08.11.22 Review

The New Digital Order: digital assets will be developed to bypass sanctions in cross-border payments

The Central Bank of Russia report on the development of digital assets in Russia in the context of the sanctions war has acquired a completely new sound. According to Elvira Nabiullina, national digital currencies could be a “factor for debottlenecking”, but now the regulator is ready to accept cryptocurrencies as well. In a recently released "report for public consultation", the Central Bank of Russia suggests digitizing traditional financial instruments and allowing exchange transactions with digital rights through brokers and managers. A particular emphasis is put on creating a mechanism for the international circulation of Russian digital assets and their exchange for foreign digital assets — but only "friendly country" assets.

For the development of the digital financial assets market and utilitarian digital rights, the appearance of innovative products and services on it, it is necessary to develop appropriate regulation, Central Bank experts write in the foreword to the "Development of Digital Assets Market in the Russian Federation" report. The Central Bank of Russia's report presents proposals for improving the regulation of digital rights, but in the context of the sanctions war, this topic acquires a specific sound. Digital currencies are a chance for Russia to build bilateral trade relations when Western sanctions are targeting international payments and settlements and Russia's partners are afraid of secondary sanctions, the Russian Central Bank said. 

"We are building relationships on a bilateral basis, trying to reduce the sanctions risks for partners. This is very difficult, because there are many individual nuances in different countries, for each country, but it is not impossible. The digital currencies we develop in our country and our partners develop in their countries may also become a factor in "debottlenecking", — said Elvira Nabiullina, the Chairwoman of the Russian Central Bank on November 8 before the deputies of the State Duma. 

Now the Central Bank is developing a national digital currency — the digital ruble, which will become the third form of the Russian national currency and will be used along with cash and non-cash rubles (the regulator first introduced the concept of the digital ruble in spring 2021). At the same time, the Russian Central Bank, together with the Bank for International Settlements (BIS) in Hong Kong and financial institutions in China, the UAE, and Thailand is implementing a project to link cross-border payment systems with the digital ruble (however, little is known about the project's success).

Cryptocurrencies have become one of the most popular digital assets among the population of Russia (the volume of Russian citizens' transactions with cryptocurrencies reaches $5 billion a year, according to some estimates), and although the Russian Central Bank is still against cryptocurrency legalization as a means of payment in Russia (as well as against legalization of crypto exchanges inside the country), it allows the possibility of legalizing cross-border transactions in cryptocurrencies. The Ministry of Finance and the Central Bank agreed that under the current circumstances" we cannot do without cross-border payments in cryptocurrency", Deputy Minister of Finance Alexei Moiseev explained at the beginning of September.

In general, the Russian financial sector is considered developed in terms of digitalization of financial services: Russian financial market players follow global trends (according to Allied Market Research, the global financial technology market may grow to $698.48 billion by 2030) actively use financial technologies (cloud technologies, corporate data warehouses, biometrics, etc.). In the report, the Russian Central Bank proposes to go further and convert traditional financial instruments — non-traded securities, debt obligations (including federal and sub-federal loans bonds), and various types of property, such as precious metals and stones (in the form of digital rights to a physical stone or metal or their equivalent value), as well as the results of intellectual work — into digital assets (banned in Russia as a payment instrument).

The regulator is also not against exchange transactions with digital rights through brokers and managers. The report indicates that market participants want to increase the limit (which is currently 600 thousand rubles) for transactions with digital assets. For this purpose, the regulator assumes to use of the pre-testing model, as well as notifying investors about taking their risks. At the same time, the Russian Central Bank believes it is necessary to create a mechanism for the international circulation of Russian digital assets and their exchange for foreign digital assets. However, a note was made to the title of the section on the foreign digital asset circulation mechanisms that it refers only to the digital assets "issued following the laws of friendly countries".