16 February 2018

TRuble in Russia - will crypto soon be legal tender?


Tatiana Menshenina
Partner | UK

A friend’s 16 year old son and his schoolmates are using pocket money to buy Bitcoin mining hardware. Several engineers at the Russian Federal Nuclear Centre have been arrested for attempting to use one of Russia’s largest supercomputers for Bitcoin mining – Interfax reports on 9 February. What is going on?

Crypto is big news in Russia, as it is in all developed countries. Forbes, for the first time, recently published ratings of those who made their wealth in cryptocurrencies. The list contains 19 names. Number 17 is the Russian Vitalik Buterin, aged 24, who created Etherium ($81 billion capitalisation). His crypto net-worth is now estimated at $400-500 million.

Number 13 in the list is Valery Vavilov, “the Digital Gold Miner”, born in the USSR, founder of the BitFury Group now based in Amsterdam. BitFury produce software and hardware solutions for businesses, governments, organisations and individuals to securely move assets across the Blockchain. His crypto net-worth is estimated at $500-700 million.

If you are still struggling (as I am) to grasp the connection between cryptocurrencies, blockchain and mining, you need to upskill fast: this is our future.

Currency becomes precious when someone is willing to exchange it for something physical like food or other essentials. Effectively those who created cryptocurrency now are no more innovative than those who invented the first physical money thousands of years ago. Many of us are struggling with the concept of crypto because a Bitcoin, for example, doesn’t really exist as a physical or even digital object. But does it matter if someone is ready to accept it as a legitimate payment unit?

The distinction of Bitcoin or any other cryptocurrency from classic currency is that there is no central authority to govern it and traditional financial institutions are unable to interfere or take 'charge' of such accounts. This is the decentralised nature of crypto.

It now appears that Russia is among a few countries which have publicly announced the creation of a national cryptocurrency. The others include China, Japan, Kyrgyzstan and Venezuela. An Estonian cryptocurrency has been mooted as part of the country’s e-residency program, though the idea was rejected by the President of the European Central bank in September 2017.

The Federal Reserve in the US has no confirmed plans to launch its own digital currency, at least for the moment. The global position on Bitcoin remains unclear, with some nations agreeing to legalise it and apply capital gains tax, others banning it completely and many remain in a state of flux. But as we have seen, the situation is likely to change quickly.

Russia submits draft law to introduce CryptoRuble 25 January 2018

While this has been on the table for some time, just a week before the submission Deputy Head of the Central Bank of Russian Federation, Sergey Shvetsov said “My opinion is that high demand on cryptocurrencies is caused by avoiding regulation (because they are not regulated, there is a high demand). It is clear the regulator cannot authorise the issue of a currency that would provide an opportunity to avoid regulation. That is why I cannot see any demand on CryptoRuble.”

In December 2017 Deputy Minister of Finance Alexei Moiseev announced that they proposed to legalise and regulate existing cryptocurrencies and permit trading on regulated licensed stock exchange platforms. He also expressed a disbelief that CryptoRuble is a viable or sensible option.

The explanatory note to the draft law on CryptoRuble says the amendments proposed by the document “codify the digital financial asset as a legal means of payment on the territory of Russia.” The draft law introduces a number of amendments to the Russian Civil Code, which would create the CryptoRuble as a legal means of payment that would be circulated nationwide.

According to the Communications Minister Nikolay Nikiforov, once CryptoRouble is issued other cryptocurrency mining will be banned on the territory of the Russian Federation, and CryptoRuble will be entirely regulated by the government. All the financial operations involving the CryptoRuble will be taxed and tax will also be applied to any appreciation in value.

“When buying and selling CryptoRuble, the tax will be levied at 13% on the earned difference. Owners will be able to exchange their currency for Russian Rubles at any time. If the owner cannot explain where he/she acquired CryptoRubles from, when converting them into Russian Rubles, the tax for him/her will be 13% of the total amount. This mustn’t be a private currency, but one which will be issued by the state, controlled by the state and this would enable the circulation of digital money in light of the digital economy,” he said.

The future of CryptoRuble is still to be seen, but what is happening in neighbouring states?

In December 2017, Belarus, the closest Russian western neighbour, legalised cryptocurrencies and all operations with them. The President’s Decree of 21 December 2017 that comes into force in three months called “on development of the digital economy” and permitted Belorussian citizens to promote initial coin offerings, own cryptocurrency, create it, exchange, buy and sell for Belorussian Rubles and other cryptocurrencies, transfer it by way of a gift or a will.

None of these operations would be treated as taxable activity for individuals, therefore it would be not necessary to declare it, at least until 2023. In order to deal with cryptocurrencies, legal entities would need to join so-called High-Technologies Parks (HTP), economic zones with special tax and legal regimes, “contributing to the favourable and successful development of IT business in the country”. They would need to become “residents of HTP” or use HTP residents as agents. No special license is required and the Decree promises preferential tax treatment until 2023.

This Belorussian bid to become a “bitcoin haven” might be successful in attracting business and brains from neighbouring Russia.

The reaction to Russia's crypto proposals?

Anything centralised will enslave us – the word on the street is that government cryptos should be given a wide berth. It is very possible that crypto enthusiasts, who celebrate anonymity and independence from government institutions and corporations will scoff at CryptoRubles and current proposals.

The Ministry of Finance has outlined an alternative approach – instead of banning the mining of cryptocurrencies, mining income could be taxed instead. Although they say that as a first step it would be necessary to define mining for the purposes of the civil code and tax code, which apparently is not that easy. Another proposal was to create “internal offshores” for the purposes of cryptocurrency trade. This was met by deafening silence from the Central Bank and Federal Tax Service and it was heavily criticised by the president's administration.

Tatiana Menshenina Partner | London

Category: Article

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