Russia Plans to Ban Bitcoin: The Risks and Rewards

It was reported today in Russia media that the Ministry is Finance is proposing a ban on Bitcoin with fines for individuals of 50 thousand rubles, for government officials of 100,000 rubles, and for companies, of 1,000,000 rubles.

This move is not surprising as the Ministry of Finance has been hinting since August that it might take just this kind of action. Like Ecuador, a country that previously announced a Bitcoin ban, Russia is a country with a weak rule of law (even weaker than in the West with its rampant culture of regulatory capture) and an economy under severe pressure. Given this, it’s no wonder why Russia fears a radical economic instrument that they might not be able to control.

Bitcoin has already been banned in a few places: Ecuador, Bangladesh, Iceland, Kirgizstan, Vietnam, and Bolivia. China has famously hinted at a ban without ever pulling the trigger, probably because it’s aware that it’s already a player in the Bitcoin economy; China isn’t comfortable with Bitcoin and its associated capital flight risk, but at the same time, it’s aware of the huge possibilities inherent in the new currency. Our feeling is that China has adopted an arm-length wait-and-see approach.

If Russia adopts this proposed bill, then it will be the first major economy to enact a true ban on the digital currency and will provide the first true test of Bitcoin’s ability to survive concerted legal action. Though the depths of Bitcoin is not entirely clear, there are a number of Bitcoin accepting businesses in Russia and one of the biggest Bitcoin exchanges, BTC-e, is thought by many to be based there, as a major economy and a populous country, Bitcoin activity is significant enough to impact the market.

This means that if a ban is put in place and actively enforced, we will see in action what many have said is one of Bitcoin’s real use cases. The ban will certainly be able to shut down merchant adoption and many Bitcoin startups, but it should not be able to stop people acquiring, holding, and using Bitcoin as part of the black and grey economies. Given the economic and political pressures on Russia, the populous should have a reason to mistrust the state currency and be looking for a safety net.

If we see that in light of a Russian ban on Bitcoin that adoption progresses and that people continue to find ways to get and use Bitcoin, it will be a major proof of Bitcoin’s viability. Since fear of regulation is one of the major concerns raised against Bitcoin, this would raise confidence in the currency and pave the way for mass adoption. On the other hand, if the Russian authorities are successful in penalizing great numbers of, or high-profile Bitcoin users to the point where adoption stops, then the path to adoption will be much more difficult.

In any case, it will take some time for all of this to play out, but it is well worth watching.

Originally appeared on 10/03/2014