Russia’s massive new crypto mining facility will open this summer, but the legal regime remains in limbo

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(Kitco News) – A massive new Siberian cryptocurrency mining center subsidized by the Russian government is set to open in the first half of 2023, according to a local news report published on February 8.

The new data processing center is being built in Mukhorshibir, Buryatia, eastern Siberia, at a cost of 900 million rubles, or $12.3 million. It will house 30,000 crypto mining machines and consume 100 MW of electricity.

The data center is being built by Bitriver-B, part of the BitRiver group of companies that are the largest players in crypto mining data centers in the country, with direct support from the Corporation for the Development of the Far East and the Arctic (KRDV).

KRDV is a management company controlled by the Ministry for Development of the Far East and the Arctic. The company uses various state support mechanisms to implement investment projects in the Far East and the Arctic regions of the Russian Federation, and they have established a special legal regime for the new facility.

“Bitriver-B company, which is building one of the most important enterprises for the digital development of Buryatia, has been provided with a wide range of state support tools,” said Dmitry Khameruev, director of KRDV Buryatia. These include zero land and property tax, insurance premiums of 7.6% and reduced income tax.

When the new facility is connected to the national power grid, electricity tariffs will also be cut by approximately half. “For an energy-intensive business, this is one of the most important support measures,” Khameruev said.

Construction of the buildings and structures for the data center is currently underway, and the new crypto mining facility is expected to employ 100 people.

However, the regulatory side of Russian cryptocurrency mining remains unclear. The country’s draft bill to legalize cryptomining stalled in January over objections from the Central Bank of Russia (CBR) and law enforcement agencies.

“We have stopped again,” Alexei Moiseev, Russia’s deputy finance minister, told local reporters on January 18. “We disagree about that, not only with the central bank, but also with law enforcement.”

Moiseev said they have not given up on the bill and a series of meetings are planned to address the issues. “We hope to reach an agreement,” he said.

The head of the State Duma Committee on the Financial Market, Anatoly Aksakov, also told reporters that the reason the draft law was not adopted in 2022 was that one of the stakeholders in the negotiations was concerned that the sales channels of Russian cryptocurrency miners could be used to illegally withdraw funds abroad , primarily by foreign companies.

“I will not name the organizations,” Aksakov said. “However, according to the critics of the bill, it could create channels to withdraw funds from our country. This would supposedly be done to buy cryptocurrency, but the risk could exist that it would be used to withdraw capital from our country.”

Aksakov said that if the parties are unable to reach an agreement, a new version of the bill may have to be submitted.

On December 7, the Russian central bank said it supported the bill in theory, but only if it added new restrictions on the sale of mined crypto.

“We believe that cryptocurrencies obtained through mining should be sold exclusively using foreign information infrastructure and only to non-residents,” the RCB said. When selling in Russia, miners will have to exchange it through an authorized organization. “In general, we take the position that the circulation of digital currency on the territory of the Russian Federation is unacceptable.”

According to the draft law sent to the State Duma in November, miners are given two options to sell their mined digital currency: through foreign systems without having to comply with the Law on Currency Regulation, and through a new platform that will be created in Russia as part of an experimental legal regime. In both cases, transactions must be reported to the Federal Tax Service.

However, the bill does not specify that the miners’ cryptocurrency must be sold only to non-residents, and the wording on the possibility of sale in Russia does not make it clear that there will be only one authorized organization to process them.

“The digital currency obtained as a result of mining may be alienated by the person who performed the mining of this digital currency, provided that when conducting transactions with it, objects from the Russian information infrastructure are not used, except for cases where transactions are carried out in accordance with established experimental legal regime”, the bill states.

At the time, Deputy Finance Minister Alexei Moiseev told reporters that the Ministry of Finance does not agree with the stated position of the central bank.

“We cannot yet accept this new position from the central bank,” Moiseev said. “In effect, all mining that is not carried out within the experimental legal regime is prohibited. That is, all mining must be done through an authorized organization, and this amounts to total licensing. We are against it.”

Under the original language of the bill, miners would have been able to start selling mined digital coins starting January 1, 2023, but this has now been delayed until the issues with the bill are resolved.

In April 2022, the International Monetary Fund warned that Russia could use the crypto ecosystem to circumvent Western sanctions imposed on it since it invaded Ukraine in February, including generating revenue by using its embargoed energy sector to mine cryptocurrencies.