Russia recently introduced The CryptoRuble so that they can take a 13% cut of Crypto profits from all around the world.
Think of The CryptoRuble as ‘the world’s Crypto tax’ and Russia as the wealthy benefactors. Welcome to the new, borderless Crypto economy.
YOU WILL LEARN:
What Is The CryptoRuble?
Are Russia Actually A Huge Fan Of Cryptocurrencies?
Is The CryptoRuble A 13% Global Tax?
- Russia’s Crypto Ban & CryptoRuble
- Does Putin Hate Cryptos?
- Taxing The World’s Economy
- Will The Tax Work?
- Follow Future Posts
1. Russia’s Crypto Ban & The CryptoRuble
Within the last month, two major announcements have come out of Russia regarding the future of Bitcoin and other Cryptocurrencies:
- Russia has announced that they plan to ban Bitcoin/Cryptocurrency exchange websites citing safety concerns for their citizens with Segiei Sehvetsov of the Central Bank of Russia quoted as saying “We cannot stand aside. We cannot give direct and easy access to such dubious instruments for investors”
- Russia are planning to introduce the CryptoRuble – a Cryptocurrency which will remain the same price as the regular Ruble (Russia’s currency). The CryptoRuble will be ‘fully controlled by the state and won’t have the decentralised nature of digital currencies’
Does this mean Putin hates Bitcoin and Cryptocurrencies?
Nobody knows for sure. Personally though, we think it’s the opposite of this;
We believe that Putin is a huge fan of Cryptocurrencies and is trying to turn Russia into the world’s Crypto hub.
It’s for this purpose that he is introducing a 13% tax for any unexplained Bitcoin/Cryptocurrency earnings – we believe that he wants to funnel Crypto money through Russia via the CryptoRuble.
Before we get into that though, let’s provide a little bit of background of why we believe this by discussing some of Putin’s previous Cryptocurrency quotes.
2. Does Putin Hate Cryptos?
Putin is somewhat divided when it comes to Cryptocurrencies; on one hand, he has regularly met the founder and genius behind Ethereum (the world’s 2nd largest Cryptocurrency), Vitalik Buterin, telling him that Russia “are doing a great deal to create a favourable business climate… so that working in Russia is beneficial and pleasant.”
On the other hand, Putin has been quoted as saying that “The use of cryptocurrencies bears serious risks” due to money laundering, tax evasion and funding for terrorism. It all seems a little confusing on the surface, right?
One moment Putin is anti-cryptos, the next he is supporting them
For this one, you have to read a little deeper into it to find the truth (in our humble opinions);
Putin fully understands the potential behind Cryptocurrencies – hence he is pro-cryptocurrencies – and he understands that they cannot simply be stopped due to their decentralised nature. However, he has previously been unable to benefit from them.
In fact, with money leaving the Ruble and being converted into Cryptocurrencies, the Russian government and banking system have lost out because of Cryptocurrencies thus far.
So what are Russia to do?
Their solution is to utilise the remarkable technology behind Cryptocurrencies (the blockchain) in a way which benefits the Russian government and this is where The CryptoRuble comes in, carrying with it a 13% tax.
3. Taxing The World’s Economy
The CryptoRuble’s 13% Tax
At this point in time, we don’t know very much about the CryptoRuble other than knowing it will be pre-mined and ‘fully controlled by the state hence it won’t have the decentralised nature of digital currencies’.
What we do know for sure though is details of the exchange between the Ruble and the CryptoRuble. This part is absolutely key:
- If the source of earnings is fully trackable and can be proven, it will be possible to convert between the Ruble and CryptoRuble for free
- However, if the source of earnings cannot be tracked, there will a 13% added tax
If The Earning Cannot Be Tracked, A 13% Tax Will Be Added
Let’s look at an example to understand how important this truly is:
- Let’s say a UK freelance writer is paid in Bitcoin. We’ve picked freelance writer but it could be literally any job in the world
- If he converts this Bitcoin straight to UK Pounds and records it as earnings, he will pay a minimum of 20% and as much as 45% income tax, depending on his salary
- If he chooses not record those earnings, he might get away with paying no tax or he might get caught and arrested for fraud. It’s a big risk.
What if he uses the CryptoRuble?
- Instead, if he converts his bitcoin to the CryptoRuble, he can do so for a very small fee on an exchange (0.1%)
- Then, he can convert this CryptoRuble to regular Rubles for just a 13% tax
- From there, he can switch his Rubles to UK pounds very easily and for under 1%
- Now, he has paid just 14% tax
- Our freelancer has just paid less tax while remaining fully compliant with the law
What About The Future?
- Currently, Cryptocurrencies like Bitcoin are only really paid to people within the industry so this issue isn’t so big for other countries
- However, as they gain mainstream adoption, we could quite easily see more commonplace examples such as an electrician being paid in Bitcoin to avoid taxes etc.
How Does Russia Benefit?
- Cryptocurrencies have been bad for governments and banks as they’ve caused money to leave national currencies
- Due to the decentralised nature of Cryptocurrencies, Putin knows that they cannot simply be stopped
- Instead, he has created a system which promotes a massive influx of money into the Ruble from countries all around the world
- Best of all, Russia receive a 13% tax while the country of origin receives nothing
You have to give it to them; the idea is pretty genius
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4. Will The Tax work?
In the short term, we think the answer is a definite yes.
If we’re realistic with ourselves, we all know people who will attempt to avoid tax. While this system won’t allow them to completely avoid paying tax, it will allow them to pay a much lower sum without even breaking a single law!
Would you choose to pay a lower tax, while complying with the law?
In the long term, however, we believe that other countries will introduce their own state-backed Cryptocurrencies. Why do we think this?
If The CryptoRuble was the only state-backed Crypto, money from all around the world would flow through it in order to take advantage of the cheap tax. For other countries, this means losing the ability to take on earnings.
From an economic standpoint, countries simply can’t allow this to happen so they will be forced to act. They can’t shut down Cryptocurrencies due to their decentralised nature. They can try to ban them but there are relatively simple ways for people to work around this.
Instead, the best option is for countries to compete with The CryptoRuble by offering their own state-backed Cryptocurrency.
Putin himself, sees this as the reality we are headed for, as we can see from his quote stating that if Russia do not implement The CryptoRuble, then “in 2 months, our neighbors in the Eurasian Economic Community will do it.”
What Tax Will Other Countries Apply?
This is the most interesting question for us. We are based in the UK so let’s use the UK government as an example:
If they introduced a government-backed Cryptocurrency but demanded a 30% tax from anyone cashing out with proper explanation, residents of the UK would surely choose to use the CryptoRuble instead as this would mean 16% less tax.
As a result, for the UK government to incentivise tax-payers to use their Cryptocurrency, they would have to offer similar rates to people cashing out the CryptoRuble.
How Will This Play Out?
For this reason, we can see this playing out in 3 ways:
- Governments enter a bidding war to offer low tax rates – this is unlikely
- Governments ban their residents from cashing out via other government-backed Cryptos
- Many governments agree on a minimum rate they will not decrease tax below – a cartel agreement formed between many Governments
- A combination of banning residents from using foreign cryptos and forming a cartel i.e number 2 and 3 combined
Number 1 seems unlikely as governments simply can’t afford to enter a bidding war and lose income taxes as a result.
Number 2 seems relatively likely but a simple VPN will make it possible for tax-payers to evade this.
Number 3 seems likely. However, if you are familiar with the first-mover advantage, the principle is particularly relevant in relation to cartels and dictates that a single country is likely to break the agreement in order to gain an advantage.
You might argue that this doesn’t apply to governments because the political ramifications would keep countries in line. To this, we would say:
Do you really think all countries around the world care about political ramifications?
History has clearly shown us that the answer is no. With Cryptocurrencies being truly global, it only takes one country to step out of line in order for the agreement to break down.
Number 4 is the most likely option in our opinion – a combination of banning the use of foreign state-backed Cryptos and agreeing to form a cartel.
The cartel will reduce the number of people attempting to use foreign Cryptos and the ban will aim to ensure that the majority of people won’t switch to a foreign currency when a country eventually breaks the cartel.
Disclaimer: None of the above is financial advice. Always do your own research.
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This article has been provided by the CEO; Tom Heavey.