Written by: Liu Honglin, Attorney at Shanghai Mankiw LLP
Russia: No more tolerance
According to Russian News Agency, on July 30, 2024, the Russian State Duma officially passed the Digital Currency Cross-Border Payment Bill and the Crypto Mining Legalization Bill. The core content of the Cross-Border Settlement Bill is to allow the use of digital currencies for cross-border settlement and exchange transactions within the framework of the Experimental Legal System (EPR) from September 1, 2024. In addition, relevant procedures and conditions are stipulated for cryptocurrency mining and will be legalized in November. This move is of great significance in the current international financial environment, especially for Russia, which is facing pressure from economic sanctions from Western countries.
In recent years, due to severe sanctions from Western countries, Russia has encountered many obstacles in using the traditional financial system for cross-border payments.
The history of US sanctions against Russia dates back to 2014, when the US and EU began to impose economic sanctions against Russia due to the Crimea incident. The initial sanctions focused on asset freezes and travel bans on senior Russian officials, but as Russia's actions in the Ukrainian conflict escalated, sanctions were gradually expanded to key industries such as energy, finance and defense, limiting the ability of Russian companies and banks to access international capital markets. This phase of sanctions marked the first time that Russia faced a large-scale financial blockade, and Western countries tried to weaken its economic foundation by cutting off Russia's access to international financial markets.
In 2017, the United States passed the Countering America's Adversaries Through Sanctions Act (CAATSA), further tightening sanctions on Russia, including imposing stricter restrictions on major Russian banks, energy companies, and military-related businesses.
After the outbreak of the Russian-Ukrainian conflict in 2022, the United States and its allies once again escalated sanctions against Russia. The U.S. sanctions policy aims to isolate Russia in international affairs and weaken its economic strength and international influence through financial pressure. A major milestone in this sanction was the exclusion of major Russian banks from the SWIFT international payment system. The SWIFT system is the core network for global cross-border payments. Being excluded means that Russian banks cannot conduct cross-border transactions through this system, which has a serious impact on Russia's international trade. Through this measure, Western countries have almost cut off Russia's connection with the international financial market, which not only limits Russia's ability to transfer funds in the international market, but also severely hits the stability of its economy. Data from the Russian Central Bank show that payment arrears have become the main challenge facing the Russian economy, directly leading to an 8% drop in imports in the second quarter of 2024. Cross-border payments for companies have become increasingly difficult, involving a wide range of goods from raw materials to technical equipment, which not only delays the supply chain but also significantly increases operating costs.
Against this backdrop, Russia's cross-border settlement through digital currency, hoping to bypass Western sanctions and restore its economic autonomy in the international market, is undoubtedly an important attempt by the country to innovate in finance and counter sanctions. Elvira Nabiullina, the governor of the Russian Central Bank, is optimistic about this. She revealed that Russia expects to conduct its first trial of cross-border payments using cryptocurrencies by the end of 2024 to overcome the current financial difficulties. Nabiullina pointed out: "Today, the State Duma is considering a law that allows the use of cryptocurrency settlements under a pilot system. We are already discussing the terms of the trial with ministries, agencies and companies, and expect the first such payments to be made by the end of this year." She also said that regulators will remain "flexible", which shows Russia's prudence and pragmatism in implementing this policy.
Response and impact of the international community
As the saying goes, a train runs fast only if it is led by the locomotive. Russia's move to pass the cross-border settlement bill has attracted widespread attention and discussion around the world, especially among its fellow sufferers who have also been sanctioned by the United States and Western countries for a long time.
Virtual currency is becoming an important tool for global political games and maintaining national financial security. Russia's decision to pass the cross-border settlement bill provides other sanctioned countries with a new perspective, namely the possibility of bypassing traditional financial sanctions through digital currency. If this model is widely adopted, it may weaken the effectiveness of Western sanctions. From this perspective, the role of virtual currency is no longer limited to financial innovation, but has gradually evolved into a new battlefield for power games between countries. Governments have realized that by controlling and utilizing digital currencies, they can not only seek breakthroughs in international economic sanctions, but also strive for greater autonomy in the global financial landscape. Especially in the current situation where the global financial system is dominated by the US dollar, virtual currencies provide countries with an alternative way to circumvent traditional financial restrictions, thereby increasing countries' bargaining chips in international affairs. For example, Iran began studying the use of cryptocurrencies for international trade as early as 2022 to bypass US economic sanctions. The Iranian government has even publicly stated that it will develop its own digital currency and actively seek to cooperate with other sanctioned countries to establish a financial network that is free from Western control. Some emerging market countries have seen the potential of digital currencies in countering external pressures and have accelerated their own digital currency research and development. For example, Latin American countries such as Brazil and Argentina have already launched their own digital currency projects to reduce their reliance on the U.S. dollar. Russia’s bill may prompt these countries to further consider the application of digital currencies in international trade, thereby promoting digital currency innovation worldwide.
On the other hand, Western countries have shown obvious concerns and vigilance about this move. In early 2024, the U.S. Treasury Department issued a statement warning other countries and companies not to try to evade sanctions through digital currencies, and emphasized that it would continue to crack down on attempts to circumvent sanctions using cryptocurrencies. To this end, the United States has stepped up its supervision of cryptocurrency trading platforms, requiring them to conduct stricter reviews of transactions from sanctioned countries. An incident that has attracted widespread attention is the experience of the cryptocurrency trading platform Binance. In 2023, the U.S. Department of Justice launched an investigation into Binance, accusing it of failing to adequately prevent users from sanctioned countries from trading on the platform. The investigation showed that some Binance users continued to conduct transactions related to sanctioned countries on the platform by hiding their true locations through virtual private networks (VPNs). In response to U.S. regulatory pressure, Binance announced that it would further tighten its review of user identities, especially those from high-risk and sanctioned countries. The Binance incident highlights the complex role of digital currency trading platforms in the global sanctions system, and also shows that Western countries are taking strict legal and regulatory measures to prevent digital currencies from becoming a tool for evading sanctions.
In addition, international organizations such as the International Monetary Fund (IMF) have also expressed concerns about this. In its 2024 Global Financial Stability Report, the IMF pointed out that the rapid popularization of digital currencies, especially in some sanctioned countries, may lead to the fragmentation of the global financial system, especially in the areas of cross-border payments and anti-money laundering. Increase systemic risks. Sanctions by Western countries such as the United States may further promote the polarization of the global financial system, with the traditional financial system dominated by the US dollar on the one hand and the emerging financial network based on digital currencies on the other. The IMF called on governments to cooperate to develop a global unified regulatory framework for digital currencies to prevent them from being used for illegal purposes while ensuring financial stability.
Inspiration and reflections on China
Russia's bold attempt in the field of cross-border payments and virtual currency mining industry may provide China with ideas for further exploration.
First of all, it is better to rely on yourself than on heaven and earth. The current trade relationship between China and Russia is becoming increasingly close. According to statistics compiled by Bloomberg, China accounted for about 28% of Russia's total trade last year, up from 19% in 2021. In contrast, the EU's share of Russian trade fell from 36% to 17% during the same period. However, this situation is facing new challenges with the latest sanctions imposed by the United States on Russia.
For example, in May this year, the RMB accounted for 53.6% of the trading volume on the Russian exchange, but the latest US sanctions imposed in mid-June forced the exchange to suspend US dollar and euro trading. As a result of the sanctions, the RMB's share of the Russian foreign exchange market soared to 99.6%, almost all of which was settled in RMB. This phenomenon shows how China and Russia can reduce their dependence on the US dollar and the euro by strengthening bilateral trade cooperation in the face of international sanctions.
The "going global" of the RMB is an old topic. The Chinese government has been committed to promoting the RMB as an international trade settlement currency, reserve currency, and investment currency, thereby enhancing China's influence in the global economy and reducing its dependence on the US dollar. As a legal digital currency, the digital RMB is an important tool in this process. It can not only improve domestic payment efficiency, but also promote RMB settlement in countries along the "Belt and Road" and other trading partners through its cross-border payment function, thereby promoting the internationalization of the RMB.
Compared with the digital RMB in the Mainland, the Hong Kong dollar stablecoin (HKDG) launched by the Hong Kong Special Administrative Region is more international. Its main goal is to embed the Hong Kong dollar into the global digital asset ecosystem through stablecoins, attract more international capital, and provide more flexible payment methods for cross-border trade, thereby enhancing Hong Kong's status as a global financial center. In contrast, the digital RMB in the Mainland mainly focuses on the digital transformation of the domestic market and the improvement of the payment system. Its strategic value lies in improving the efficiency of the financial system, promoting inclusive finance, and strengthening the supervision of domestic financial activities.
The relationship between the Hong Kong dollar stablecoin, the digital RMB and the RMB's "going global" can be understood as synergy at different levels. The Hong Kong dollar stablecoin and the digital RMB each play a unique role in the international and domestic markets, but both are committed to promoting the internationalization of the RMB. The Hong Kong dollar stablecoin enhances Hong Kong's position in the global financial network through deep integration with the international capital market, thereby providing support for the internationalization of the RMB. The digital RMB gradually expands its use in international trade through technological innovation and policy guidance, providing direct support for the RMB's "going global".
This synergy will not only enhance China's financial competitiveness, but also gradually enhance the global influence and acceptance of the RMB through multi-level and multi-path innovation, which will not only serve the domestic economy, but also help the integration and innovation of the international financial market.
Secondly, can Russia's experience be copied? For example, in the bill passed this time, Russia allows the use of virtual currencies in cross-border trade, but still prohibits virtual currency payments within the country. This flexibility allows Russia to take advantage of virtual currencies when dealing with international sanctions without causing financial risks in the domestic market. Whether China can learn from this practice and use virtual currencies as a tool for cross-border settlement while maintaining a strict regulatory framework at home to ensure financial security is worth further discussion.
By legalizing the mining of virtual currencies such as Bitcoin, Russia has enhanced its ability to bypass the US-led cross-border settlement of applicable virtual currencies for self-production and sales. Bitcoin is the world's largest and most successful virtual currency. By legalizing mining, Russia can not only ensure the stability of the currency source for cross-border settlement, but also occupy a place in the global virtual currency market. Russia's mining industry benefits from the country's abundant energy resources and cold climate, which help reduce mining costs and improve efficiency. In 2023, Russia became the world's second largest cryptocurrency mining country, with its computing power accounting for 13% of the global Bitcoin computing power, second only to the United States. The Russian Ministry of Finance estimates that starting in 2023, tax revenue from cryptocurrency transactions and mining activities could reach 2.5 billion rubles (about US$340 million) per year. This tax revenue provides Russia with a new source of finance, especially in the context of international sanctions. For China, can this policy consider allowing virtual currency mining activities in specific areas or under strict supervision to enhance China's strategic reserves and market competitiveness of mainstream virtual assets in the global financial market competition?
Lawyer Mankiw's Summary
Russia's adoption of the cross-border settlement bill marks an important milestone in the global digital currency field. It is not only a financial innovation for Russia to deal with international sanctions, but also a far-reaching attempt in the development of global digital currencies. The status of virtual currencies in the global financial landscape is gradually improving, and countries are accelerating the research and application of digital currencies, which indicates that the global financial system may face major changes, especially in the fields of cross-border payments and financial supervision.
For China, how to balance the application of digital currency in the international and domestic markets, promote the internationalization of the RMB, and ensure national financial security is an issue that needs to be deeply considered in future policy making. Through the coordinated development of the Hong Kong dollar stablecoin and the digital RMB, China is expected to occupy a more advantageous position in the global digital currency competition. At the same time, China can also learn from Russia's policy flexibility in cross-border settlement and mining of virtual currencies, and explore more paths for the RMB's "going overseas" strategy. This will not only help enhance the country's financial competitiveness, but will also contribute important forces to the reconstruction of the future global economic order.
