Russia plans to treat digital assets as a form of money, with a draft law expected by Feb. 18

The Russian government and the country's central bank have reached an agreement on how to regulate bitcoin and other cryptocurrencies, with plans to treat the digital asset as a form of money.

The government is expected to introduce a draft law by February 18, according to a document published on the official Russian government website late Tuesday.

"The state (Russia) will regulate the circulation of such financial assets, impose strict obligations on all participants in the professional market, and emphasize the protection of the rights of ordinary investors," the document said.

According to local business publication Kommersant, the new legislation will bring cryptocurrencies into the same regulatory framework as foreign currencies.

The new legislation will not go into effect immediately and will require the Russian government to pass new laws and directives, which could happen as early as late 2022 or early 2023.

A few weeks ago, the Bank of Russia proposed a total ban on cryptocurrencies, but the country’s Ministry of Finance vehemently opposed it.

On January 20, the Central Bank of Russia said in a report that cryptocurrencies have the characteristics of pyramid schemes, undermine the sovereignty of monetary policy and pose a threat to the Russian financial system.

“The potential financial stability risks associated with cryptocurrencies are much higher in emerging markets, including Russia. This is due to the traditional preference for saving in foreign currencies and their lack of financial literacy,” the report said.

Russia’s central bank also said that the crypto mining industry undermines the country’s green agenda, jeopardizes Russia’s energy supply, and amplifies the negative effects of the spread of cryptocurrencies, creating incentives for attempts to bypass regulation.

Russia’s central bank’s tough stance against cryptocurrencies aligns with that of Russia’s security services, according to two people familiar with the matter. The security sector has also backed a domestic competition ban to prevent cryptocurrencies from being used to fund the country’s opposition.

However, Russia's central bank's tough stance sparked dissatisfaction with the finance ministry. On January 25, Ivan Chebeskov, head of the financial policy department of the Russian Ministry of Finance, said: “Regulation of the cryptocurrency market will make it possible to protect the rights of citizens. The first thing that should be done is to protect citizens, consumers of such services, purchase of these assets. Or the interests of those who use cryptocurrencies in some other process solution. In this regard, in my opinion, regulation, not prohibition, is needed. Regulation will make it possible to support transparency and thus protect citizens.”

The Russian Finance Minister added that the Ministry of Finance prepared the concept of regulating the cryptocurrency market and sent it to the government office for review. The Ministry of Finance is actively involved in developing legislative initiatives from the perspective of regulating such markets. We've got the regulatory concept ready, we're discussing it within the Treasury, and we've recently sent it to the government office. So far, we have not made a decision on this concept; the government has no official position, but this is our field of activity.

The feud between the two sides will come to an end as the Russian government and central bank reach an agreement on the issue.

The new legislative proposal suggests that cryptocurrency purchases in Russia must be made through licensed, locally registered companies with full user status.

In other words, the new legislation will allow banks to act as intermediaries between users and crypto trading platforms.

Exchanges and peer-to-peer marketplaces offering crypto trading services must also be registered as legal entities in Russia, which means these companies need to open accounts with authorized banks and meet all the requirements normally applicable to traditional financial institutions.

Track user transactions

Additionally, the new law will force foreign cryptocurrency exchanges to set up separate offices in Russia.

Both domestic and foreign businesses are required to check transactions for illegality and keep user transaction data for at least five years.

If the draft law is passed, all cryptocurrency transactions over 600,000 rubles (about $8,000) must be declared to the Federal Tax Service (FNS). Failure to do so may be considered a crime.

Notably, the proposal states that banks working with crypto exchanges will not be able to use blockchain analysis tools offered by companies such as Chainalysis or Elliptic.

Instead, they will have to use a tracking tool developed by the Russian Federal Financial Monitoring Service (Rosfinmonitoring).

According to the document, the tool, dubbed "Transparent Blockchain," could help identify the owners of cryptocurrency wallets and be able to gather information from the dark web to identify patterns of illegal use of digital assets.