The Bank of Russia has sanctioned a new regulation that permits banks to halt operations involving digital rubles for several days if they are suspected to be associated with fraudulent activities.
The Bank of Russia has established new guidelines that require banks to pause digital ruble transactions for up to two days if they are believed to involve fraud. This directive, aimed at “protecting citizens and organizations” from fraudulent practices, is set to take effect on February 23, 2025, according to a press release from the central bank.
“Banks must temporarily block client directives for transactions involving digital rubles for two days if they exhibit signs of fraud,” stated the Bank of Russia.
The central bank indicated that upon detection of a suspicious digital ruble transaction, the bank will notify the customer about potential fraud. Customers will have a 24-hour window to either confirm or cancel the transaction. If there is no response, the funds will remain in the customer’s digital wallet. The central bank emphasized that these protocols are akin to those currently in use for traditional payments.
Since August 2023, Russia has been testing its central bank digital currency, and it is anticipated to be widely available by mid-2025. Central bank governor Elvira Nabiullina previously confirmed that, contingent on successful pilot projects, the digital ruble will undergo “mass implementation” by July 2025. However, she acknowledged that the transition is expected to take multiple years to finalize.
In a consultation document from October 2020, the central bank reassured citizens that the planned CBDC would complement rather than replace existing cash and non-cash rubles in circulation. In contrast, China, which serves as a key benchmark for Russia’s digitization initiatives, has commenced paying civil servants in Changshu state salaries utilizing its own CBDC, the digital yuan, to promote the adoption of the government-controlled currency.
Russian lawmakers are optimistic that the digital ruble may lead to the obsolescence of traditional banking institutions.
Anatoly Aksakov, who leads Russia’s Banking Committee, believes the digital ruble could potentially make conventional banks redundant.
In a conversation at the AiF.Media club, Aksakov expressed that the changing landscape of financial technology might lessen the need for traditional banking entities. Nevertheless, no formal strategies have been proposed to phase out banks in Russia.
“The future of banking could undergo a major transformation due to advancements in blockchain technology and central bank digital currencies,” noted Anatoly Aksakov, the head of Russia’s State Duma Banking Committee.
Although the Central Bank of Russia has yet to authorize loans in digital rubles, Aksakov remains hopeful that this would be a logical subsequent step. He believes that transactions could be expedited and might become more efficient when conducted in digital rubles.
In addition, Aksakov argues that automation enabled by this digital technology could further render traditional banks unnecessary.
“In the future, decision-making will likely be automated, eliminating the need for human involvement. This could effectively make the traditional banking institution irrelevant as the digital ruble advances technologically,” commented Anatoly Aksakov.
Since Russia’s extensive invasion of Ukraine in late February 2022, which spurred the escalation of the Russo-Ukrainian conflict, the country has faced severe financial and economic sanctions, prompting authorities to explore cryptocurrencies as a payment option for international trade.
In September 2022, a regulation was established between the Bank of Russia and the Ministry of Finance allowing Russians to conduct cross-border payments using cryptocurrency.
In this context, Russia initiated a pilot program to evaluate the functionality of a digital ruble in collaboration with various banking institutions.
However, launching a digital ruble is unlikely to change or improve the geopolitical situation facing Russia. Additionally, officials have mentioned that trials of the CBDC platform can only be carried out with countries that are “friendly” to the Russian government and possess the necessary technological capabilities.
Russian Central Bank: nearly half of all financial scams in Russia last year involved crypto
The Central Bank of Russia has revealed that almost 50% of the financial fraud schemes in the country last year utilized cryptocurrency and foreign currencies for transactions.
The central bank provided this information in a report highlighting the rise in scams throughout the nation and detailing strategic actions to address the ongoing increase. The report confirms that 5,735 entities were identified as participating in fraudulent activities in 2023.
According to the central bank, this number signifies a 15.5% rise from the scam schemes recorded in 2022, which totaled 4,964. However, despite the increasing frequency of these schemes, they have been shorter in duration, and the associated losses have decreased.
Out of the 5,735 scams, 2,944 were related to financial pyramid schemes, an increase from 2,017 in 2022. The central bank also noted that cryptocurrencies and foreign currencies were the favored payment options for pyramid scams, comprising 45% of the payments.
Data indicates that close to 1,500 scam schemes, making up 26% of the total, utilized cryptocurrency for donations, aiming to exploit the nature of blockchain for complete anonymity, a trend that has persisted since Bitcoin’s inception.
Rising worries surrounding anonymity
Many global leaders who criticize cryptocurrencies attribute their disapproval to the increased anonymity that blockchain technology allows. While some argue that crypto isn’t as anonymous as it is often believed, the use of crypto mixers like Tornado Cash has only intensified these apprehensions.
In February 2018, Bill Gates, the founder of Microsoft, commented on the level of anonymity that cryptocurrencies provide during a Reddit AMA session. The billionaire argued that the anonymity associated with cryptocurrency is not necessarily a “good thing,” as it complicates law enforcement’s ability to trace criminals.
Additionally, in March 2022, Christine Lagarde, the president of the European Central Bank, claimed that Russia was using cryptocurrencies to bypass Western sanctions. Members of the now-defunct black market Silk Road also turned to Bitcoin for transactions to enhance their anonymity.
Despite the various use cases and growing concerns, several leaders in the crypto industry contend that the use of fiat currencies in financial crimes is also widespread. Former ex-CEO Changpeng Zhao stated last year that Bitcoin is traceable, while cash remains untraceable.
The Bank of Russia has been testing a central bank digital currency (CBDC) for the past two and a half years and is increasing pilot activities toward a rollout it anticipates will progress in three main phases.
The central bank governor, Elvira Nabiullina, provided an update and confirmed the next steps for its CBDC program, including the proposed launch date of ‘from July 2025’ for the extensive introduction of the digital ruble – during a speech at a conference in the Black Sea resort city of Sochi.
In 2021, the Bank of Russia announced that 12 banks would participate in the initial testing of a CBDC, referring to the group as the ‘first pilot group’. In February 2022, it reported that two banks had completed a cycle of digital ruble transfers between individuals. Nabiullina stated at her speech that “another 20” banks are now ready to participate. There will also be 9,000 individuals (up from 600) and 1,200 ‘trade and service companies’ (increased from 22) involved.
“We aim to require banks to process digital ruble transactions in stages: initially, these should be systematically important banks that are better prepared; next, banks with a universal license; followed by banks with a basic license,” Nabiullina mentioned at the ‘XXI International Banking Forum’ on September 26. “The same approach will apply to trade and service companies [merchants]: they should gradually begin accepting digital ruble payments, similar to the rollout of non-cash transactions.”
QR code-supported system
Nabiullina elaborated on the Bank of Russia’s current vision for how the country’s CBDC ecosystem is expected to function.
“It is crucial — and I know that small banks have raised this point — to ensure the capability to connect to digital ruble services, and some banks have shown interest in this option, though it will undoubtedly involve costs. Small banks might find them considerable,” she stated at the event organized by the Association of Banks of Russia.
“We are offering a software module to banks so they can integrate their mobile applications with the digital ruble platform. In collaboration with the IT sector, we will examine model solutions that could lessen the costs for banks upgrading their systems. It is vital that small banks are prepared for this stage of deployment,” she continued, emphasizing that businesses and banks “should not encounter difficulties with the launch of digital ruble payment options.”
The Central Bank Digital Currency (CBDC) will function using a QR (Quick Response) code, akin to the one utilized in Russia’s Faster Payments System (SBP), which enables users to perform interbank transfers via a mobile phone number. “This code is set to become a universal method for processing transactions with digital rubles, as well as for payments conducted through the SBP and other commercial payment systems,” Nabiullina noted, mentioning that Russia’s National Payment Card System (NSPK) had successfully completed pilot testing of this technology with 22 banks.
Nabiullina stated that the Bank of Russia “anticipate[s] the universal QR code will serve as a national standard” and therefore, “we recommend implementing a legal requirement to utilize only one QR code at cash registers—a universal QR code that should function within an arm’s-length infrastructure.”
“We believe it is essential to mandate this by the time the digital ruble is fully introduced. This draft legislation is currently being prepared and will be discussed,” she indicated, adding that “a single standard for QR codes is already obligatory in Brazil, Indonesia, and Malaysia, for instance.”
Changes to legislation are necessary. Nabiullina spoke a fortnight after the Bank of Russia released proposals concerning the infrastructure for the digital ruble.
This announcement outlined the 13 major banks (designated as ‘systemically important credit institutions’) that will be required to provide their clients with the ability to conduct transactions using digital rubles, which includes the ability to open digital ruble accounts, deposit physical cash into them, transfer funds, and receive digital rubles through the relevant infrastructure, with a compliance deadline of 1 July 2025.
‘The regulator aims to enable the extensive use of the digital national currency starting at that date,’ the announcement clarified, emphasizing that it is ‘crucial for both individuals and businesses to have access to the digital ruble and to utilize it freely, just like other forms of rubles (physical currency or bank deposits).’
Legislative adjustments will be necessary, with the announcement stating that the Bank of Russia has ‘submitted its proposals to amend the appropriate laws to the Russian Ministry of Finance.’
According to the announcement, banks with a universal license will be ‘given an extended timeframe to adapt their systems,’ with a deadline of 1 July 2026, while other credit institutions will have until 1 July 2027.
The announcement also laid out plans for staggered deadlines regarding the mandatory acceptance of digital ruble payments by ‘trade and service companies’: 1 July 2025 for companies generating an annual turnover exceeding ₽30 million (about £239,000/$312,000); 1 July 2026 for those with annual turnover surpassing ₽20 million (around £159,000/$208,000); and 1 July 2027 for all other enterprises.
Countries exhibit varying inclinations towards CBDCs. Currently, none of the few CBDCs that are operational globally have gained significant popularity, while major nations appear to be clearly divided regarding whether to push CBDC initiatives to the sidelines or enhance their exploration.
The Bank of Canada announced last month that it is ‘reducing’ its efforts in this area. In the same month, Australia’s financial regulators indicated that a ‘clear public interest justification’ for issuing a retail CBDC has ‘yet to be established.’
Countries exhibiting a more supportive stance towards CBDCs include China, where the authorities are actively promoting the digital yuan, and India, where a CBDC pilot program boasts over five million users and involves 16 participating banks.
The European Central Bank is currently about halfway through a ‘preparation phase’ for a potential digital euro.
Since Russia’s incursion into Ukraine in February 2022, multiple nations and international organizations have imposed economic sanctions on Russian banks and other related entities and individuals. Last year, the European Union (EU) reported that 70 percent of the assets within the Russian banking sector are under sanctions.
The business model for the digital ruble
Regarding the central bank’s strategy for charging fees, consumers will incur no costs for transactions made with the digital ruble. This includes transfers between consumers (C2C) and those from businesses to consumers (B2C). However, transactions from consumers to businesses (C2B) will be subject to fees starting in 2026.
The model operates with all income going to the platform operator, which is the central bank, and then the central bank disbursing some fees to payment providers. The central bank retains a portion, about one-third for business to business (B2B) transactions and roughly one-sixth for consumer to business (C2B) payments.
For C2B transactions, businesses receiving payments must pay a fee of 0.3%, capped at 1,500 Rubles ($14.34). In this scenario, the central bank will compensate the payment provider chosen by the consumer 0.1%, with a maximum of 500 Rubles. Additionally, the payment provider for the recipient will earn 0.15%, capped at 750 Rubles. Payments related to housing and community services incur a reduced central bank charge of 0.2%, as opposed to 0.3%, with a maximum fee of 10 Rubles. The payment providers receive decreased fees for these types of housing transactions.
B2B transactions are charged a flat rate by the central bank of 15 Rubles (14¢). The payment provider for the payer will receive 10 Rubles for each B2B transaction.
At the same time, it’s not just banks resisting the changes. Merchants have expressed their concerns about the timeline, prompting the involvement of the Ministry of Trade on their behalf.