Russia will start its trial of cross-border payments using crypto next week.
Recent statements from senior Russian leaders suggest the law’s purpose is to use crypto to counter sanctions.
The law hands power to Russia’s central bank to oversee an “experimental” regime.
Russia will begin trialing cross-border crypto payments next week in an effort to circumvent international sanctions – but this effort may not work, several policy and legal experts told CoinDesk.
Legislation passed at the end of July and swiftly signed into law by President Vladimir Putin does not lift an existing ban on using cryptocurrencies as legal tender for regular payments within Russia, but instead allows cross-border payments with crypto.
How the law will allow such payments remains unclear because the legislation doesn’t specify rules for such transactions. Instead it hands power to Russia’s central bank to oversee an “experimental” regime, experts said.
Russia’s economy has been hit hard by a suite of sanctions imposed by the U.S. and other nations following its invasion of Ukraine.
Since Russia’s invasion of Ukraine in Feb. 2022, it’s faced 16,500 sanctions from the U.S., U.K., European Union, Australia, Canada and Japan.
“The passing of these bills by the Russian government signals a continuation of Russia’s evolving strategy to circumvent Western sanctions,” blockchain analytics firm Chainalysis’ director of investigations, Valerie Kennedy, told CoinDesk.
The EU said about half of Russia’s total foreign currency reserves, worth 300 billion euros ($332 billion), including 70% of the assets of the Russian banking system, were frozen. Select Russian banks were disconnected by the interbank messaging system, the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
“It has been difficult for Russia to avoid the U.S. dollar and euro via the SWIFT system, which has created increasing risk of secondary sanctions,” she added. Secondary sanctions are penalties designed to prevent any third party from trading with a sanctioned nation.
Some details have emerged in the days leading up to the Sept. 1 implementation of the law.
CoinDesk viewed a copy of the law using google translate. It said “during the circulation of digital currency in the Russian federation … special regulation may be established … by the experimental legal regime program.” That regime is still in the works. Before finalizing it, the central bank will consider proposals and suggestions from domestic stakeholders.
“Some players, including us, have already come with our own proposals,” said Anti Danilevski, founder and CEO of Kick Ecosystem, a one stop shop for crypto, who has been closely engaging with regulators. “The central bank will decide if it fits with their view. They are moving very fast, so it won’t take much time.”
Bloomberg reported that Russia is planning to use the National Payment Card System, for swapping between rubles and cryptocurrencies when testing payments. The system was chosen because it already features infrastructure for functions like interbank settlement and is fully regulated by the central bank. If the trials are successful, Russia may allow the Moscow Exchange and the St. Petersburg Currency Exchange to set up crypto platforms next year, the report added.
Ivan Chuprunov, an associate professor at the Research Centre of Private Law in Moscow, said the regime’s “exact parameters are not clear” because none have been published yet but the “central bank will likely publish some guidance in the coming weeks.”
The law also appears to let the central bank change how it oversees these trials at any time.
The legislation said that the provisions may “exclude or change” parts of the Federal Law in relation to transactions with “digital currency made in the implementation of foreign trade activities through an authorized organization.”
The regime is “more a flexible one” because it’s “just the central bank who will be approving it,” said Chuprunov. “Whether they will have just one exchange, what currencies would be traded, how participants would get trading access, is still a big unknown.”
Nor does the law clearly specify what rules now apply to crypto entities or businesses wanting to deal in crypto, because the central bank will determine which companies will participate in the experiment.
While the law doesn’t specify what its exact purpose is, recent statements from senior Russian leaders pointed toward using crypto to counter sanctions.
On July 17, 2024, in an economic affairs meeting, Putin said Russia should not “miss the moment” and should promptly set up a “legal framework” for crypto, which is “increasingly used in the world as a means of payment in international settlements.”
Then, one of the authors of the bill said Russia views cryptocurrencies “primarily as a tool for circumventing sanctions,” followed by its central bank Governor Elvira Nabiullina saying that’s why we “softened our stance” on crypto at an event in Moscow recently.
Uncertainty remains around how Russia will use this new law to exert more control and overcome sanctions.
The experimental regime is a global first of its kind because it hands carte blanche control to the central bank to make any rules anytime and select any company it chooses to participate in the test.
“Authorizing the Bank of Russia to create an electronic platform for digital currency transactions and monitor activities centralizes control,” said Jim Mignano, an assistant policy researcher at research organization RAND.
Because the law allows such dynamic rule-making, it’s difficult to predict how geopolitics or new sanctions will make Russia’s government and central bank change the law every now and then.
“I’ve been practicing Russian law for over 18 years. I cannot remember the word ‘experimental’ in a draft law,” said Svetlana London, managing partner at CIS London, a law firm specializing in advising clients about cross-border transactions related to the Commonwealth of Independent States (CIS), which includes Russia. “It’s quite difficult to decipher, just based on the label, how exactly it will work.”
Danilevski said the law gives the Central Bank of Russia the power to release an experimental legal regime (ELR) but that in its current form the ELR “won’t work effectively” and needs “significant refinement” for “practical implementation.”
And then comes the question of whether Russia will even reveal how it chooses to implement the law. Sitting alongside Governor Nabiullina at that Moscow event last month, Andrei Kostin, head of Russia’s second largest lender, VTB, proposed that the implementation of such laws should be made a “state secret” because right now “somewhere at the U.S. embassy” someone is noting down every statement we make, to allow the West to react “very” quickly.
Mignano told CoinDesk that the successful bypassing of sanctions by Russia could “prompt more aggressive enforcement measures or new forms of sanctions.”
One of those growing threats is that of secondary sanctions.
Last month after the bill passed, Governor Nabiullina told Reuters that “The risks of secondary sanctions have grown. They make payments for imports difficult, and that concerns a wide range of goods.”
“While crypto assets may live and move outside the traditional financial system, the activity will be traceable and trackable allowing Western governments to follow and investigate transactions in new and innovative ways,” Isabella Chase, Senior Policy Advisor of Europe Middle East and Asia at blockchain analytics firm TRM Labs said.
Despite the law’s intent, experts questioned whether foreign partners will engage through crypto.
Kennedy also said crypto markets don’t have the liquidity to support such evasion “en masse” without “either crashing the prices of crypto assets or drawing the attention of blockchain observers” suggesting that such evasion “will look like other forms of money laundering” – small amounts of crypto “gradually moved to cashout points.”
Mignano said this problem might require Russia to “do more work.” It may need to offer “economic or political incentives to counterparties” to participate in crypto-based transactions, he said.