By Michael Keller
Bitcoin’s astronomical surge in valuation was one of the defining digital trends of 2020. Valued at around $8,500 at the beginning of March of last year, the cryptocurrency is now, as of March 9, 2021, trading above $50,000. Its market capitalization—which, in the crypto space, is calculated by multiplying coins in circulation by their constituent valuation—has recently surpassed $1 trillion for the second time.
The meteoric rise of Bitcoin has captured the fascination of retail and institutional investors alike. More and more individuals are opening up trading accounts on a number of different crypto exchanges. Institutional investors are also increasingly drawn to this digital asset. For example, more than three Bitcoin-centric exchange-traded funds have been announced in recent months. Perhaps more notably, Tesla purchased $1.5 billion worth of Bitcoin in January of this year, and the company plans on using the technology as a medium of exchange at some indefinite point in the future. And Bitcoin’s success is hardly an anomaly. If anything, it serves as a bellwether for the continued impact that cryptocurrency and the underlying blockchain technology will have on the global financial landscape.
The potential benefits of cryptocurrency are undeniable: decentralization, confidentiality, financial autonomy, accessibility, low transactional friction, and so on. This developing technology is not without its drawbacks, however. Among the most frequent criticisms is that cryptocurrency (as an asset class) is extremely speculative and is therefore subject to a high degree of volatility. Thefts, hacks, and frauds also remain a significant issue in the crypto space. Critics point out that these problems undermine its utility as an alternative or reserve currency.
There are also a number of negative externalities associated with the technology. For example, the environmental impact of Bitcoin mining is staggering. Total power consumption, according to one index, is comparable to that of Chile. On the criminal front, it has, to a certain extent, facilitated organized crime and money laundering.
Regardless of its perceived advantages and disadvantages, it appears that, for now, cryptocurrency has entered the mainstream. Yet, the proliferation and growing ubiquity of this digital asset has created a regulatory headache for governments. Cryptocurrency’s unique characteristics make effective, comprehensive regulation a difficult task. The inconsistent and fragmented regulatory regimes around the world highlight the extent to which governments have struggled with this task.
In recent years, many have speculated as to how the Russian government may try to regulate this technology, especially given the staggering volume of cryptocurrency trading in the country. With the passage of Federal Law No. 259-FZ on Digital Financial Assets and Digital Currencies in July of last year, the Russian government clarified its stance—at least in part—on digital currencies. The law, which went into effect on January 1, 2021, essentially regulates the “issuance, recording, and circulation of digital financial assets (DFAs).”
While the new law effectively legalizes cryptocurrency, it also sharply circumscribes its functionality. For one, Russian citizens are not able to receive cryptocurrency as payment for goods, work, or service. Cryptocurrency is also not considered to be legal tender in Russia, and is therefore not recognized as a monetary unit by the government.
In addition to these restrictions on use, the law also makes clear that Russian banks and exchanges must register with the Bank of Russia to become an exchange operator of digital financial assets. New digital currencies can also be issued by these exchange operators, but, again, only with the consent of the Bank of Russia.
It appears that this law was a mere overture, as additional regulations appear to be forthcoming. One bill currently being considered—Bill No. 1065710-7—would amend the Russian tax code to incorporate the DFAs. The bill provides that cryptocurrencies would be treated as property for tax purposes. Users of cryptocurrencies will be required to file a declaration if cryptocurrency transactions exceed 600,000 rubles a year (roughly $8,100). Failure to declare receipts or pay property taxes can result in fines.
Despite these restrictions, the decision to legalize cryptocurrency came as a surprise to some observers, especially in light of past rhetoric from the Bank of Russia. As recently as last year, bank officials warned of a potential ban on its use, citing fears of financial instability and criminal activity. It appears, however, that the allure of cryptocurrencies and blockchain technology overcame these initial trepidations.
One has to wonder what the underlying rationale was for this legislation. On the one hand, there are—in a broad sense—some very legitimate reasons for enacting legislation of this nature. The bank officials’ fears about crime and financial instability are undoubtedly warranted. Providing comprehensive legislation for managing and regulating this technology is certainly one way to address these fears. It also goes without saying that cryptocurrencies and blockchain technology are revolutionizing the financial industry. This new legislative framework will likely help the Russian government manage crypto-related developments in the country.
On the other hand, it is certainly possible that more nefarious motivations drove the effort to pass sweeping cryptocurrency regulation. When read in combination with the Russia Sovereign Internet Law, it seems like another blatant attempt tighten its grip on digital activity within the country. Cryptocurrency has also proven to be a boon to Russian opposition, as it allows them to operate outside the ambit of state control. This is particularly apparent in the case of Alexei Navalny, whose assets have been repeatedly frozen by Russian authorities. An enhanced monitoring regime may ultimately limit the utility of cryptocurrency as a viable workaround.
With that said, the reality is that this legislation was likely motivated by an amalgam of different concerns and interests. Regardless, the new monitoring and enforcement regime may reduce the appeal of cryptocurrencies in Russia, especially given the technology’s emphasis on privacy and decentralization.
It is unclear exactly how the Russian government plans on amending and updating the legislation in the coming months and years. It is even more unclear how the technology will develop under the new legislative framework. What is clear, however, is that this law represents yet another heavy-handed attempt by the government to exert its control on the digital world.
 Bitcoin Price Index and Live Chart, Coindesk, https://www.coindesk.com/price/bitcoin.
 See Isabelle Lee, Bitcoin Reclaims $1 Trillion Market Cap As Support for the Cryptocurrency Builds Among Major Players, Business Insider, https://www.businessinsider.com/bitcoin-price-market-cap-reclaims-1-trillion-ether-cryptocurrency-2021-3.
 Harry Robertson, The Estimated Number of Global Crypto Users Has Passed 100 Million, Business Insider, https://markets.businessinsider.com/currencies/news/crypto-users-pass-100-million-boomers-gen-x-bitcoin-btc-ethereum-2021-2-1030122720.
 Kevin Helms, 3 Bitcoin ETFs Have Been Approved in North America, Bitcoin.com, https://news.bitcoin.com/3-bitcoin-etfs-approved-north-america/.
 Steve Kovach, Tesla Buys $1.5 Billion in Bitcoin, Plans to Accept It As Payment, CNBC, https://www.cnbc.com/2021/02/08/tesla-buys-1point5-billion-in-bitcoin.html.
 See, e.g., Nathan Reiff, What Are the Advantages of Paying with Bitcoin, Investopedia, https://www.investopedia.com/ask/answers/100314/what-are-advantages-paying-bitcoin.asp; Advantages of Cryptocurrency, Finjan Cybersecurity, https://blog.finjan.com/advantages-of-cryptocurrency/.
 Sofiane Boukhalifa, What Are the Disadvantages of Cryptocurrencies?, Prescouter, https://www.prescouter.com/2019/11/disadvantages-of-cryptocurrencies/.
 See id.
 See Cryptocurrency Crime and Anti-Money Laundering Report, February 2021, CipherTrace, [hereinafter Cryptocurrency Report], https://ciphertrace.com/2020-year-end-cryptocurrency-crime-and-anti-money-laundering-report/.
 Andrew Singer, Bitcoin As A Last Resort? Murmurs of Crypto As Reserve Currency Abound, Cointelegraph, https://cointelegraph.com/news/bitcoin-as-a-last-resort-murmurs-of-crypto-as-reserve-currency-abound.
 Bitcoin Energy Consumption Index, Digiconomist, https://digiconomist.net/bitcoin-energy-consumption.
 See Cryptocurrency Report, supra note 9.
 Bitcoin Trading Volume on Online Exchanges in Various Countries Worldwide in 2020, Statista, https://www.statista.com/statistics/1195753/bitcoin-trading-selected-countries/.
 Iana Fremer, Russian Federation: New Bill Defines Cryptocurrency, Proposes Tax Regulations, Global Legal Monitor, https://www.loc.gov/law/foreign-news/article/russian-federation-new-bill-defines-cryptocurrency-proposes-tax-regulations/#:~:text=The%20law%20prohibits%20exchange%20operations,in%20accordance%20with%20this%20law.
 Roger Huang, Russia Backs Away from Total Cryptocurrency Ban, Forbes, https://www.forbes.com/sites/rogerhuang/2020/08/10/russia-backs-away-from-total-cryptocurrency-ban/?sh=4fe089787520.
 Jamie Crawley, Russia’s Crypto Tax Bill Passes First Reading at State Duma, Coindesk, https://www.coindesk.com/russia-lower-house-approves-crypto-taxation-bill-in-first-reading.
 Billy Bambrough, Blow to Bitcoin As Russia Moves to Effectively Ban Crypto, Forbes, https://www.forbes.com/sites/billybambrough/2020/03/21/blow-to-bitcoin-as-russia-moves-to-effectively-ban-crypto/?sh=5f572f9b5c63.
 See Huang, supra note 17.
 Catherine Belton & Anton Zverev, Bitcoin Donations Surge to Jailed Kremlin Critic Navalny’s Cause: Data, Reuters, https://www.reuters.com/article/us-russia-politics-navalny-crypto-curren/bitcoin-donations-surge-to-jailed-kremlin-critic-navalnys-cause-data-idUSKBN2AB2GR.