Russia, the third-largest crypto mining nation in the world, has proposed a ban on the use and creation of all cryptocurrencies domestically, citing threats to its monetary policy sovereignty, financial stability and citizens’ wellbeing.
In a report published Jan. 20, the Bank of Russia said the crypto market is showing “signs of a financial pyramid as increase in their prices is largely driven by demand demonstrated by new market participants.”
A pyramid scheme is a fraudulent system of making money based on recruiting an ever-increasing number of investors. The initial promoters recruit investors, who in turn recruit more investors, and so on. The scheme is called a “pyramid” because at each level, the number of investors increases.
Russia has argued for years against cryptocurrencies, saying they can be used in money laundering or to finance terrorism. It eventually gave them legal status in 2020 but banned their use as a means of payment.
Russia’s central bank proposes preventing financial institutions from carrying out any operations with cryptocurrencies and said the mechanisms should be developed to block transactions aimed at buying or selling cryptocurrencies for fiat, or traditional currencies.
“Potential financial stability risks associated with cryptocurrencies are much higher for emerging markets, including in Russia,” Bank of Russia said in a report. “This is due to the traditionally higher propensity for saving in foreign currency and an insufficient level of financial literacy.”
Russians are active cryptocurrency users, with an annual transaction volume of about $5 billion, according to the central bank.
Bitcoin mining has come under fire in recent years for the massive amount of electricity consumed in the mining process. It has been blamed for threatening the power supply of residential buildings, social infrastructure, and enterprises. Bitcoin and some other cryptocurrencies are mined using powerful computers with miners competing against others hooked up to a global network to solve complex mathematical puzzles. The reward is paid in Bitcoin.
The process guzzles electricity and is often powered by fossil fuels. To prevent this environmental decay, the best solution is to ban cryptocurrency mining, according to Russia’s central bank.
Russia became the world’s third-biggest crypto-miner in 2021 after the U.S. and Kazakhstan, according to Cambridge University data.
The largest crypto mines are in the Northern Russia and in Siberia, where the temperatures are low and there is access to cheap power. Minespot and BitCluster are among the biggest miners in the industry.
Russia’s central bank said it would work with regulators in countries where crypto exchanges are registered to collect information about the operations of Russian clients. It pointed to steps taken in other countries, such as China, to curb cryptocurrency activity.
In June 2021, China intensified its crackdown on cryptocurrencies with a blanket ban on all crypto transactions and mining, hitting bitcoin and other major coins and pressuring crypto and blockchain-related stocks.
Listen to GHOGH with Jamarlin Martin | Episode 74: Jamarlin Martin Jamarlin returns for a new season of the GHOGH podcast to discuss Bitcoin, bubbles, and Biden. He talks about the risk factors for Bitcoin as an investment asset including origin risk, speculative market structure, regulatory, and environment. Are broader financial markets in a massive speculative bubble?