On August 8th, just the day before yesterday, Russian President Vladimir Putin signed a bill officially legalizing cryptocurrency mining in Russia. This bill introduces new concepts such as cryptocurrency mining, mining pools, and mining infrastructure operators. Putin had previously pointed out at an economic meeting that digital currency is an area of great potential and that Russia must seize the opportunity to quickly establish a legal framework and regulatory mechanism.
Rather than interpreting this as a grand narrative of Russian authorities, Aiying Payment Compliance is more inclined to believe that Russia, under the heavy pressure of international sanctions, is seeking a way out of its economic blockade.
I. Cross-border payment settlement dilemma in Sino-Russian trade
In early 2024, as the West intensified its enforcement of sanctions, major Chinese banks began to feel greater pressure from the United States, especially when it came to their position in the financial market and the US dollar clearing system. Banks had to take more cautious measures. Several major Chinese banks started to restrict US dollar transactions related to Russia, especially cross-border settlements involving the US dollar. These banks significantly reduced or completely stopped providing credit services to companies doing business with Russia.
According to Aiying Payment Compliance, it was learned that as of June 12th, some small and medium-sized banks in China, similar to Hunchun Rural Commercial Bank and VTB Bank, have stopped accepting cross-border remittances and suspended account opening. Even accounts that have already been opened cannot receive payments normally. VTB has been listed by the U.S. Office of Foreign Assets Control (OFAC) of the Department of the Treasury as a sanctioned entity. Executives of three Russian commodity export companies interviewed by Bloomberg also mentioned that it has become very difficult, if not impossible, to make direct payments from China to Russia after the implementation of new U.S. sanctions, even if payment is made in Chinese yuan.
The payment issue not only affects major commodities such as metals and agriculture but also other industries. Aiying Payment Compliance has learned from inquiries with some companies that Chinese goods such as automotive parts and agricultural machinery often get stuck due to payment issues. In the past, payments could be received within one or two days, but now various procedures and inspections have caused delays of one to three months. Doubts about whether certain products have both civilian and military uses can also lead to longer delays, and transaction failures due to incomplete documents are also common. The Russian Automobile Dealers Association warned last week that it may suspend the import of cars and car parts from China due to settlement issues.
According to a recent report released by the National Institute for Research on Aging in China, it was mentioned that from February to March 2024, due to the threat of Western secondary sanctions, both SPFS and CIPS, which are used for RMB-RUB transactions, were suspended. As of March this year, 80% of transactions were blocked. This is consistent with the feedback from Aiying Payment Compliance and the companies it has consulted: Chinese funds cannot enter Russian accounts, and Russia itself cannot make payments.
II. Cross-border payment settlement in Sino-Russian trade is a major issue
According to statistics compiled by Bloomberg, China’s share in Russia’s total trade volume last year was about 28%, higher than 19% in 2021. In contrast, the EU’s share in Russia’s trade during the same period dropped from 36% to 17%.
In May, the renminbi accounted for only 53.6% of the trading volume on the Moscow Exchange, but the latest round of U.S. sanctions implemented in mid-June forced the exchange to suspend dollar and euro transactions. As a result, the renminbi’s share in Russia’s foreign exchange market rose to 99.6% and almost all settlements were made in renminbi.
In the over-the-counter market, the U.S. dollar and the euro are still traded. In June, the trading volume in the over-the-counter market slightly decreased to 13 trillion rubles, and the renminbi’s share increased by 0.8 percentage points to 40%. The sales of major exporters remained high, reaching $14.6 billion (about 19.7 billion yuan) last month.
Based on the above data, if the issue of fund settlement between China and Russia is not properly resolved, it will have a significant negative impact and economic losses on Chinese companies.
The current issue of cross-border payment settlement between China and Russia is like a major traffic jam in the financial world, which is even more troublesome than traffic congestion in logistics. After all, payment settlement is the foundation of bilateral trade circulation.
III. Cryptocurrency cross-border payment as a way out
In this context, China and Russia have begun to explore new payment methods to overcome the obstacles brought by sanctions. Currently, according to Aiying Payment Compliance’s understanding of some companies active in Sino-Russian trade, their initial focus was on importing Chinese consumer goods, including daily necessities, electronic products, clothing, and home goods, to the Russian market. These companies have established a complete logistics and distribution network in Russia, allowing Chinese consumer goods to quickly enter the Russian market. However, in recent years, sanctions have led to difficulties in settlement and a decline in trade volume.
Initially, companies found that many small regional Chinese banks, which were not directly targeted by international sanctions due to their small scale, were able to handle payment transactions with Russia more flexibly. These banks usually operate at the local level with limited business scope, so they can still maintain their daily business relatively smoothly under the “radar” of international sanctions. However, as the sanctions deepened, these methods also became restricted, so they began to explore more innovative approaches – using digital assets and cryptocurrencies for cross-border payments, bypassing the limitations of traditional banking systems. By using Tether (USDT), settlements can be completed within one day, greatly simplifying the process and reducing overall payment costs.
IV. Russia introduces supporting legislation for cryptocurrency cross-border payments
1. Anatoly Aksakov, Chairman of the Financial Market Committee of the State Duma, predicted that in the future, Russian citizens will be able to exchange Bitcoin for digital rubles.
2. Russia is also actively promoting the application of digital ruble. Digital ruble has made significant progress in the pilot phase, and President Putin strongly supports its accelerated integration into the economic system.
3. Elvira Nabiullina, the governor of the Russian central bank, said in an interview, “By 2031, CBDC will become part of daily life. Digital ruble has the advantage of free or low transaction fees, which will promote the adoption of CBDC.”
4. The Russian State Duma passed a law in the second and third readings, allowing digital currency cross-border settlements and exchange transactions to be conducted within the Experimental Legal Regime (EPR) framework from September 1, 2024.
According to a report cited by the Russian Central Bank in the “Messenger” newspaper, the Russian government is actively considering legalizing stablecoins in international transactions to simplify and promote cross-border payments by Russian companies.
It is worth noting that before 2017, the Russian government and the central bank had a very cautious attitude towards cryptocurrencies. Cryptocurrencies and mining were considered highly risky, mainly due to concerns about their use in illegal activities such as money laundering and terrorist financing. The central bank repeatedly warned the public not to invest in cryptocurrencies such as Bitcoin, pointing out their price volatility and high financial risks. In 2020, Russia passed the “Digital Financial Assets Act,” which recognizes cryptocurrencies as property but prohibits their use for payment of goods and services. However, in recent months, Russia’s policy has made a 180-degree turn, issuing various bills, policies, and statements acknowledging that digital currency is an area of great potential and that Russia must seize the opportunity to quickly establish a legal framework and regulatory mechanism. It is Aiying Payment Compliance’s subjective judgment that Russia has achieved some success in using virtual currency as one of the solutions to break free from sanctions, which led to this adjustment.
V. Can cryptocurrency cross-border payment solutions perfectly break free from sanctions?
This question is undoubtedly a compliance issue that everyone regularly asks, especially in the field of finance, where the game rules of this world, especially in the financial field, need to be followed. Everyone needs to comply with the FATF’s anti-money laundering regulations and the “Banking Protection Law.” So, does this not apply to the cryptocurrency field? If it does, can this solution still work?
This involves a detailed investigation into the operational details of specific execution cases. Due to the limited space, it is impossible to delve into it. We can only use a question asked by Foresight last week to Aiying Payment Compliance to answer dialectically: Is it good or bad that the fate of cryptocurrencies is becoming increasingly tied to politics? On the one hand, cryptocurrencies, represented by Bitcoin, are decentralized, but on the other hand, political participation deepens, pulling them back into the center of centralized power. In the case of cross-border payments using digital currencies, the game rule makers of centralization will do everything possible, whether through technological means, establishing licensed institutions through the passage of bills, or anti-money laundering regulations, etc., to bring it back within the scope of their sanctioning ability and maintain the deterrent power of their sanctions tools. This can be frustrating for those who long for “freedom and innovation.”
Aiying Payment Compliance understands the relationship between these two aspects as “love and hate.” On the one hand, the cryptocurrency industry’s starting point is decentralization, a revolution. However, the body of capital is honest; they don’t care what revolution you bring as long as I can obtain a hundred-fold return, that is my goal. Therefore, the pursuit of profit by capital will naturally lead them to engage in more political lobbying, influencing the game rules that are favorable to them. This process may not be a bad thing for the cryptocurrency industry. It is more like a Trojan horse entering in good faith, gradually infiltrating and reforming the institutional rules and regulations of the current financial system. Taking cross-border payments as an example, without considering ethical and political factors, using stablecoins like USDC and USDT represents the US dollar and exercises the game rights of settling in US dollars. However, on the other hand, it has become one of the most effective ways for sanctioned countries to break free from “sanctions” and counter or counterattack the existing rules. Two years ago, after being sanctioned by the US government, the activities of the cryptocurrency mixer Tornado Cash significantly declined. However, in the first half of 2024, the protocol received deposits of over $1.8 billion, about 45% higher than the total deposits in the previous year, according to blockchain analytics company Flipside Crypto. In a sense, it can be considered as breaking free from the sanctions of the centralized power.
Therefore, whether the blockchain technology that has given rise to Bitcoin and stablecoins, which can be described as “unbridled wild horses,” will be truly tamed, who is changing whom, and who needs to be forced to change, is a question worthy of in-depth exploration. Returning to the question itself, it is a dynamic question. The emergence of cryptocurrency payments has given the original currency settlement system new variables. In addition to the cyclical changes in the timing, favorable geographical conditions, and national policies, this variable has had a more comprehensive game with the Bretton Woods system, which is dominated by the US dollar, and the international monetary system. Therefore, the current solution is the result of bargaining.
VI. Adhering to principles while surprising
Of course, adhering to the principles of righteousness is the starting point for everything. While using cryptocurrency payments as a way out, it also provides a haven for some lawbreakers. Therefore, when using digital currencies as a settlement solution in normal trade, it is necessary to enhance anti-money laundering capabilities and comply with local regulations to avoid being used by some criminals as a channel for money laundering, which would outweigh the benefits.
