Cryptocurrencies in international settlements: what difficulties may be encountered
In March 2024, Russia changed its legislation to allow the use of digital financial assets (DFAs) in settlements under foreign trade contracts. However, this step has not become a panacea for cryptocurrencies, which are still in the gray zone of international payments. Why is this the case and what are the pitfalls of trying to use cryptocurrency for cross-border settlements?
Digital financial asset (DFA) legislation and its limitations
The key point is the difference between digital financial assets (DFAs) and cryptocurrencies. Digital financial assets (DFAs) are strictly regulated digital rights whose existence is confirmed by an entry in a specific information system based on a distributed registry. Cryptocurrencies, on the other hand, mostly exist outside of this strict regulation, lack the legal status of DFAs and, accordingly, are not fully subject to the new amendments. This creates legal uncertainty and risks for businesses.
Despite the restrictions, small and medium-sized businesses are actively using cryptocurrencies for international payments. The head of the Digital Assets Practice notes that this practice is based on the assumption that cryptocurrency stored in a foreign wallet is not subject to the jurisdiction of Russian law. However, this is a deep misconception. If a cryptocurrency wallet is managed from the territory of Russia, using Russian telecommunication networks, then a transaction under Russian law may be considered to have taken place in the territory of the Russian Federation, despite the geographical location of the cryptocurrency wallet. This means that such transactions may be subject to taxation and other regulation under Russian law.
Introduction of an experimental cryptocurrency regime
On September 1, a new experimental cryptocurrency regime began to operate, which is regulated by the Central Bank of the Russian Federation.
The new experimental cryptocurrency regime provides ample opportunity to explore the use of cryptocurrency in international settlements. The key aspect of this regime is the recognition of digital currency as a currency value, which allows it to be used in official international transactions. Thus, Russia gets a tool to reduce its dependence on traditional payment systems and diversify its financial ties.
The experimental regime is not limited only to the sphere of international settlements. Amendments to the legislation authorize the use of cryptocurrency in various sectors of the Russian economy, including:
- Medicine and pharmaceuticals
- Design, manufacture and operation of transportation vehicles
- Agriculture
- Financial market
Main difficulties of cross-border payments in cryptocurrency
In addition to legal risks, there are other major obstacles to the widespread use of cryptocurrencies in international payments:
- Rejection by foreign counterparties.
Many foreign companies remain reluctant to accept cryptocurrency as a means of payment due to the lack of an international regulatory standard and the high volatility of cryptocurrency rates. This creates uncertainty and risks for both sides of the transaction.
- Exchange rate volatility.
Significant fluctuations in cryptocurrency exchange rates make planning and forecasting financial results a challenge. A change in the exchange rate between the time of the transaction and the time of the actual transfer of funds can result in significant financial losses for one party.
- Security risks.
Storing and transferring cryptocurrency involves certain risks associated with hacker attacks and loss of access to wallets. This requires the use of reliable and trusted services and compliance with security measures, which is not always available to small businesses.
- Lack of transparency.
Unlike traditional wire transfers, tracking cryptocurrency transactions can be difficult. This can make it difficult to monitor transactions and confirm their legitimacy.
Conclusion
Despite the attractiveness of cryptocurrencies as a means for international settlements (speed, low commissions), their use in Russia is still fraught with significant legal and practical difficulties. The lack of a clear legal framework, rejection by foreign counterparties and high volatility of the exchange rate are the main obstacles to the mass introduction of cryptocurrencies in cross-border trade. Businesses need to carefully weigh risks and opportunities before using cryptocurrency for international payments, and lawmakers need to continue working on creating a clear and understandable legal framework to regulate this rapidly developing market.