In 2021, Russia was third in the world in terms of bitcoin mining.
The Russian cryptocurrency business exists in a murky area; over the years, the authorities have been honored to pass just one regulation governing the status of the crypto market. The absence of defined rules of the game is already causing issues: mining farms are overloading power systems, posing serious concerns of rolling blackouts across the nation, and Russian residents and businesses are being compelled to bear the price of the electricity utilized. Representatives from the sector are willing to come out of the shadows and pay taxes on a par with the rest of the company, but the state is taking its time making decisions and assisting the ailing industry.
Absolute precedent
In 2021, Russia was third in the world in terms of bitcoin mining, with an 11 percent stake. The number of bitcoin miners has increased dramatically after their operations were prohibited in China, the world's largest mining hub. In two months, the PRC's computer power dropped from 46 percent of the worldwide hash rate to zero. Many miners opted not to abandon their lucrative profession and began looking for more favorable circumstances for the creation of digital assets in other nations. Russia and Kazakhstan have been the primary centers of interest for them due to low-cost power and the absence of any industry limitations.
On January 1, 2021, the single Russian law governing the cryptosphere went into effect. The Law on Financial Digital Assets defines bitcoin and forbids its usage as a means of payment for goods and services. However, the Russian government has not even begun to legitimize mining. Miners can register as private entrepreneurs and face the appropriate electrical expenses and taxes to fit within the framework of the right sector, but they were not required to do so until recently - there is no punishment for "underground" mining in Russia.
Nonetheless, these actions result in unmanageable losses for both energy providers and regular individuals. In mid-October, Igor Kobzev, the governor of Russia's mining capital, Irkutsk region, declared a "avalanche-like rise in energy usage" owing to cryptocurrency mining, for which the power networks were not prepared. Mining in the area has already resulted in a number of power interruptions in the suburbs. Because of the country's lowest energy rates, the Irkutsk area has become a magnet for bitcoin miners. Currently, over a thousand farms have been found in the region.
Irkutsk energy corporations chose to attack the miners with their own hands due to the lack of a legal framework. They launched a serious hunt for the miners, calculating them on exaggerated power bills, and Irkutsk locals were even provided telephone hotlines to denounce their mining neighbors. After gathering the essential information, regional electricity engineers began suing the miners.
The Irkutsk energy provider Irkutskenergosbyt has already sued bitcoin miners for 18.7 million rubles as a result of this campaign. Currently, the corporation has won 9 of 85 cases. The electricity engineers were able to demonstrate to the court that commercial operations take place in the residences where the mining farms are situated, and that homeowners should not be charged for it at the standard "household" prices. The court upheld the rate hike and ordered the miners to pay an extra sum for the energy they had previously used. At the same time, neither Russian miners nor energy specialists were able to provide Lenta.ru with persuasive explanations why the procedures concluded in this manner - after all, mining is not considered a business under Russian legislation.
"Given the lack of clear definitions in the legislation, it is unclear on what grounds the connection of devices for computing at home is recognized as a commercial activity," Vitaly Borshchenko, co-founder of BitCluster, one of the Russian market leaders in the provision of services for the placement and hosting of crypto equipment, told Russian media Lenta... Murad Yaliev, a spokesman of the Irkutsk mining hotel MinerWorld, also indicated that there was no legal foundation for such a decision. Konstantin Krokhin, chairman of the Union of Moscow Housing Organizations and an expert in housing and communal services, justifies the court's judgment by pointing out that the Russian state has given energy firms extremely extensive powers.
Experts believe miners will be able to appeal the ruling to the Supreme Court. According to Pavel Ganin, a lawyer and partner atLegal, the Supreme Court can accept and evaluate such complaints because the subject is significant in Russia and is not yet controlled in any manner. In his perspective, the Supreme Court is unlikely to overturn lower court rulings, but it can give reasons that will serve as the foundation for the construction of the legislative framework.
At the same time, leaders of Russia's mining sector and energy experts recognize the validity of the energy industry's tariff hike proposals. "Irkutskenergosbyt can be understood - the use of devices to hide a large amount of electricity consumption caused an increase in the company's debt, the debt was constantly growing, and it had to be covered at the expense of citizens," said Dmitry Kudinov, the head of the sales department of the EMCD mining company and a specialist in the field of mining digital assets, in a conversation with Lenta. According to him, the cause of this problem is a lack of regulation.
The battle against miners in Russia is now chaotic, and market participants do not trust in the efficacy of such a "manual method" of mining management, citing the necessity for a complete regulatory solution. Dmitry Kudinov and his EMCD colleague, blockchain specialist and liquidity manager Denis Smirnov, think that the lack of a legal framework for mining impedes both energy suppliers and the industry's development.
"Because mining is the most energy-intensive activity, it should be categorized as a commercial activity." If mining is acknowledged as a business, I do not believe Russia will lose its attractiveness to miners. On the contrary, this will increase the attraction of a nation where the rules of the game are clear and miners can forecast the development of their business and comprehend the prospects. Legislative actions and regular regulation will draw a huge number of market participants to us, and it is this step that will allow Russia to become the industry's flagship," Denis Smirnov said.
His colleague went on to say that the low cost of energy and the dependability of the domestic energy system will eventually attract huge investors who are still hesitant to enter this market owing to a lack of regulation. Nikita Zuborev, senior analyst at the Russian crypto market aggregator Bestchange.ru, agrees: "The primary aspects of appeal for miners are the safety and legality of doing business," he says.
According to energy experts, the issue of energy consumption restriction is important not just in Russia, but across the world. Many nations, they believe, will pursue tariff control in the future years, so that the money earned by miners may be used to pay for higher-priced power. "They [the miners] are acting dishonorably in respect to business as usual." "In Russia, the owner of a mini-bakery or café spends 30-50 percent more for power than cryptominers," said Sergei Kondratyev, deputy chairman of the Institute of Energy and Finance's economic section.
"For example, there is evidence that miners in Transnistria are extremely aggressively consuming electricity, taking advantage of the fact that Transnistria receives free gas from Russia." "I believe similar things [business regulation] will happen all over the world," said Stanislav Mitrakhovich, senior researcher at the Financial University and specialist at the National Energy Security Fund (NESF).
Hazy prospects
Experts are divided on when to expect clear mining laws to emerge in Russia. Their development will most likely take several years. "There aren't many professionals dealing with this subject in our state administrative organizations." The establishment of the regulatory framework, on the other hand, takes a long period. […] It also has an impact on associated businesses such as energy, equipment makers, and the settlement system, according to Sergei Kondratyev of the Institute of Energy and Finance. Keeping mining's power use within any bounds would not work at this time, he stressed.
BitCluster co-founder Vitaly Borshchenko stated that work on the appropriate paperwork has already begun, and that the authorities are working with his business and other significant industry figures as part of the process. However, an equally pressing concern is what concrete actions will be implemented, as the survival of Russia's mining industry is at stake. "Recognition is excellent in and of itself because it allows you to engage in this sort of action lawfully." The mechanisms and quantity of taxation for this sort of business are critical. Borshchenko stated, "He must be sensible about the economics of this sort of enterprise." Experts in the mining and energy industries recognize that determining the optimal choice for financial regulation in this field is extremely challenging.
According to Zuborev, the used electricity does not always adequately reflect the efficiency of mining. To begin with, the quantity of mining earnings is unpredictability. Second, the distribution of power for equipment might vary, because energy is used not only for the functioning of integrated circuits, but also for cooling them. The energy consumption ratio varies depending on the type of equipment and the environment.
As a result, the imposition of a special tax is more appropriate in this case, according to Zuborev. However, mining various tokens yields different returns, and it would be nonsensical to compute taxes without taking into account cryptocurrencies. Furthermore, while calculating the amount of tax, it is critical to include the miner's net profit, which is used to lower the taxable base for paying for energy and depreciation of mining equipment.
Simultaneously, in order to avoid double taxation, it will be necessary to omit customs costs for the import of such equipment for personal use, or to lower the tax base by the amount of these fees. The tax rate itself might be modified based on the economic zone's classification and the size of the enterprise.
According to Sergei Kondratyev of the Institute of Energy and Finance, a combination of two measures - taxation and tariff increases - will be more beneficial for Russia. In his perspective, imposing a higher-than-usual 20 percent tax on miners' income will allow them to remove part of the extra revenues that result from a dramatic spike in the price of cryptocurrencies. At the same time, the professional agrees that determining the tax base would need the hard work of attorneys and financiers.
"It's a terrible time when you have to accept that you're generating money." The tax authorities will have a tough time keeping track of when the transactions have place. In the conventional economy, tax officials have a good idea of who has sold to whom and for how much. Can comprehend the commercial reasoning behind transactions. "However, there are a lot of difficult periods here," Kondratyev remarked. Tariffs for bitcoin miners should be the same as those for other commercial users at the appropriate voltage level. If this option is chosen, miners' tariffs will be about the same as those of a small firm.
The expert is optimistic that the combination of these restrictions will assist keep Russia's mining output at a safe level. According to Kondratyev, Russia's appeal to miners is now more of an issue for the government, as the losses from the migration of miners into the nation might be substantially more than the profit.
As a result of mining, several areas in Kazakhstan, which has just become one of the world's mining centers, are already facing power disruptions. "If Russia does not adopt a specific approach in relation to mining farms, a scenario in which normal users do not have adequate electricity may develop." Simultaneously, Russian customers and big Russian enterprises incur a significant amount of the costs associated with maintaining the energy industry. "I don't think we're interested in such cross-subsidization of individual miners," adds the expert.
According to him, many nations are already attempting to simplify both the connection and use of energy by miners, so that in the case of an energy crisis, the supply of electricity to this industry might be limited, as well as for the simplicity of collecting taxes. However, taking control of bitcoin mining will be tough for Russian authorities, according to Kondratyev.
Under response to the Governor of the Irkutsk Region's recent proposal to give miners with distinct industrial sites, the expert stated, "This is sensible, but I am not convinced it would work in Russian conditions." […] Finding miners to work on such sites will be challenging. It will be necessary to provide some benefits to those who choose to "come out of the shadows" and work in such clusters. On the other hand, considerable effort will be required to discover unlawful energy usage."
The ice has broken
In 2021, various government departments recommended comparing mining to entrepreneurship at the same time. Among them are members from the Ministries of Economic Development and Energy, as well as Anatoly Aksakov, the head of the State Duma Committee on the Financial Market, and Alexei Savatyugin, the auditor of the Accounts Chamber.
In November, State Duma Chairman Viacheslav Volodin directed the formation of a working group to address the problem of cryptocurrency circulation. It was led by Deputy Chairman Alexei Gordeev, and his deputy was First Deputy Chairman of the State Duma Committee on Security and Anti-Corruption Andrei Lugovoi, the architect of the working group idea.
In an interview with "Lenta.ru," deputy Anatoly Aksakov stated that the working group's first meeting is slated for the third decade of December. It will be attended by members from the executive branch as well as Central Bank specialists. According to Aksakov, the Central Bank is compiling a report on cryptocurrencies, which, along with the findings of the invited analysts' work, will form the foundation of the debate at the first meeting.
According to Andrey Lugovoy, deputy leader of the working group, there is no priority position in the State Duma on mining legalization. The regulation of the sphere is currently on the table - there is no mention of a ban on cryptocurrencies and their creation, despite the fact that many authorities advocate this approach. They suggest excessive currency volatility and illicit interest in digital assets.
Russian President Vladimir Putin has expressed alarm about these dangers as well. "It [the cryptocurrency] is not backed by anything, the volatility is huge, therefore the dangers are quite big," he remarked at the Russia Calling! Investment event. According to Lugovoi, among the participants in the State Duma, a particularly adversely adjusted representatives of the Central Bank.
The deputy himself is not convinced that outright rejection of cryptocurrencies is the best option: "From the standpoint of common sense, we need to regulate." [...] Russians hold $200 billion in cryptocurrencies, according to different expert sources, including international ones. "I'm not sure how 200 billion dollars can be grabbed and scooped out of Russian folks' purses."
In terms of mining regulation, both Aksakov and Lugovoi believe that an integrated strategy, including particular rates for power and taxes, is required. "Of course, the fact that miners are now using tariffs for the populace is plain unfair." "This should not be the case," stated the working group's deputy head. He went on to say that the pricing hike would be addressed with the Ministry of Energy, but that the miners will most likely be obliged to utilize the same plan that any other legal entity is presently using to pay for power. There is no need, according to Lugovoy, to create different tariffs for bitcoin miners.
Furthermore, in order to prevent overloading power systems, miners will be required to coordinate their connections with power engineers: "If mining is a lawful operation, they will consult the relevant electric and power grid organizations before connecting." If they are refused but continue to connect, they will be in violation of both the Administrative and Criminal Codes. [...] Illegal miners will have to serve time in prison.
Taxes will be levied in accordance with the widely recognized plan, based on the size of the enterprise. "If there is land, real estate, you pay for it according to established legislation." "If there is a profit, you must pay income tax," explained Lugovoi. As with other forms of company, the expenditures spent will be included when assessing the tax base.
"They created bitcoin, then they examined the rate, calculated how much power they used, and what other expenses they incurred" (for salaries and other payments). Subtraction of all of this yields a profit." Income tax will be computed in accordance with this number. Despite the fact that the mining industry in Russia will become more appealing for investment with the establishment of a legal framework, the authorities have no plans to promote it.
According to Aksakov, assisting mining is not worthwhile due to the absence of societal advantages and the potential problems linked with the rise of cryptocurrencies: "They assist the socially oriented business that creates things, but it is unclear what they produce." Virtual currencies are digital, have the potential to explode, and so on. They will build financial pyramids, and we must assist them."
Risk Nothing
Mining pools and corporations do not anticipate drastic actions from the authorities because they, too, support the introduction of regulation. Market participants believe that if the government imposes a tax or raises tariffs, the magnitude will be acceptable. According to Murad Yaliev, who represents the MinerWorld mining hotel in Irkutsk, the costs for cryptocurrency mining in the Russian territory "will not be gigantic and will not play a significant role." These operations are too profitable, and additional rules are unlikely to "scare off" miners and push them to seek better circumstances in other nations, according to him. Even today, when the hunt for miners has begun in Irkutsk, demand for the MinerWorld mining hotel has not decreased - "there have been no places for three months already."
According to Nikita Zuborev, senior analyst at Bestchange.ru, miners began to leave Kazakhstan following allegations of a tariff rise. "The price increase will apparently be only 1 tenge (about 0.17 rubles) per kilowatt, allowing energy to remain one of the most lucrative in the world in any case." "The fundamental issue with the departure of miners there was the imposition of restrictions for energy supply by local authorities, not the expressly planned price increase," he stated.
Even nearby Ukraine, Belarus, and Georgia, which have more liberal cryptocurrency limitations, are less viable possibilities for miners than Russia, according to Zuborev, due to the low cost of power. "We clearly acknowledge a scenario in which, even with more taxation, mining profitability remains more appealing than in other nations," the expert added.
As a result, even after the formation of the legal framework, the risks for miners in Russia remain low, and market representatives do not anticipate "shocks." Nikita Zuborev argues that if the magnitude of taxes and tariffs satisfies the expectations of industrial participants, only political actions of the government would remain possible dangers. According to him, if Central Bank lobbyists continue to squeeze out any digital assets other than the digital ruble, miners will be driven to leave the nation for political reasons rather than financial ones.