Russian government to devise new cryptocurrency regulations

Russian leadership has finally made a move to clarify its approach to blockchain, cryptocurrency and ICOs. But despite the long-awaited end to a protracted bout of vacillating, the Kremlin’s position can hardly be considered good news for either miners or cryptocurrency users.

What happened?

After holding discussions with Anton Siluanov, the Finance Minister, Andrey Belousov, the Kremlin’s adviser, and Elvira Nabiulina, the head of Russian Central Bank, President Vladimir Putin issued instructions concerning cryptocurrency regulations.

Firstly, Putin ordered the government to clarify in statute the status of cryptocurrency, tokens, smart-contracts and blockchain technology.

Secondly, the government is ordered to make sure that the miners of bitcoin, ethereum, and other virtual currencies will register with the officials and pay taxes.

Thirdly, the officials will lay down regulatory principles for ICOs (initial coin offerings), with the practice used in IPOs (initial public offerings) taken as a basis.

The Kremlin furthermore ordered the government to create a special “sandbox” — a trial regulatory space based on the instruments of the Central Bank — to create environment for testing the new financial technologies, products and services.

Finally, at Putin’s request, the government, in conjunction with the Bank of Russia, is planning to devise the “single payment space” within the Eurasian Economic Union (Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia) using up-to-date technology.

To oversee the implmenenation of those reforms, the Kremlin appointed a duo of top officials. Dmitry Medvedev, the Prime Minister and technology enthusiast, will work together with Elvira Nabuilina, a cryptocurrency skeptic who once referred to the non-fiat assets as pyramid scheme.

I want to pay attention to four main facts.

1. Russia has chosen the American approach to ICOs regulation. In the US, cyrptocurrency regulation is stringent. The rules got tougher after April 2016. Then The DAO, a decentralized blockchain-based investment fund, earned about $150 million from token sales. A month later, hackers stole some $50 million off The DAO due to the breach in the code. Consequently, the U.S. Securities and Exchange Commission became more vigilant other projects. It closed down public security auctions organized by several companies — First Bitcoin Capital Corp., CIAO Group, Strategic Global и Sunshine Capital. All in all, American leadership decided to ‘tighten the screws’, introducing tough requirements that ICOs have hitherto had to abide by.
2. Coming back to the regulations proposed by the Russian government, I do have reservations regarding its understanding of either the technological side of the cryptoworld or how the law itself should be implemented. To begin with, registering all miners is impossible from the technological point of view. True, the officials can track down the large-scale miners who need a lot of electricity for their operations. But what about smaller players who mine currencies other than Bitcoins, and thus do not need a lot of resources? How do you track them down? The idea of controlling the entire mining industry appears to me as unfathomable as, say, controlling the rental housing market. Flat owners carry on making deals off the books, refusing to either buy patents or register with the officials. Random checks of owners’ properties, in the meanwhile, have yielded little results.
3. Another question is whether the victims of hackers may suffer as a result of the government’s actions. Many cyber-criminals create botnets by hacking into ordinary users’ personal devices and use those to mine cryptocurrency. Will those inadvertent miners, too, face punishments for not registering with the officials?
4. Further, it may be worth mentioning the timeline for carrying out Putin’s orders, which is rather intriguing. The current deadline is set on July 1 2018. That means that the government was careful not to cause public outrage on behalf of the miners before the Presidential election due to take place in March next year. Little wonder perhaps, given that the Kremlin’s reluctance to impose taxes on the economically active section of the population.

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