Dmitry Zhurbin – senior legal advisor, Infralex law firm
The State Duma of the Russian Federation (lower house of the parliament) has passed in the first reading draft federal law On Digital Financial Assets submitted by the Ministry of Finance. It thus made a first step towards amassing regulations on cryptocurrencies circulation.
It is worth reviewing the subject of the bill and the possible consequences of its enactment. It should be noted that in many instances the wordings of the laws approved in the first reading have very little in common with the ultimate versions signed by the Russian Federation president into laws at the final stage of a legislative process.
Cryptocurrencies circulation and ICOs legalization should undoubtedly be seen as the draft law’s key achievements. In case the bill is passed, an ICO under the Russian law will turn from a myth into reality. Besides, the bill specifies definitions of major terms which is of prime importance for a proper law administration.
Once the draft law is approved, cryptocurrencies and tokens – jointly defined as digital financial assets – will formally become properties. In practical terms that means such assets can be subjects of civil transactions, can be inherited, contributed to corporate capitals, pledged, seized by a court ruling, etc. It should be remembered the norms of tax laws will from then on be fully applied to digital financial assets.
The bill regulates two types of relationships: (1) issue of tokens (ICOs), and (2) cryptocurrencies circulation.
Issue of tokens must be arranged in two stages: (1) publication by tokens issuer of an investment memorandum (analogous to white paper) and an offer, and (2) making agreements intended to alienate tokens and arrange payments for them by purchasers.
Under the proposed bill, when issuing tokens, an issuer must take into consideration that:
- One type of tokens can only be issued by one issuer;
- An issuer must disclose the entire ownership structure and the ultimate beneficiary;
- An issuer is responsible for completeness and reliability of the entire information contained in the investment memorandum;
- Individuals who are not qualified investors are not entitled to acquire tokens in quantities exceeding limits set by Russia’s Central Bank;
- An issuer is only entitled to offer its tokens to prospect purchasers or advertise their purchasing after the respective offer has been published;
- To buy tokens, a purchaser must have a digital wallet which is only possible after an identification procedure is completed. Such an identification can only take place if an investor is present personally, not remotely. That will inevitably cause hardships for foreign investors.
As for the cryptocurrencies circulation, the bill provides for a possibility of exchanging tokens for fiat money through an operator holding a special status (analogous to an exchange) only. An exchange is only possible if there is a digital wallet (meaning an identification procedure). It should be specifically noted that the draft law does not equate cryptocurrencies to fiat money and does not award cryptocurrencies a status of a lawful means of payment. Yet one could hardly have any doubts in that respect since no single state would act in a way to stimulate a competitor to its national currency.
Concurrently, the State Duma also reviews a draft law on amending Russia’s Civil Code aiming to recognize digital rights as a new object of civil laws. The amendments proposed for acceptance should make the basis for cryptocurrencies legal regulation. Finance Ministry’s draft law should in turn regulate specific (individual) aspects of ICOs and cryptocurrencies’ circulation. At the moment, the two draft laws are not aligned, contain some overlapping provision and employ differing terms. The two bills can not evidently exist in the present state. Parliamentarians assure though that by the second reading the bills will be brought into compliance.
To summarize, it should be noted that when passing legal regulation of new social relationships, legislators must make sure their rules do not kill a new social institution by setting such frameworks in which the institution can not efficiently develop. They must instead create such a legal terrain which will stimulate industry’s development. We will soon learn if Russian legislators have successfully sorted that out with cryptocurrencies.