Russia has overtaken Kazakhstan to become the world's second-largest cryptocurrency mining country in 2023, Kommersant reports on April 12.

Bitriver, Russia's largest bitcoin mining provider, says that Russia's coin generating capacity had reached 1 GW in January-March this year, second only to the US with a capacity of 3-4 GW.

Cut off from the international payments system following the imposition of the SWIFT sanctions shortly after the start of the war a year ago, Russia has accelerated its plans for digital currencies, which operate outside the control of international regulators. The Central Bank of Russia (CBR) has already launched a pilot programme to test the use of a state-backed digital ruble.

Bitcoin and other cryptocurrencies are already being widely used by the population to get around the restrictions on transferring money to the EU. And Russian companies are investing in developing new cryptocurrencies.

Russia has achieved significant progress in the crypto mining industry in recent years. In contrast, Kazakhstan has slipped down to ninth position due to its restrictions on crypto mining activities in 2022, due to its drain on the power sector and unlicensed activity.

As reported by bne IntelliNews, the Kazakh Financial Monitoring Agency (FMA) shut down ABS Change, a cryptocurrency trading platform that was operating illegally without a licence since 2021. Three people were arrested and $342,000 and KZT7mn ($16,000) in cash were seized during a raid in the company's headquarters in Astana. Additionally, ABS Change had $23,000 worth of crypto assets in two wallets on Binance, which was temporarily restricted.

Kazakhstan, which attracted many cryptocurrency miners with its cheap electricity following China's move to put in place a crypto industry ban, has taken steps to regulate the sector, including laws restricting mining farms' access to low-cost power, and introduced licences for miners. Kazakhstan suffered multiple power outages across 2021 and 2022 due to the surge in crypto-mining operations.

Inhabitants of Ekibastuz in the north-eastern Kazakhstan’s Pavlodar Region were left without heating during the freezing winter days this year after cryptocurrency miners drained the local utility of power, until authorities shut down their operations.

China has been implementing a similar crackdown since 2021 and also did not make it to Bitriver's top ten list. China banned crypto mining in 2021.

However, bitcoin use is limited in Russia due to restrictive laws on cryptocurrencies, including President Vladimir Putin's 2020 law on digital financial assets. Although the law legalised cryptocurrencies, it banned their use to pay for goods and services. The CBR’s compromise has been to propose a regulated digital ruble, which is not a true cryptocurrency, as the regulator controls the supply of the coins and hence can fulfil a central bank’s traditional role of controlling the money supply.

After initially rejecting the idea of cryptocurrencies, the famously conservative Central Bank of Russia (CBR) has more recently softened its stance on the potential use of cryptocurrency as recognised means of payment. Deputy Head of the CBR Xenia Yudaeva said the regulator was toying with the idea of allowing the use of crypto for international payments and signalled a more lax stance on crypto-mining in June last year.

“We have changed our position on mining, and we [could] allow the use of crypto-currency in foreign trade and outside of the country,” Yudaeva said in June 2022.

However, Yudaeva reiterated the regulator’s position that crypto was a highly speculative instrument that is actually a ponzi scheme. She warned that legalising crypto in Russia could boost illegal activity and tax evasion. 

In search of solutions to avoid sanctions restrictions, Russian Prime Minister Mikhail Mishustin added his name to the roster of Russian high officials endorsing the use of digital money to settle international trade deals in September.

The US, aware that the unregulated and decentralised cryptocurrencies represent a threat to the effectiveness of the SWIFT sanctions on Russia’s ability to make international payments, has already started to try to close the loopholes. The US has already blacklisted a bitcoin and an ether address in February, suspecting their involvement in Russian defence equipment sales abroad, and is examining various crypto-exchanges for their role in sanctions busting.

One of the largest crypto-currency exchange platforms, Binance, announced last April that following the EU’s fifth sanction package it is “required to limit services for Russian nationals or natural persons residing in Russia, or legal entities established in Russia, that have crypto-assets exceeding the value of €10,000”. Another exchange, Coinbase, also warned Russian users that their accounts will be blocked on May 31.

Additionally, the European Union imposed a total ban on carrying out cryptocurrency transactions with Russian citizens and anyone residing in the country as part of its eighth round of sanctions introduced last summer. The US Treasury Department also targeted Swiss-based Russian crypto-currency mining holding BitRiver in September.

But Russia has taken the first step towards international crypto-payment when the Russian Ministry of Industry and the Central Bank of Iran agreed that imports could in theory be processed using crypto-currencies last August.

Iran is another cryptocurrency hotspot, accounting for 4.5% of the global coin mining, according to a study made last year, partly because of the country's cheap electricity.

If it happens, Russia’s use of cryptocurrencies to settle international trade deals won’t happen soon. In May 2022 Moody’s Investor Service warned that crypto-currencies will not help Russia bypass sanctions due to the limited market size and payment-tracing mechanisms. Moody’s believes that the low liquidity of the ruble/bitcoin pair of about $0.2mn makes crypto-currency an unlikely instrument to cover $46bn of daily transactions of Russian financial institutions for the foreseeable future.