“To ban or not to ban” has dominated crypto mining regulations in Russia for many years. Russia ranks third in crypto mining in the world, behind the U.S. and Kazakhstan. Crypto miners in Russia have been going through various controversies on mining, with multiple bills proposed to regulate mining and crypto usage.
Some bills have become laws, others in the latter stages in parliament, while others have stalled. It is certain that regulating digital operations is not a walk in the park but requires high-level engagement with all the stakeholders.
Russia’s crypto mining contributes to about 11.2% of the global “hashrate” – a crypto term used to describe the volume of computing power utilized by machines attached to the bitcoin blockchain.
The Bank of Russia is among the most concerned parties in the mining craze. The bank has cited several problems arising from crypto mining, with energy consumption topping the list. The powerful computers that compete to solve complex mathematical problems consume a lot of electricity, often created through fossil fuels.
Bank of Russia
Crypto is also seen as a limit on monetary policy sovereignty. The central bank of Russia is concerned with the widespread use of crypto, terming it as a hindrance towards containing interest rates crucial in controlling inflation.
Russia continues to experience a pull and push towards creating and implementing crypto mining laws. We will look at various proposed bills and regulations to control crypto mining in the country. However, some bills are yet to become laws.
Digital asset mining limitation by location
The Bank of Russia, in conjunction with the Russian Federation Ministry of Finance, reached an agreement to limit crypto mining to certain areas. The deal in 2022 aimed at legalizing crypto mining but limited the operation areas. The energy-scarce areas are no mining activity areas according to the regulation.
When discussing the proposed bill, Anatoly Aksakov, the parliamentary Financial Market Committee chair, indicated that crypto mining should be banned in places facing power shortages.
Before the regulation, the Ministry of Economic Development had recommended crypto mining be conducted in stable power supply areas. Roman Nekrasov, the ENCRY Foundation co-founder, intimated that mining was suitable in areas getting power from nuclear power plants and hydroelectric plants.
Krasnoyarsk Krai and Irkutsk Oblast have a stable hydroelectric power supply. On the other hand, places like Leningrad, Smolensk, Tver, and Saratov enjoy the energy from nuclear power plants in the areas. Most miners have populated the said areas for a long time now.
Additionally, the regulations allow miners to conduct their activities in Karelia. The mining in Karelia only can happen if the miners commit to supporting the creation of mini-hydropower plants in the area.
Ban on illegal mining
The regulations go deeper to curtailing any form of illegal mining in the country. Limitations come as the country struggles against sanctions on international trade. The authorities decided to ban the domestic creation and utilization of cryptocurrency.
In 2022, the Federal Security Services, together with officers from the Dagestan Ministry of Interior, closed two crypto firms operating illegally in the area, detaining more than 1,500 machines for mining.
Declaration of earnings by crypto miners
The Russian authorities mandate every crypto miner to declare earnings from their activities or face jail terms with forced labor. The government’s directive requires all people engaged in crypto mining to report income or serve a jail term of four years.
The directive came into perspective after a meeting held by officials of the relevant departments in January 2023.
The law requires the miners to disclose their transaction history about wallet addresses. Guilty parties will face sentences resonating with the income earned. Miners guilty of evading a declaration of about $200,000 two times in three years will be jailed for two years and subjected to forced labor for two years. Miners avoiding $600,000 and above income statements will be jailed for four years and forced labor for four years.
Furthermore, miners must disclose information about the people involved in the process and crucial information on their operations. The requirement follows after the amendment of the money laundering laws.
Opening of a crypto mining place in Siberia
Russia’s motive to bridle the crypto mining industry is on the verge as it opens a new mining facility in Siberia. Other attributes, such as concessions and tax incentives to the miners, signal its intentions toward crypto mining.
The Siberia mining facility is set to provide 30,000 mining outfits fashioned with 100 megawatts of power. The center starts at the beginning of 2023, and the government looks upon the Siberia center as a source of relief towards economic sanctions. Tax revenue from the center will also boost the country’s financial status.
Cryptocurrency attained legal status in Russia
In July 2021, a law was passed giving cryptocurrencies legal status but prohibiting their use for purchasing goods and services. The rule also inscribed a clause that removed undeclared cryptocurrency assets from court protection. Circulation and allotting of cryptocurrencies were placed under regulations. However, the 2021 regulations have yet to take precedence, leaving the crypto industry operations in a grey area.
Mining and selling of cryptocurrency mined in Russia
According to the current statutes, crypto mining in Russia remains legal while its use as a form of payment is banned. Therefore, you cannot use crypto to make any form of settlement in Russia.
A proposed law in its latter stages states that “A person mining digital assets in Russian territory can dispose of the mined digital currency in a manner that does not utilize the Russian information infrastructure.” However, the clause excludes the transactions made under the recognized experimental legal establishment.
The law was speculated to take effect in the first quarter of 2023. Rules governing experimental sales came into the limelight in 2020 after adopting the law on digital innovation. The new law includes a proper definition of crypto mining and mining pools and prohibits crypto advertising in Russia.
The new proposed regulations allow Russia to have a cryptocurrency sale platform, and miners can exploit the services of foreign outlets. The rules can solve the tax regulation procedure concerning crypto mining. The current establishment needs clear taxation legislation on crypto mining activities.
Discussion on introducing crypto into the Russian markets keeps taking different trajectories. In late 2022, the Moscow Exchange acting under the power of the Central Bank, drafted a bill to allow digital asset trading. The advancements led to exchanges warming to enter the market.
The authorities enacted a policy on crypto use in international payment in Sep. 2022. However, more than the national legislation might be needed for the crypto miners in Russia because they have to circumnavigate global sanctions.
Ban on minting in inhabited zones
Residential areas in Russia enjoy subsidized electricity. Some small-scale crypto miners have taken the opportunity to exploit the lower rates to earn crypto. Russian authorities have vowed to prosecute the miners using subsidized power to mint crypto.
No regulation in place prohibits small-scale miners from minting from their residential areas. The power supply entities in Russia are responsible for providing and regulating electricity consumption. Any surge in electricity usage in residential can be detrimental to the companies in terms of cost and electricity balance.
Bitcoin consumption. Source: Cambridge Bitcoin Electricity Consumption Index
Despite the need for fair laws banning small-scale crypto mining in residential areas, the authorities can prove that individuals use power for commercial purposes in residential areas.
Legal minds have argued that the home miners are obliged to pay for the power consumed through higher tariffs specified for commercial consumption. Therefore, the utilities have the right to send inspectors to areas showing a surge in usage and issue new invoices commensurate with use for commercial purposes.
In 2021, the electricity supply entity in the Irkutsk region, the region known for high levels of electricity in Russia, was the first to identify the cases of residential mining. A report established in 2022 indicated that more than $1.7 million was collected as fines from miners in Siberian Oblast.
The future of mining in Russia
Mining activities in Russia are on the rise as most people continue to perfect the exercise using sophisticated equipment such as ASICs readily available in the market. Cryptocurrency miners call for a sizeable upsurge in electrical power.
Ole Ogienko, Bitriver’s government relations director, acknowledges that crypto mining in Russia requires about 1.7 GW of energy, which amounts to about 50-60% of the total power needed in the industrial sector. Bitriver is one of the largest crypto-mining farms in Russia.
Datacenter in Bitriver: Source: Reuters
The government and other authorities have taken strides towards regulating the crypto mining sector to tap from its advantages. Russia has a competitive advantage from its cheap power sources and cold climate.