## Russia’s Experimental Approach to Cross-Border Crypto Payments

Starting next week, Russia will initiate trials for cross-border cryptocurrency payments. This move aims to navigate around the international sanctions imposed on the country after its invasion of Ukraine. However, experts are skeptical about the effectiveness of this strategy due to the unresolved legal and regulatory framework surrounding these payments.

## Legislative Background

The legislation permitting cross-border crypto payments was passed at the end of July and rapidly signed into law by President Vladimir Putin. While this law does not lift the existing ban on using cryptocurrencies as legal tender for domestic transactions within Russia, it does allow for cross-border payments using digital currencies. The ambiguity lies in the law’s lack of specific guidelines detailing how these transactions will be conducted, which raises questions about its practicality.

The law empowers Russia’s central bank to oversee an “experimental” regime for these transactions, but without clear regulations, the operational framework remains uncertain. Experts suggest that this vagueness could hinder the law’s effectiveness in achieving its intended goals.

## The Impact of Sanctions on the Russian Economy

Since the outbreak of the Ukraine conflict in February 2022, Russia has faced approximately 16,500 sanctions from various countries, including the United States, United Kingdom, European Union, Australia, Canada, and Japan. These sanctions have severely impacted Russia’s economy, freezing around 300 billion euros (approximately $332 billion) of its foreign currency reserves. Furthermore, many Russian banks have been disconnected from the SWIFT interbank messaging system, complicating international transactions.

According to Valerie Kennedy, director of investigations at blockchain analytics firm Chainalysis, the legislative measures taken by Russia signify an ongoing strategy to circumvent these Western sanctions. The challenge, however, remains in executing such an approach effectively.

## Details of the New Law

As the September 1 implementation date approaches, more details about the law have surfaced. A translated version of the law reveals that “during the circulation of digital currency in the Russian federation … special regulation may be established … by the experimental legal regime program.” This indicates that the framework for these transactions is still under development, with the central bank considering input from domestic stakeholders before finalizing the guidelines.

– Anti Danilevski, CEO of Kick Ecosystem, mentioned that they have already made proposals to the central bank.
– Bloomberg reported that Russia intends to utilize the National Payment Card System for currency swaps between rubles and cryptocurrencies during the trials.

This system was chosen due to its existing infrastructure that supports interbank settlements and is fully regulated by the central bank. Should these trials prove successful, Russia may permit the establishment of crypto trading platforms by the Moscow Exchange and the St. Petersburg Currency Exchange in the following year.

## Uncertainties Surrounding the Implementation

Despite the passage of the law, uncertainties linger regarding how the central bank will regulate these transactions. Experts like Ivan Chuprunov, an associate professor at the Research Centre of Private Law in Moscow, noted that the exact parameters of this experimental regime are not yet published. The central bank possesses the authority to modify how it oversees these trials, potentially leading to dynamic and unpredictable changes in regulatory frameworks.

Moreover, the law allows the central bank to exclude or modify existing Federal Law provisions concerning transactions involving digital currencies within international trade contexts. This flexibility indicates that the central bank will have significant control over the experiment, which may lead to a lack of transparency regarding the rules governing participation.

## Potential Motivations Behind the Law

While the law does not explicitly state its objectives, comments from senior Russian officials suggest that it aims to utilize cryptocurrency as a means to combat sanctions. President Putin emphasized the urgency of establishing a legal framework for crypto, highlighting its increasing global use for international transactions. Additionally, a key author of the bill indicated that cryptocurrencies are viewed predominantly as tools for circumventing sanctions.

## The Risks of Centralized Control

The experimental regime grants the central bank extensive control over the operational landscape of cryptocurrency transactions. This has raised concerns about the potential for centralized implementation leading to arbitrary rule changes and selective participation criteria. Jim Mignano, an assistant policy researcher at RAND, warned that this could create a scenario where the central bank’s discretion undermines the law’s intended goals.

Experts express concerns about the implications of such centralized control. Svetlana London, managing partner at CIS London, highlighted the unusual use of the term “experimental” in legislative context, indicating the challenges in deciphering how the law will function in practice. Danilevski, the Kick Ecosystem CEO, noted that the current form of the experimental legal regime requires significant refinement for practical implementation.

## Potential Western Response

The successful evasion of sanctions through these new measures could provoke a more aggressive response from Western nations, including the implementation of secondary sanctions. Such sanctions aim to penalize third parties engaging in trade with sanctioned nations. Governor Nabiullina acknowledged the growing risks associated with secondary sanctions, which complicate payment methods for imports across various sectors.

Despite the innovative use of cryptocurrencies, experts assert that these activities remain traceable. Isabella Chase, a Senior Policy Advisor at TRM Labs, emphasized that while crypto assets might operate outside traditional financial frameworks, they can still be monitored, enabling Western governments to track and investigate transactions effectively.

## Challenges of Foreign Engagement

Although the new law aims to facilitate cross-border transactions, experts question whether foreign partners will be willing to engage in crypto-based transactions with Russia. The liquidity of crypto markets may not support large-scale evasion of sanctions without attracting attention or resulting in significant price fluctuations. Kennedy indicated that any such activities would likely resemble money laundering, with small amounts of crypto gradually funneled through cash-out points to evade detection.

Mignano pointed out that Russia may need to enhance its approach by offering economic or political incentives to encourage foreign counterparts to participate in crypto transactions. This could involve establishing partnerships or creating favorable conditions that would make engaging in such transactions more appealing for foreign entities. The success of these trials and the broader strategy will depend significantly on how effectively Russia can navigate these complexities and the reactions from the international community.