to secure their money. Out of Russia, out of the Ruble – into Bitcoin.

Although stablecoins and other cryptocurrencies are offered on exchanges, the P2P marketplaces primarily focus on Bitcoin.

Many Russians buy gold and the increasingly scarce Dollars and Euros in small quantities and Bitcoin. The goal: to protect their assets from rampant inflation. Officially, Russian inflation currently stands at 18 percent per year. Unofficial estimates suggest a much higher rate. The not unreasonable fear is that the Ruble will follow the path of the Turkish Lira, which inflates by up to 80 percent annually. Thus, fleeing into Bitcoin is an act of monetary self-defense.

Another reason for the growing interest in Bitcoin is transfers abroad. Many expats and guest workers financially support relatives abroad. Since the invasion of Ukraine, up to a million people have fled the country, mostly young, educated, tech-savvy individuals.

With sanctions and measures, the government tries to hinder capital flight. Ironically, the West involuntarily supports this with financial sanctions. Resourceful Russians have founded exchanges in other jurisdictions (Asia, Arab region) where neither US sanctions nor Russian restrictions apply.

Cash Deposits and AML Tools

The Bitcoin scene in Russia is vibrant but not in the way the government wishes. Therefore, there are good reasons to believe that undesirable uses will be further suppressed by the new law.

But most Russians are used to operating in a legal gray area and continue to do so. It is relatively common to deposit Rubles in cash, for instance, at Garantex in Moscow. You bring or send the banknotes there and then receive credit on the exchange. Alternatively, you get a coupon you can share. Fees are somewhat opaque but quickly reach 10-15 percent.

US sanctions against exchanges like Garantex complicate matters for foreign transaction partners. AML tools must be used to ensure that no “tainted” coins are acquired and reach Western exchanges. However, it is challenging to avoid that Western sanctions inadvertently punish those trying to secure legal funds. Examples include exiles or Russian citizens living abroad for various reasons.

Terror Against Their Own People

The supposed legalization of mining in Russia, sometimes celebrated by the Bitcoin community as „advancements in technological openness,“ has nothing to do with it. This is pure propaganda by the experienced Russian institutions, most notably Russia Today, the mouthpiece for foreign audiences that now finds receptive ears in many Western circles.

This topic touches on a much larger issue: the fact that ordinary Germans practically have no idea under what adverse conditions most Russians live in their own country, composed of over 190 ethnic groups and nationalities with a core group of about 77% ethnic Russians. In place of „knowledge,“ there is often „romanticizing,“ seeking a metaphysical connection to Russia rather than realities.

Few Germans know how much Russia has institutionalized terror against its own people since the Putin era. Within 15 years, all democratic (human) rights of the citizens have been practically abolished, the separation of powers effectively eliminated, and lawlessness and arbitrariness became standard.

Many Germans, but also sympathizers of other nationalities, want to deny this and fall for the various propaganda instruments of the Russian government all too willingly. Parties like the AfD and the „Bündnis Sarah Wagenknecht“ (BSW) seem willing accomplices of the Putin regime with their irrational assessment of the Russian war of aggression.

Anyone who actually believes to find an ally in this state has nothing to do with Bitcoin and its values.