The law on digital assets has become another 2019 novelty to the Russian Federation Civil Code. Most importantly, the law now recognizes digital currencies and assets as properties, accepts their circulation, and becomes a legal foundation for protecting the rights of the assets owners. The law is a breakthrough for both Russian and international legislations, since until now cryptocurrencies are unregulated in most jurisdictions. The law will be enacted on January 1, 2021 and Russia’s Central Bank will have to draft a number of bylaws by then.
Bitcoin, Ethereum and other cryptocurrencies (aka coins) are now formally recognized by the new law and civil deals with them are permitted, yet settlements in digital currencies (and advertizing of such settlements) are prohibited, therefore crypto coins may not be used as means of payment for goods and services. No digital currency is likely to become a formal means of payment since there are no single issuer thereof and no backup assets, and its very existence is totally dependent on a market demand.
It’s noteworthy that the law only regulates the crypto deals employing domain names within Russia’s domain extension, and IT systems located in Russia.
No digital currency may be issued and circulated in Russia until a special federal law is enacted.
The law defined digital financial assets (DFA) as digital rights to receive monetary funds or special securities. The DFA concept legalizes the tokens startups offer to investors in order to attract investments at an early stage of operation (Initial Coin Offering). To get such tokens, investors have to pay fiat money or cryptocurrencies. The terms and conditions for the tokens issue may vary as investors may be entitled to some dividends or to exchanging their tokens for goods/services.
DFA therefore grant rights to receive monetary funds, securities or have a stake in company’s share capital, whereas utility digital rights (UDR) envisage obtaining copyrights/goods/works/services. UDR are thus e-certificates (coupons or vouchers) allowing to get in the future some physical goods, services or non-physical products such as movies, music or software. The law also envisages hybrid digital rights so that investors can have some DFA and some UDR. Once an ICO is over, tokens usually are traded at cryptoexchanges, so investors can sell them.
The regulations of DFA and UDR are different. DFA are regulated by the new law whereas UDR are regulated by the law on investment platforms. Investment platforms are special websites used by companies to raise private investors’ funds. The most well-known platforms are Starttrack, Ozon Invest, Alfa Potok, Sbercredo. The borrowers are usually small and medium businesses who can not afford to issue stocks and securities while are interested in getting fast and short money through crowdfunding. With the new law in force, businesses will be able to offer UDR to their investors.
The law provides for some essential requirements to blockchain platforms and companies willing to offer UDR. Such requirements are intended to protect investors’ rights, namely:
- Blockchain platforms and cryptoexchanges have to be on Russia’s Central Bank’s register as operators of information systems and as operators of DFA exchange obliged to observe such conditions as:
- registration of the legal entity in Russia,
- share capital of at least RUR 50 mio ($680K),
- no offshore shareholders,
- certain qualifications of the executive management,
- special unit to run risks management system,
- technical requirements to operator’s information systems;
- Each operator is to draft and publish at its website its Information System Rules;
- License to keep a register for operators of titles to DFA stocks;
- Company is to make public its resolution on DFA issue meeting established requirements;
- Russia’s Central Bank is entitled to allow access to some DFA to qualified investors only.
The law has recognized that digital currencies are properties, thus entailing the following legal implications:
- Title to digital currency is subject to judicial protection only if the transactions with such currency have been declared under the national Tax Code,
- Like any other properties, digital assets and digital currencies may be seized by a court ruling or through bankruptcy procedures.
Evidently, not every platform will meet the new requirements and it’s likely some part of the crypto market will remain within a shadow economy. Yet some fully legalized platforms will appear making it safer to invest.
By Valeria Grigorieva, corporate counsel, Legalight law firm