DFA in Russia: Five growth vectors for the new market

Over the next three years, the Russian market for digital financial assets (DFAs) is poised to reach 0.5 trillion rubles. The actual pace of growth will hinge on various factors, including legislative adjustments that broaden the tool’s scope and captivate user interest. The Commission on Digital Financial Assets and the Expert Council for assessing the regulatory impact of draft laws under the Council of the Russian Chamber of Commerce and Industry on financial, industrial, and investment policy jointly convened to discuss key aspects of the legal regulation of digital financial assets, measures to stimulate investment activity, and the future trajectory of this new sector within the financial market. This thematic event, titled “Directions for the development of legal regulation of digital financial assets (DFAs) and utilitarian digital rights”, took place at the Russian Chamber of Commerce and Industry.

Control is everything

One of the main objectives in the development of DFA is to outline the optimal level of control over operators of the new market infrastructure, says Artem Genkin, Professor, President of the NPO Center for Protection of Bank Clients and Investors. These entities are tasked with ensuring the seamless operation of information systems (IS) responsible for issuing digital financial assets and managing asset records.

Although the level of control over IS operators is often perceived as overly stringent, even impeding market growth, in the case of new high-tech financial instruments – known for their profitability and corresponding risks – prioritizing a measured pace of advancement is paramount.

“Progress should unfold devoid of scandals and widespread instances of fraud and deceived investors, all while cultivating a positive public perception surrounding innovation,” Artem Genkin believes.

Encouraging investor participation

An essential aspect entails broadening the spectrum of participants in the new market, particularly targeting mass investors who have yet to fully engage with the tool.

“While there is no longer a substantial gap between private investors and the digital financial market, a universally accessible bridge has yet to be established. Instead, current pathways are limited and well-trodden,” Artem Genkin notes.

To address this, incentive measures should be implemented to attract retail investors to the DFA market. Increased participation from retail and institutional investors in friendly countries has the potential to expand the player base. However, this necessitates the development of solutions tailored specifically to this group.

“There are currently no such solutions on the market yet, they need to be developed,” Artem Genkin says.

Attracting institutional investors

Engaging institutional investors that would allow for DFA liquidity is essential. According to Oleg Ushakov, founder of the Sagrada Legal bureau and Chairman of the Commission on DFAs of the Russian Chamber of Commerce and Industry’s Council for Financial, Industrial and Investment Policy, the Bank of Russia regulations provide for the opportunity for the same insurance companies or non-government pension funds to engage in acquisition of bonds. As regards DFAs, similar options may be useful as well. It would be efficient to eliminate contradictions between the law on DFAs and the laws on joint stock companies and the securities market, which hamper issuing shares in the form of DFA.

Igor Kuzmichev, General Director of Blockchain Hub, also mentions the significance of institutional investor engagement.

“The opportunity to involve existing financial market players, depository participants, brokers and management companies in the market is a key vector of its progress,” he emphasizes. 

The task is similarly relevant for the collective investment market, whose participants so far lack the opportunity of investing in DFAs, notes Viktor Burchik, Head of Digital Assets Department at INFINITUM specialized depository.

New DFA tasks

A particular priority here is a greater use of digital financial assets for various economic tasks.

The tool involves attracting co-investors in complexly structured projects, including in project financing. Priorities include making investments in industrial and infrastructure projects, such as plant, road and airport construction.

“DFA advantage is not about prompt emission but about a greater flexibility, allowing for development of appealing payout profiles. This, among others, would attract a wider range of investors to such projects,” notes Dmitry Aksakov, Executive Director of the Business Block at VEB.RF. 

DFAs can indeed be used for designing, or customizing, investment instruments, Aigenis Investment Company Deputy General Director Mikhail Vasilyev agrees.

“The opportunities also include the use of DFA as a payment method in international trade, with the option being actively discussed,” Oleg Ushakov notes. 

Protecting digital asset investors

Digital financial instruments could eventually become an essential part of the economic market.

“I believe DFAs to be essential for all aspects of our economy,” says Vladimir Gamza, Chairman of the Council for Financial, Industrial and Investment Policy at the Russian Chamber of Commerce and Industry.

Efforts to establish synergistic interaction between digital financial services and the traditional financial market are already a major task.

“Eventually, we should ensure mutual conversion for traditional securities and blockchain-based ones, and allow for DFAs to be traded in the traditional financial market infrastructure,” Artem Genkin predicts. 

In this regard, protecting the interests of investors in new digital financial instruments remains paramount. The DFA market is actively expanding, having reached 70 billion rubles within some 350 issues, according to Kristina Alyoshina, Deputy Director of the Financial Market Infrastructure Department and Head of the Directorate for Platform Operators and Information Services Supervision at the Bank of Russia.

“Issuers include not only major companies but also small and medium-sized businesses. Even with a small volume of about 3 billion rubles, the economic agents’ activities are already obvious,” Kristina Alyoshina explains. 

“The DFA market is stirring interest, including from investors willing to use the instrument, which makes its promotion important. To become mainstream, DFAs should be put to use,” agrees Sergei Bezdelov, First Deputy Chairman of the Russian Chamber of Commerce and Industry’s Council for Financial, Industrial and Investment Policy and Director of the Industrial Mining Association. 

In this regard, ensuring maximum information transparency is essential, Artem Genkin believes.

“This will serve to both prevent the emergence of “dark horses” and allow for an adequate assessment of the investment attractiveness of investment decision-making tools,” the expert notes. 

Obviously, the entire market will benefit from efforts to collect and generalize law enforcement practice, and to establish a guild of conscientious and qualified investment consultants specializing in DFAs.

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