Cryptocurrency restrictions in Russia could cool risk, innovation: Fitch

Russia’s central bank is proposing curbs on cryptocurrency that that could limit risks to its financial system, while also clearing the way for a digital ruble, says Fitch Ratings.

In a new report, the rating agency said that the Central Bank of Russia has proposed certain restrictions, including bans on crypto mining, trading crypto for fiat currency, and on banks investing in crypto. It would ban the use of its existing financial infrastructure for crypto operations.

If the central bank’s proposals are adopted, this would “increase the authorities’ capacity to monitor and manage financial flows,” and also limit systemic risk due to growing use of crypto, Fitch said.

It could also help the bank launch its own digital currency.

“We believe another motive for the restrictions may be to favour the development of Russia’s proposed central bank digital currency,” it said, noting that the central bank plans to test a CBDC “possibly as soon as this year”.

Introducing a CBDC may impact banks’ deposits and access to funding, Fitch said.

To cushion the impact on banks’ funding, the central bank has said that it will provide access to its refinancing operations — which should help maintain financial stability.

In the meantime, restrictions on crypto in Russia will also limit an array of other risks to the country’s banking system, Fitch said.

“The volatility of cryptocurrencies, highlighted by steep falls in the market value of Bitcoin and other digital currencies in recent weeks, can contribute to earnings instability, balance-sheet complications and potential asset/liability mismatches,” it said.

“Crypto involvement can also create reputational and legal risks around illicit activity, cybersecurity and operational risks to manage, as well as [environmental, social and governance] concerns and additional compliance costs,” it added.

The proposed ban on crypto avoids these issues, but also potentially thwarts innovation, Fitch said.

For example, “Initiatives involving privately-issued payment tokens are unlikely to advance in light of the proposed regulatory changes, in our view,” it said.

Reducing banks ability to take advantage of crypto-driven innovations that could enhance payments systems, or improve asset liquidity, “could over time weaken this aspect of the Russian banking sector’s operational environment,” it said.

Fitch noted that the central bank’s proposals could be revised, and that the country’s Ministry of Finance (among other groups) have proposed alternatives to the sweeping restrictions sought by the central bank.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.