Konstantin Tserazov: Catching Up: CIS Countries Embrace the Potential of FinTech in Capital Movement

FinTech symbolizes the application of revolutionary ideas to uplift financial services, presenting tech-infused solutions designed for diverse business landscapes, potentially leading to the emergence of new business models and enterprises. FinTech innovations disrupt traditional paradigms of money transactions, compelling financial regulatory authorities in Commonwealth of Independent States (CIS) countries to acknowledge and adapt to this evolving reality.

From Payments to Capital Flow

Most FinTech startups conventionally operate under novel frameworks to streamline payments and capital movement, particularly focusing on cross-border transactions. Their inherently digital nature ensures broad accessibility, allowing them to serve individuals and businesses across the CIS region.

To encapsulate the prevalent tools accessible to clients cross-border money transfer services leverage crypto solutions, where dollar stablecoins hold significant sway. Building upon established payment systems like PayPal, some startups introduce unique features and advertise "0% commission" for money transfers. However, the catch lies in the exchange rate, as some startups employ a lower exchange rate to offset their costs.

Mobile Payments and Fund Transfers

The pervasiveness of mobile payments has transformed mobile phone accounts into quasi-banking accounts, considering their functionality. Mobile payment services have risen as a crucial component in the financial sector, facilitating user-friendly execution of a wide range of financial activities, encompassing online and offline transactions, fund transfers, and associated responsibilities, all through mobile devices.

In CIS countries, mobile operators typically offer services for transferring money from mobile accounts to bank cards or even paying for services abroad, thereby establishing pathways for international money transfers.

USSD, developed in 1994, remains the fundamental and most commonly used technology in mobile payments, still surpassing QR codes in popularity. This interactive, menu-driven technology is compatible with a wide array of mobile devices. USSD messages, capable of holding up to 182 alphanumeric characters, resemble SMS but facilitate data exchange between users and the mobile network.

Its capability for immediate interaction outperforms SMS, making USSD particularly responsive. Moreover, this technology is accessible on all phone models, from rudimentary to advanced, without needing software installation or internet connectivity.

Certainly, financial regulatory bodies establish parameters and track transactions in a manner they consider suitable for effectively implementing Anti-Money Laundering (AML) practices and aligning with the recommendations of the distinguished Financial Action Task Force (FATF). The introduction of advanced security measures, such as encrypted transactions and real-time monitoring, significantly diminishes the likelihood of fraudulent activities.

NFTs, Telegram, and Donations

Crypto developments often surprise regulatory bodies, as seen in the sudden surge of Non-Fungible Tokens (NFTs) worldwide. These digital assets can be used for cross-border money transfers under the guise of "NFT sales and purchases''. While not all NFT trades involve such activities, the potential exists within the system's functionality.

Telegram, a widely-used messaging platform in the region, has ventured into FinTech by introducing peer-to-peer (P2P) transactions, digital wallets (both custodial Wallet Pay and non-custodial TON Space), supporting cryptocurrencies like Toncoin, Bitcoin, and Tether. These advancements pose a significant challenge for CIS regulators.

The evolution of these features could facilitate cross-border digital money movement, highlighting the concept of the “Internet of Money”. This digital financial landscape presents regulators with the tricky task of maintaining Know Your Client (KYC) procedures in the sphere at par with traditional financial institutions' standards.

Internet-based donation services can also be utilized for cross-border money transfers, presenting another regulatory challenge for CIS authorities.

Remittances: A Catalyst for FinTech Innovation

Labor migration significantly fuels the demand for innovative FinTech solutions for cross-border money transfers in CIS countries. Tajikistan, for instance, sees remittances accounting for 48% of its GDP, the highest proportion in the CIS. Consequently, numerous FinTech startups have emerged, offering locals faster, cheaper, and more convenient alternatives to traditional banking and major payment services for receiving money from abroad.

The recent wave of Russian relocation, primarily to Armenia, Kyrgyzstan, and Kazakhstan (2022-2023), has sparked a need for FinTech solutions that simplify innovative money transfer methods. Given Russia's status as the largest economy in the CIS bloc, many Russians abroad continue to work for Russian companies.

A closer examination of Russia's recent developments reveals why the country is accelerating its efforts to develop new FinTech solutions for capital movement.

The SWIFT Alternative

Russia's economy faces a unique scenario, shaped by Western sanctions. The number of banks connected to SWIFT has dwindled significantly. The Bank of Russia established the National Payment Card System (NSPK) in 2014, which laid the groundwork for "MIR" cards and the Fast Payment System (SBP). Russia now heavily depends on this financial ecosystem, having banned SWIFT for domestic money transfers starting October 1, 2024.

Cross-border capital movement, however, poses a significant challenge. On December 22, 2023, U.S. President Joe Biden signed an executive order enabling penalties on financial institutions assisting Russia in evading existing restrictions. In 2024, several Chinese and Turkish banks announced stricter scrutiny of transactions involving Russia.

Russia's SWIFT alternative, the System for Transfer of Financial Messages (SPFS), gained traction in at least twenty countries by mid-2024, with 150 foreign banks utilizing the system. On June 1, 2024, G7 countries and the EU began discussions on imposing financial restrictions against international banks using SPFS to aid Russia in bypassing sanctions.

CBDCs in the Spotlight

These circumstances prompt Russia to expedite the development of its central bank digital currency (CBDC), known as the digital ruble. The notion of a unified BRICS digital currency is being considered, although formal discussions are only preliminary in 2024.

Practically, the Central Bank of Russia has consented to let Russian firms experiment with digital financial assets as a payment method in international transactions within its regulatory sandbox. Russia possesses comprehensive legislation concerning digital financial assets, delineating a clear path for their domestic launch.

However, the Bank of Russia staunchly opposes the use of any currency alternative to the ruble for domestic transactions. Cryptocurrencies are banned as a payment option inside Russia, but investment in crypto remains in a legal grey area.

While some experts and the Trade and Industrial Chamber advocate for cryptocurrency adoption in international trade under some circumstances, the Bank of Russia's position remains unclear amidst a rapidly shifting geopolitical landscape.

Kazakhstan launched its central bank digital currency (CBDC), the digital tenge, in November 2023, aiming to enhance capital flow and enforce KYC and AML measures in the financial sphere through robust compliance processes.

Capital Movement Limitations: The Case of Russia and Dedollarization

In 2024, the Russian regulator extended restrictions on capital outflows until September. Russians can transfer up to $1 million abroad to foreign banks, whereas non-resident employees in Russia are capped by their salary size. Monthly limits for transfers via money transfer systems remain at $10,000 or equivalent in another currency. Non-resident individuals, excluding those employed in Russia, from countries deemed unfriendly by the Russian government remain barred from transferring funds abroad. However, this restriction doesn't apply to foreign companies controlled by Russian citizens or businesses.

These constraints, coupled with Western sanctions' impact on Russian capital abroad, have effectively "trapped" a record amount of capital within Russia. Consequently, very stringent capital export restrictions haven't been imposed.

It's noteworthy that digitalization of capital movements and de-dollarization are concurrent trends in CIS countries. For instance, the Central Bank of Azerbaijan declared that in 2024 it would persist with its de-dollarization policy to bolster public trust in the national currency.

These developments indicate that in CIS countries, international capital movement is becoming more regulated due to CBDCs and mobile payment services. As more people and businesses use local currencies for cross-border transactions, they inadvertently support the internationalization of these currencies.