Russia Finalizes Draft of Digital Currency LawsBank of Russia to Be in Charge of Digital Ruble Platform; Buyers Identified
The less dramatic news that came from Russia on Monday was the Russian Ministry of Finance's announcement that it has submitted the draft federal law on digital currency to the Government of Russia. The law prohibits the use of digital currencies as a means of payment and considers them to be an "investment vehicle" only - that is, digital currencies cannot be used as legal tender.
The draft law also requires exchanges and operators in Russia to comply with mandates on corporate governance, reporting, information storage, internal control and audit and risk management systems.
The country will soon introduce the digital ruble - its version of central banking digital currency, or CBDC. The digital ruble will be the only recognized fiat currency in digital form. The Bank of Russia will be responsible for regulating the digital ruble and developing its platform.
The Digital Ruble
According to the information on the Bank of Russia website, customers can access the digital ruble wallet through any financial institution with which they perform transactions.
The wallet can be accessed without internet access, and the customers' assets will be protected by "high levels of safety and security of funds."
Olga Skorobogatova, first deputy chairman of the Bank of Russia, said in a statement: “For businesses, this will reduce costs and create opportunities for the development of innovative products and services. The state will also receive a new tool for targeted payments and administration of budget payments."
The digital ruble is expected to increase competition in the market, foster the development of a new payment infrastructure and create innovative financial products and services.
The prototype of the digital ruble platform was completed in December 2021, and thus far 12 banks have shown interest in taking part in testing it. The Bank of Russia will be the issuer of digital rubles and the operator of the platform.
Still in its first phase of testing, the digital ruble platform is currently being tested for issuance of digital rubles, opening of digital wallets for banks and citizens, and transfers between citizens.
Securing the Digital Ruble Platform
According to the Bank of Russia's report on the digital ruble, several measures have been introduced to ensure the information security and cyber stability of the digital ruble platform prototype.
Many of the security measures have been built into the specialized software module that the Bank of Russia has developed. For example:
- The interaction of the customer with the digital ruble platform will be carried out through secure channels via the bank's application installed on the user's mobile device.
- User access to the wallet where digital rubles are stored and all transactions are carried out will use a specialized Bank of Russia software module.
- The software module will include an API for application developers of credit institutions and will be used for ensuring safe interaction between the user and the bank.
- The module will generate and store a cryptographic key for accessing the digital wallet.
- The software module will be used to sign orders for transactions with the client's digital rubles.
- The module will ensure cryptographic protection of user interaction channels with the infrastructure.
- When accessing the digital ruble platform, strong two-way authentication of direct participants will be carried out through secure channels.
The Bank of Russia also says that "special attention is paid to operational reliability and cyber resilience at all stages of the life cycle of the digital ruble."
Cryptocurrency Exchanges to Be Heavily Regulated
Russia's new draft law on digital currency mandates that the buying and selling of cryptocurrency can only be validated if a customer is identified by the bank as well as the crypto exchange or operator.
Cryptocurrency operators in the country are required to maintain registers that record information on digital currency holders, including their identification and addresses.
The activities of crypto exchanges will be licensed and controlled by a government-authorized body. Foreign crypto exchanges will have to register in Russia to obtain a license to operate.
Any form of cryptocurrency transaction between a user and an exchange, be it for deposits or withdrawals, will only be possible if the transaction is conducted through a verified bank account.
In addition to maintaining user records and meeting compliance procedures, crypto exchanges operating in Russia are required to report suspicious transactions to the Federal Financial Monitoring Service, or Rosfinmonitoring - the country's main body for financial intelligence.
Crypto exchanges are also required to warn customers of the high risk associated with digital assets.
Focus on Consumer Awareness
Russia's finance ministry appears to be cognizant of the volatility of crypto assets and the financial risk posed to Russian citizens. The new digital currency law mandates that crypto exchanges inform their customers about the financial risks involved and requires citizens to undergo online testing before purchasing cryptocurrency.
Citizens who successfully pass the test can invest in digital currencies amounting to a maximum of 600,000 Russian rubles annually, or approximately $7,560. Failing to pass the test would restrict a user to invest up to 50,000 rubles only ($630).
While many countries, including the U.S. and India, have passed laws pertaining to crypto assets, the requirement for users to take an awareness test is unique to Russia's law.
Central Banking Digital Currency Concerns
The U.S., Russia, India, the U.K. and many other European nations are either in the process of conducting research or deploying pilot projects on CBDCs, while China, Nigeria and the Bahamas have already implemented early CBDC projects (see map above)
The World Economic Forum, in its analysis of CBDCs, warns that their adoption will not be successful if a platform fails to invest in a robust cybersecurity strategy. This is because, like digital payments, CBDCs are prone to cyberattacks, data breaches and counterfeiting.
The analysis shows credential theft, misuse of privileged roles such as freezing or withdrawal of CBDC funds, system integrity and quantum computing are the immediate cybersecurity concerns around CBDCs.
Alexander Samarin, an independent enterprise architect and consultant, tells Information Security Media Group that disagreements between some major players and a chaotic way of addressing the modern, strategic issue of digital currency don’t allow the country to systemically use some national advantages.
"The country’s Central Bank-issued digital ruble, which follows the CBDC design from the majority of central banks, is about deliberately killing cash and subsequently eliminating many good features associated with it, such as privacy, choice in possession, legal finality of payment and no-fee payments," Samarin says.
He calls promises to keep cash in circulation "typical governmental promises" and says they "will be quickly forgotten." According to Samarin, "This erases any competition for retail payment."
Ukraine Legalizes Cryptocurrency
In contrast to Russia's measured stance on cryptocurrency, Ukraine has passed a law that recognizes crypto as a legal asset.
The government's announcement on Thursday says the National Commission on Securities and Stock Market will be responsible for regulating the virtual assets market.
Mykhailo Fedorov, the country's deputy prime minister and minister of digital transformation, stated that the new law is an "additional opportunity" for business development in the country.
"Foreign and Ukrainian crypto companies will be able to operate legally, while Ukrainians will have convenient and secure access to the global market for virtual assets," Fedorov said.
Ukraine's move to legalize cryptocurrency was driven by two important factors, according to the government's official statement - the country is among the top five in the world in terms of the number of cryptocurrency users, and it is home to a well-developed community of blockchain developers.