A bit of history: from garage enthusiasts to global mining farms

Crypto mining in Russia started as a small hobby for a certain small group of people who set up mining equipment in garages and on balconies. In time, the activity attracted more and more attention and today Russia is among leaders in crypto mining. There are even large mining farms in some Russian regions, making use of cheap energy sources. According to Cambridge Centre for Alternative Finance (CCAF), Russia in 2021 held third place among crypto mining countries, exceeded only by the US and Kazakhstan. This makes Russia one of the largest players on the global mining market. Read more about CCAF’s research at https://ccaf.io/cbeci/index.

The mining law has been passed and goes into effect on November 1, 2024

Russian President Vladimir Putin signed a law on August 8 that will allow cryptocurrency mining to be regulated in Russia starting from November, see https://sozd.duma.gov.ru/bill/237585-8 (Federal Law No.221-FZ dated August 8, 2024 “On amendments to certain legislative acts of the Russian Federation”). The law is intended to grant crypto mining a legal status and include it into the nation’s legal framework.

Key points

1. Definition of mining

The bill defines mining as activity aimed at creating new blocks in blockchain networks using computing technology.

2. Registration of mining companies

Mining companies must register in a special register to be kept by the federal executive authorities.

3. Taxation

Rules are set in place concerning the taxation of income from mining, including the procedure for paying taxes and levies.

4. Energy regulation

The bill introduces special tariffs for electric power for mining companies and provides for control measures in respect to power consumption.

5. Reporting and control

Mining companies are obliged to submit to the tax authorities regular reports on their activities and income.

6. Legal protection for participants

New rules are being introduced, aimed at protecting the rights and interests of crypto miners, including mechanisms for resolving disputes.

Consequences for the technology and business

If the law is adopted, it will have a substantial impact on the technological and business aspects of mining.

1. Technology: The expectation is that once mining is legalized, there will be an influx of investments to the develop the technology. Mining will be more effective and safe, which will in turn accelerate the development of new algorithms and hardware.
2. Business: For business, this means doing clean. Legal mining companies will be able to sign official contracts, attract investments and work with the state and private sectors. This will also help decrease corruption risks and increase transparency of operations.

Questions and obstacles in implementing

As in any legislative act, there are issues that could hinder actual implementation:

1. Energy resources: mining requires significant energy resources. Introducing regulation could lead to higher tariffs for miners, which will make the business less profitable.
2. Taxation: How will mining income be taxed? High taxes could discourage small players and lead to market concentration in the hands of large companies.
3. Enforcement: How will the state monitor compliance with the new rules? A lack of clear control mechanisms could lead to unfair competition and abuse.

Positive and negative implications for the market

On the cryptocurrency market, the bill could have both positive and negative consequences:

1. Positive: Legalization could attract new investments into the industry, promote infrastructure development and increase the number of market participants. It could also increase confidence in cryptocurrencies among the general public and encourage their broader use.
2. Negative: Possible high taxes and electricity tariffs could reduce the number of miners, leading to a decrease in the hash rate (a measure of the computing power used to process and validate transactions in a blockchain) and possible centralization of mining around large players. This could have a negative impact on the security and stability of cryptocurrency networks.

Impact on the cryptocurrency market as a whole

If the bill passes, it could have a significant impact on the global cryptocurrency market. Russia, as one of the largest players on the mining market, will be able to set new standards and rules of the game. This may attract the attention of other countries and promote development of international regulation of cryptocurrencies.

Interesting ideas and looser grip on the industry

In order for the mining and cryptocurrency market to continue to grow, the following leniency measures should be considered:

1. Reducing the tax burden: Moderate taxes on income from mining could stimulate the development of small and medium-sized businesses in this area.
2. Electric power benefits: Special tariffs for miners will help maintain profitability of the business and prevent it going underground.
3. State support for innovations: Programs to subsidize and support developments in mining and blockchain technologies could stimulate the development of new solutions and attract additional investments.

Current developments in mining

Active developments are now underway in Russia and around the world to improve the efficiency and security of mining:

1. Development of new consensus algorithms: Researchers are working on more energy-efficient and sustainable algorithms such as Proof of Stake (PoS) and Proof of Space (PoSpace). Read more at  https://ethereum.org/en/developers/docs/consensus-mechanisms/pow/
2. Innovative cooling and heat management solutions: Mining companies are adopting new cooling methods, including immersion cooling and the use of renewable energy to reduce energy costs. Read more at https://www.coindesk.com/business/2021/09/09/how-miners-are-harnessing-hydro-power-to-cut-down-energy-costs/
3. State-of-the-art ASIC and GPU setups: Equipment manufacturers are developing new models that offer better performance and energy efficiency. Read more at https://www.tomshardware.com/news/best-mining-gpus

Legalization of transfer of cryptocurrencies to the customer

If mining becomes legal, the process of transferring the cryptocurrency obtained by the farm to the customer should also be legalized. It is important to consider a few key aspects:

1. Contractual obligations: The terms and conditions for the transfer of cryptocurrency should be clearly spelled out in contracts between mining farms and their customers. This includes volumes, timing and methods of transfer.
2. Taxation: A mechanism for taxation of the transfer of cryptocurrency should be developed in order to avoid double taxation and ensure transparent transactions.
3. Reporting: Mining farms and their customers will have to file regular reports with the tax authorities, indicating the volumes and amounts of cryptocurrencies transferred. This can be implemented through a blockchain system that provides transparency and makes data tampering impossible.
4. Legal protection: Legislative norms protecting the rights of customers and mining farms need to be developed for cases of disputes or breach of contractual obligations.
5. Role of banks: Banks can act as intermediaries in the process of cryptocurrency transfer, ensuring control over the legitimacy of transactions and their compliance with the law. This will also give an added level of protection to both parties.

Conclusion

The law on mining in Russia is the first step toward legalization and regulation of the industry. Its successful implementation could lead to the growth and development of mining, attract investment and create new jobs.

Additional information

Should any questions arise in connection with the above or if you need any additional materials, please contact the CLS office in St. Petersburg or Moscow.

This information letter keeps clients of CLS and other interested parties abreast of information that may, to some extent, affect their activity or cater to their interests. The opinions and commentaries expressed in this information letter shall not be deemed legal advice and do not cancel the need to obtain legal advice or legal opinion on separate issues.

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