Smothered by safety

How tough regulation constrains the crypto market — and forces it to evolve

Since their emergence, bitcoin and other cryptocurrencies have travelled from a niche instrument to a market being gradually woven into the traditional financial system. Banks, asset managers and institutional investors arrived alongside regulation that increasingly constrains digital assets’ key property — independence from intermediaries and the state.

The process looks different across jurisdictions. In Russia it is taking one of the toughest forms — an attempt to fold cryptocurrencies into a fully controlled domestic circuit.

We examine how viable such a model is and whether state pressure can spur the industry’s development.

Stick without a carrot

By 2026, even in jurisdictions lenient on regulation, cryptocurrencies are tolerated only when embedded in auditable, governable infrastructure. Where oversight starts from a tougher premise, the industry’s founding principles are almost beside the point.

Russia is a case in point. On April 1 the government submitted to the State Duma a draft federal law “On digital currency and digital rights” that pulls cryptocurrencies into the domestic circuit. Under this model, assets are embedded in licensable infrastructure with mandatory intermediaries, record-keeping, identification and the possibility of forced recovery.

According to the document, buying and selling cryptocurrencies in Russia will be possible only via a regulated third party; a digital depository is being created for custody and accounting. In such conditions there is virtually no free circulation, and the global industry’s mantra “not your keys — not your coins” effectively loses meaning.

As Olga Zakharova, head of the legal department at PLAN B, told ForkLog, once the new rules are introduced, market access will depend on an investor’s status and the ability of anyone to engage in P2P trading will disappear.

“The adoption of the law will mark the ‘sunset’ of the crypto-enthusiast era,” the expert believes.

Zakharova also added that some market participants will likely “go underground”. Those who remain will have to restructure processes to comply with the regulations, which will require not only operational but also financial costs, she concluded.

As a result, the Russian user will be left with a narrow set of state-selected instruments and will probably face higher service costs due to reduced competition and the need to recoup expenses. In parallel, some operations may shift into the grey zone, affecting the model’s practical resilience — it is unlikely the authorities can both increase market safety and keep users in the legal sphere.

Vladimir Sobinsky, head of the digital currencies and digital financial assets practice at PLAN B, thinks the model proposed by the authorities could prove workable: it addresses one of the crypto market’s problems — unsafe purchases through P2P.

“On the P2P platforms of major exchanges there were always fraudsters who would periodically send users dirty fiat or dupe them using the ‘AML-check’ scheme. Now this will be a maximally simple process; you will be able to buy crypto right in the bank’s app,” he told ForkLog.

Still, a single advantage in the form of safer purchases is plainly not enough. Danila Sadovsky, an IP/IT practitioner at BBNP and an expert on crypto-asset regulation, noted that the success of the proposed rules depends on the presence of economic incentives to legalise.

“Infrastructure is being created, but it is not yet clear in what way the legal circuit is objectively better than self-custody in familiar wallets. Without a ‘carrot’, hard barriers work not as an incentive to legalisation, but as a catalyst for going into the grey zone,” the expert said.

In his view, protection for market participants is necessary, but it should not turn into an excessive restriction on an investor’s conscious risk. Otherwise, users will move to platforms where the level of protection is lower and the risks are higher.

Problems remain

For retail investors, regulation can indeed reduce entry risks. But that effect applies only within a local circuit, while the prospects for larger market participants are far less clear.

According to Sadovsky, the only area where the model can work “here and now” is cross-border settlements. For businesses, a legal channel using cryptocurrencies is a chance to bypass economic restrictions, he noted.

Yet this very area is simultaneously vulnerable. According to Vladimir Sobinsky, the possible “labelling” of assets as sanctioned will significantly limit opportunities to work with foreign counterparties.

“Our market will be fairly closed. It is unlikely we will see major exchanges trying to obtain our licence, as happened in Kazakhstan. This is largely due to sanctions against Russia,” Sobinsky concluded.

Thus, while regulation makes operations more transparent and controllable, it simultaneously complicates engagement with the global market. In such circumstances, some foreign players may prefer not to cooperate directly with Russian infrastructure to avoid additional risks.

Ultimately, part of the market will look for ways to operate outside the legal perimeter — through shadow exchange schemes, decentralised solutions and other tools that preserve access to liquidity and reduce dependence on local infrastructure. The key question is no longer whether the market will become formally more regulated, but what share of real activity the state will be able to keep inside this system at all.

The bottom line

Global regulation has made cryptocurrencies acceptable to big capital and the state, but at the same time has altered their basic meaning: where the mass user appears, the market becomes licensable, de-anonymisable and folded into the familiar legal perimeter.

In the Russian model, this process is taken to extremes — with restricted access, mandatory intermediaries and a high degree of control. It may indeed simplify entry and reduce risks for some users. But others will find work in such a closed ecosystem unacceptable.

This is the chief effect of hard regulation: it does not cancel demand for privacy, self-custody and access to global liquidity; it merely pushes it beyond official bounds. State pressure will inevitably accelerate the development of decentralised services, workarounds and infrastructure that preserve the market’s original logic.

As a result, the crypto industry will cease to be a single environment. One part will be embedded in the financial system and legible to the state; the other will remain a space for those willing to assume more risk and responsibility in exchange for independence, continued access to the global market and liquidity.

Text: Alisa Ditz