Source: Aiying Payment Compliance
Just the day before yesterday, on August 8, Russian President Vladimir Putin signed a bill to officially legalize cryptocurrency mining in Russia. The bill introduces new concepts such as digital currency mining, mining pools, and mining infrastructure operators. At a previous economic conference, Putin made it clear that digital currency is an economic field with great potential, and Russia must seize the opportunity to quickly establish a legal framework and regulatory mechanism.
Rather than understanding it as a vision of the grand narrative of the Russian authorities, Aiying Aiying is more willing to believe that Russia is looking for a way out of the economic blockade under the heavy pressure of international sanctions.
1. Dilemma of cross-border payment and settlement of Sino-Russian corporate trade
In early 2024, as the West stepped up its enforcement of sanctions, China's large banks began to feel greater pressure from the United States, especially when their position in the financial market and the US dollar clearing system was threatened, and banks had to take more cautious measures. Many large Chinese banks have begun to restrict dollar transactions related to Russia, especially those involving cross-border settlements of dollars. Banks have significantly reduced or completely stopped providing credit services to companies doing business with Russia.
According to Aiying, as the United States expanded its secondary sanctions against Russia on June 12, some small and medium-sized banks with good relations with Russia are similar to: Huanchun Rural Commercial Bank and Russian Foreign Trade Bank VTB have stopped accepting cross-border remittance business and suspended account opening. Even corporate accounts that have already opened accounts cannot receive payments normally. Among them, VTB was included in the sanctions list of the U.S. Treasury Department's Office of Foreign Assets Control (OFAC). Executives of three Russian commodity exporters also said in an interview with Bloomberg that after the United States implemented a new round of sanctions, it became very difficult or even impossible to make direct payments from China to Russia, even if they were paid in RMB.
The payment problem not only affects commodities such as metals and agriculture, but also other industries. Aiying asked that some companies also learned that Chinese auto parts and agricultural equipment are often delayed due to payment problems. Payments used to arrive in one or two days at most, but now the various procedures and inspections required delay payment by one to three months. Questions about whether certain products are dual-purpose for military and civilian purposes still lead to longer delays, and in some cases, it is common for transactions to fail due to incomplete documents. The Russian Automobile Dealers Association warned last week that imports of cars and auto parts from China may be suspended due to settlement problems. According to the recent report "Creating a New Channel - The Current Situation, Challenges and Suggestions for China-Russia Bilateral Investment" released by the Renmin University of China Chongyang Institute, it was mentioned that between February and March 2024, due to the threat of secondary sanctions from the West, RMB-ruble transactions including SPFS and CIPS were stopped; as of March this year, 80% of transactions were blocked. This is consistent with what Aiying learned from the companies: Chinese funds cannot be deposited into Russian accounts, and Russia itself cannot pay.
Second, cross-border payment settlement in Sino-Russian trade is a big problem
According to statistics compiled by Bloomberg, China accounted for about 28% of Russia's total trade last year, up from 19% in 2021. In contrast, the EU's share of Russian trade fell from 36% to 17% during the same period.
In May, the renminbi accounted for only 53.6% of the Russian exchange's trading volume, but the latest sanctions imposed by the United States in mid-June forced the exchange to suspend trading in dollars and euros. The sanctions caused the renminbi's share of the Russian foreign exchange market to rise to 99.6%, almost all of which was settled in renminbi.
In the over-the-counter market, the dollar and the euro are still traded. In June, over-the-counter trading volume fell slightly to 13 trillion rubles, and the renminbi's share rose slightly by 0.8 percentage points to 40%. Sales of major exporters remain high, reaching US$14.6 billion (about S$19.7 billion) last month.
From the above data, if China and Russia do not have a suitable solution to the problem of fund settlement, it will also cause great negative impact and economic losses to Chinese companies.
The problem of cross-border payment and settlement in Sino-Russian trade is more like a financial traffic jam, which is actually more troublesome than the traffic jam at the logistics level. After all, payment and settlement are the basis of the blood circulation of bilateral trade.
Third, the breakthrough of cross-border payment of cryptocurrency
Against this background, China and Russia began to explore new payment methods to break through the obstacles brought by sanctions. At present, according to Aiying, some domestic companies active in the field of Sino-Russian trade initially focused on importing Chinese-made consumer goods into the Russian market. These consumer goods mainly include daily necessities, electronic products, clothing and household goods. They have established a complete logistics and distribution network in Russia, enabling Chinese consumer goods to quickly enter the Russian market. However, the sanctions in recent years have led to settlement difficulties and a decline in trade volume.
In the early stage, the company found that many small regional Chinese banks were able to handle payment business with Russia more flexibly because of their small size and not being within the direct target range of international sanctions. These banks usually operate at the local level and have a limited business scope, so they can still maintain their daily business needs relatively smoothly under the "radar" of international sanctions. However, as the sanctions deepened, these methods began to be restricted, so they began to try in a more innovative direction - cross-border payment of virtual currency. After some practice, digital assets and cryptocurrencies were used for settlement, bypassing the limitations of the traditional banking system. By using Tether (USDT), settlement can be completed within one day, which greatly simplifies the process and reduces the overall payment cost.
Fourth, Russia launched a supporting policy bill for cross-border payment of cryptocurrencies
1. Anatoly Aksakov, chairman of the State Duma Financial Market Committee, predicted that Russian citizens will be able to exchange Bitcoin for digital rubles in the future
2. Russia is also actively promoting the application of digital rubles. , the digital ruble has made significant progress in the pilot phase, and President Putin expressed strong support for it, hoping to accelerate its integration into the economic system.
3. Elvira Nabiullina, Governor of the Central Bank of Russia, said in an interview, "By 2031, CBDC will become part of daily life. The digital ruble has the advantage of free or low transaction fees, which will promote the adoption of CBDC."
4. The Russian Duma passed a law in the second and third readings, allowing cross-border settlement and exchange transactions of digital currencies within the framework of the Experimental Legal System (EPR) from September 1, 2024.
According to Izvestia, citing the Central Bank of Russia, the Russian government is actively considering legalizing stablecoins in international transactions to simplify and facilitate cross-border payments for Russian companies.
It should be noted that before 2017, the Russian government and central bank were very cautious about cryptocurrencies. Cryptocurrency and mining are considered to be extremely risky, and the main concern is that they will be used for illegal activities such as money laundering and terrorist financing. The central bank has repeatedly warned the public not to invest in cryptocurrencies such as Bitcoin, pointing out that their prices fluctuate greatly and there are high financial risks. In 2020, Russia passed the Digital Financial Assets Law, which recognizes cryptocurrencies as property but prohibits them from being used to pay for goods and services. In the past few months, Russia's policy has undergone a 180-degree turn, promulgating various bills and policies and stating that digital currency is a highly promising economic field, and Russia must seize the opportunity to quickly establish a legal framework and regulatory mechanism. Personally, I think this is an adjustment made by Russia as one of the solutions to break through the siege has achieved considerable results.
V. Can encrypted cross-border payment solutions perfectly break through sanctions?
This question must be a compliance question that everyone routinely asks, after all, the rules of the game in this world, especially in the financial field. Everyone needs to comply with FATA's anti-money laundering regulations and the Banking Protection Act, so is it not necessary in the field of encryption? If it is necessary, can this solution still be established?
This involves an in-depth study of the practical details of specific execution cases. Since the space is far from enough to elaborate, I can only use a question that Foresight asked Aiying last week to dialectically answer: The fate of cryptocurrency is increasingly tied to politics. Is it good or bad? On the one hand, the decentralization of cryptocurrency represented by Bitcoin, and on the other hand, the deepening of political participation is also pulling it back to the centralized power center. In the cross-border payment of virtual currency, the centralized game rule makers will try every means, whether it is technical means, establishing bills to pass licenses, anti-money laundering regulations, etc., to pull it back to the scope of their own sanctions, so that their own sanctions tools still retain deterrence. This is something that people who yearn for "free innovation" may feel more frustrated.
Aiying Aiying understands that the relationship between the two can be described as "love and hate". On the one hand, the starting point of the crypto industry is decentralization and a revolution, but the body of capital is honest. They don't care what revolution you have. It's my goal to make me get a hundred times the profit. Therefore, the pursuit of capital will naturally make them do more political lobbying, so that the game of power will inevitably participate in it, protect them and formulate game rules that are beneficial to them. Is this process a bad thing for the crypto industry? Not necessarily, or it is more like a Trojan horse, gradually infiltrating and reforming the current financial system. The system and rules. Take cross-border payments as an example. Not from the perspective of ethics and politics, take USDC and USDT as examples. They represent the US dollar and exercise the right to settle games in US dollars, but on the other hand, they have also become one of the most effective ways for sanctioned countries to break through "sanctions" and become a countermeasure or backlash against the original rules. After the crypto mixer Tornado Cash was sanctioned by the US government two years ago, the platform's activity dropped significantly, but in 2024, according to blockchain analysis company Flipside Crypto, the protocol received more than $1.8 billion in deposits in the first half of 2024 alone, about 45% higher than the deposits for the whole of last year. To some extent, it can be regarded as a "breakout" under the sanctions of the centralized power department.
Therefore, for the "unbridled wild horse" of Bitcoin and stablecoins derived from the blockchain decentralization technology, will it be truly tamed? Who is changing whom and who needs to be forced to change? This is a question worth exploring in depth. Back to the question itself, this is a dynamic issue. The emergence of encrypted payments has given the original currency settlement system a new variable. Coupled with the cyclical changes of time, place and country, this variable has a more comprehensive game with the official launch of the Bretton Woods system and the international monetary system dominated by the US dollar, so the current plan is also the result of the game.
Six, stick to the right path and be surprising
Of course, the principle of sticking to the right path is the starting point of everything. While crypto payment breaks through, it also provides shelter for some lawless elements. Therefore, when using digital currency as a settlement solution in normal trade, it is necessary to improve anti-money laundering capabilities and comply with local laws and regulations to avoid being used by some lawless elements as a channel for money laundering. This is not worth the loss.
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