Raising The Iron Crypto Curtain — AAX Academy

Cryptocurrencies are gaining greater adoption as a means of payment and store of value and are being used to great effect, and in line with their virtue of anonymity, on DarkWeb resources and channels that are known for being the ‘shady’ part of the internet.

But while some countries like Iran and Japan are adopting favorable legislations for the development of mining and the use of cryptocurrencies for the broader strata of the population, the Russian Federation has adopted a law that came into force on January 2021, that, essentially, crosses out the possibility of using cryptocurrencies as the means of payment inside the country, though allows possession and trade as the commodity.

Too Much At Stake

The reasons why cryptocurrencies are being outlawed in some countries are quite evident and are directly related to their potential use as a means of payment for subverting existing sanctions regimes, purchasing illegal goods, or transferring illegally earned funds abroad into offshore accounts.

In this respect, it is important to note that in contrast to public perception (and much less so physical cash), cryptocurrencies such as Bitcoin are actually hardly used to fund criminal activities. According to a report by research firm Chainalysis, in 2019, criminal activity was represented by 2.1% of all transaction volume. In 2020, this number further fell to 0.34% (around $10 billion USD).

Cryptocurrencies are seen as some by tools that could destroy the existing fiat monetary system, and since all modern states, without exception, have long abandoned the gold standard and switched to national monetary systems with unlimited emissions, they approach cryptocurrencies with great caution. The massive exodus of populations to cryptocurrencies can be foreseen only upon adoption of their unlimited emissions, which would lead to the collapse of debt markets and hyperinflation — or some would argue, the other way around.

If it were to happen, the fight against cryptocurrencies would turn into a struggle for survival for states, and that would mean the adoption of an entirely different dimension of legislation aimed at not limiting the use of cryptocurrencies, but their total banning.

An irreconcilable attitude towards cryptocurrencies is by no means exclusive for China and India, as the countries of Western civilization are, though restrained yet, hoping to extract dividends from the technological aspects of the crypto revolution and the application of blockchain technologies. But such openness might only last until fiat monopolies come under threat. The rhetoric of US senators about the threat digital currencies of central banks pose to the US dollar and how they undermine the geopolitical influence of the United States, is not hollow wording, but a call to inevitable unison in more far-sighted visions that could spell difficult times for this emerging asset class. The reality, of course, is that the decentralized nature of cryptocurrencies makes it difficult to enforce any ban, except at touch points with banks and other regulated financial institutions.

From Russia With Law

Cryptocurrency regulation came into force in the Russian Federation on January 1. The law denies cryptocurrencies one of the main properties of money, as it does not recognize them as a means of payment.

The law defines digital financial assets as digital rights, the emission, accounting and circulation of which is possible only through making entries in an information system based on a distributed ledger, or a blockchain. Such assets can be used as pledges, for sale and purchase transactions, exchange of one type of digital asset for another, including those issued under the rules of foreign information systems, or for digital rights of other types.

The law also coins the term digital currencies, which, unlike digital financial assets, do not have an issuer and are classified by law as property with all relevant rights. Digital currencies are thus subject to personal income tax. Individuals registered as individual entrepreneurs and legal entities have the right to make records on the emission of digital financial assets and The Bank of Russia has the right to determine the characteristics of digital financial assets that unqualified investors can acquire and limit the amount of their investments in such assets. All transactions with digital financial assets will have to be made only through exchange operators, that are certified by the Central Bank — mainly banks and stock exchanges.

Russian citizens, foreigners residing in the country, as well as companies, are required to report on obtaining the right to dispose of digital currencies, including through third parties, submit reports on transactions with digital currencies and on balances of digital currencies annually no later than April 30, if the transaction amount exceeds 600,000 rubles. If the report is not submitted on time, the amount of digital currencies received or withdrawn, depending on which is greater, will be subject to a 10% fine, or 40% in case of non-payment or incomplete payment of the relevant tax. The tax authorities have also been granted the right to request bank statements on the transactions of persons suspected of violating the given law.

The Underlying Reasons

The Bank of Russia believes that such rules for regulating cryptocurrencies will allow for digitalizing traditional financial instruments and expanding alternative ways to attract investments, as well as protect investors and citizens from financial pyramids, online fraud, criminal activities in DarkWeb resources, and prevent the outflow of capital into offshores.

The Russian Ministry of Finance has even proposed a law that foresees imprisonment for violating the rules of cryptocurrency circulation. According to the proposed law, owners of cryptocurrencies can be imprisoned for up to three years with several other types of criminal punishment also proposed, such as fines of up to 2 million rubles, depending on the severity of the crime, however, this initiative was removed from the final version of the law. Cryptocurrency owners will face criminal liability if they do not report to the tax authorities on transactions with virtual money. The liability will come in penalties amounting from 100 000 RUB to 2 000 000 RUB depending on the volume of cryptocurrencies that wasn’t declared.

It is also proposed to establish administrative responsibility and a fine for illegal issue of cryptocurrency:

• from 50 000 to 500 000 rubles for citizens;
• from 100 000 to 1 000 000 rubles for officials;
• from 200 thousand to 2 million rubles for legal entities.

For violation of the rules for transactions with cryptocurrencies, as well as for illegal acceptance as payment will be imposed a fine of:

• from 20 000 to 200 000 rubles for citizens;
• from 50 000 to 400 000 rubles for officials;
• from 100 000 to 1 000 000 rubles for legal entities.

Enforcing

The Russian authorities are intent on relying on an artificial intelligence system that will allow them to monitor the internet for prohibited actions with cryptocurrencies and analyze the movement of digital financial assets, identifying service providers, and conducting investigations related to the illegal circulation of digital assets.

The system would also make it possible to partially remove the anonymity of participants in transactions with cryptocurrencies, and scan the internet to detect images with fundraising details for illicit activities, as well as detect messages related to money laundering and terrorist financing.

Conclusion

In general, the position of the Russian authorities is in line with the majority of states that are dealing with corruption or the threat of terrorism. Considering the virtues of cryptocurrencies that allow for anonymity and the ability to transfer near unlimited amounts of funds to anyone, anywhere, it is not difficult to imagine illegally procured funds being sent offshores for avoiding taxation.

But while the laws being adopted in the Russian Federation have noble underpinnings for enforcing taxation and preventing the financing of terrorism, they are also depriving Russian citizens of the possibility of using cryptocurrencies for paying for goods and services directly. Such a position contradicts the development of the crypto market in Russia, which saw roughly 420 million US dollars worth of Russian rubles used in 2020 to buy Bitcoin alone on exchanges. However, it opens up the possibility of adapting to the law and the development of new directions in the industry.

Originally published at https://academy.aaxpro.com on February 9, 2021.