© Financial Times
The promise of new measures to curb the virtual currency was made after Russia leapfrogged China to become the second-fastest growing territory for Bitcoin software downloads, behind the US.
Russia's intervention comes at another turbulent time for Bitcoin, the price of which dropped sharply over the weekend because Mt Gox, one of the largest exchanges, stopped letting customers withdraw their money. It cited technical issues and promised an update on Monday.
Law enforcement organs in Russia and the country's central bank are working on joint steps to prevent "illegal acts in the sphere of money circulation in Russia and prevent the violation of property rights of citizens and legal persons associated with the use of 'cryptocurrencies'," the general prosecutor's office said in a statement posted on its website over the weekend.
It added: "Anonymous payment systems and cryptocurrencies that have gained considerable circulation, including the most famous of them, Bitcoin, are money substitutes and cannot be used by individuals and legal persons."
Under existing legislation, the introduction of monetary units other than the rouble or the issuance of money substitutes is prohibited in Russia. But the threat of regulatory action indicates that the authorities are now leaning towards banning the currency in a long-running debate over its use.
Data from Sourceforge, the open-source software website, shows that Russian downloads of its Bitcoin software overtook those of China in the past month and accounted for more than 10 per cent of all downloads. China banned financial institutions from handling virtual currencies in December, prompting online merchants including Baidu to stop accepting payment in Bitcoin.
Regulators' actions could sharply alter the development of Bitcoin, which is seen by some as a cheap alternative to the current system for transferring money and by others as a completely separate currency that could replace government-controlled fiat currencies. In the US, federal and state authorities want to regulate Bitcoin businesses and force them to conduct the same anti-money laundering checks as banks. In the UK, the Financial Conduct Authority has said it will wait to see if Bitcoin becomes more widely used before considering its stance.
Last month, the United Russia party of president Vladimir Putin submitted a package of draft laws to the Duma, Russia's parliament, which included proposals to give the security services vastly greater access to internet services user data and strictly limit the use of electronic payment systems.
If passed as proposed, the new laws would ban anonymous transfer of money across the Russian border and reduce the amount users can transfer domestically to Rbs15,000 a month - little more than one-third of the current limit. The draft rules explicitly mention electronic payment systems, but would also apply to other payment systems that allow anonymous use - like Bitcoin.
The initiative runs counter to a push by liberals to allow virtual currencies to develop. In December, state-owned Sberbank said it was acquiring Yandex. Money, the PayPal-like solution set up by Russia's leading search engine. German Gref, Sberbank chief executive and a former economy minister, said that Russia's largest lender was looking to create a new digital currency as such currencies could not be stopped.
Last month, Mr Gref called Bitcoin an "interesting experiment that breaks the paradigm of currency issuance" and warned that a ban would be "a colossal step backward".
But the twin bombings in the southern Russian city of Volgograd on December 30 and 31 last year, which killed 34, strengthened the case of the law enforcement authorities which are pushing for stricter controls.
The prosecutor-general's office said a working group on economic crimes and terrorism financing, which had discussed the regulation of pseudo-currencies, would decide more concrete steps at its next meeting. Meanwhile, the Duma is expected to debate the draft legislation this month.
Although part of the working group, the central bank has so far taken a less aggressive tone. In a statement published on January 27, it just warned that citizens and legal entities using virtual currencies risked "being drawn - even unintentionally - into illegal activity, including laundering of money obtained through crime, as well as financing terrorism".
For the simple reason there is no bitcoin bank and at some point in future there will be no bitcoin mine. The lack of a bank means it is just a trading currency and cannot therefore be used for loans - unless of course the banks choose to issue bitcoin loans in the fututre. While they cannot create bitcoin issuing interest bearing bitcoin loans would drain bitcoin out of the world financial system and onto the banks servers thus killing it dead and any threat it might pose to their business.
Russia's announcement reinforces the probable outcome for cryptocurrencies. They are doomed without regulatory agreement and approval between member states of the world financial community.
In any event the crypto-currency initiative has overlooked a massive potential advantage the such currencies might have:
Object oriented crypto currency. That is a currency object that has both value and functionality.