Gowling WLG (International) Inc - Russia
Since 2017, bitcoin, cryptocurrencies and blockchain-based technologies have been a frequent area of focus for regulators in Russia. The prevalence of these technologies was prompted by the rapid emergence of:
- initial coin offerings (ICOs);
- thousands of blockchain-based projects that aim to attract funding on cryptocurrency markets; and
- active mining and trading activities.
As is often the case with proactive markets, regulators have largely been forced to catch up. In March 2018 a number of draft bills regulating cryptocurrency, ICOs and crowdfunding were introduced to the State Duma, including:
- the Draft Bill on the Introduction of Amendments to Parts One, Two and Four of the Civil Code of the Russian Federation;
- the Draft Bill on Digital Financial Assets; and
- the Draft Bill on Alternative Methods of Attracting Investments (Crowdfunding).
In May 2018 the long-awaited draft bills were approved in the first reading at the State Duma. The bills introduce various concepts that are new to Russian legislation, such as:
- digital rights;
- digital financial assets (including cryptocurrencies and tokens);
- smart contracts;
- mining; and
- a distributed register of digital transactions.
The primary goal of the legislation is to provide a legal platform on which to introduce more detailed regulation of the circulation of cryptocurrencies in Russia.
Legal status of cryptocurrency
The documents answer the key question as to the legal nature of cryptocurrencies by qualifying them as an electronic property that has been created by cryptographic means (digital financial assets). ‘Digital financial assets’ include cryptocurrencies and tokens. The main difference between a cryptocurrency and a token is that a token is issued by one issuer while a cryptocurrency is created by numerous issuers. Neither is recognised as a means of payment.
Mining and crypto-exchange
Mining is expected to be legitimised as an entrepreneurial activity through the creation or validation of a cryptocurrency with the aim of making a profit. Mining can be considered an entrepreneurial activity, provided that the miner exceeds the limits of the power of consumption for three consecutive months. To qualify mining as an entrepreneurial activity requires obtaining commercial status by either an individual or a company.
With respect to exchange and circulation, the new legislation permits an exchange for rubles or foreign currency only. The exchange between digital financial assets is allowed, but the procedure and conditions for such an exchange will be established by the Central Bank of Russia and the government. Cryptocurrency exchange activity is allowed only to Russian companies that have qualified status under the Law on Securities Marker (No 39) and the Law on Organised Bidding.
The Draft Bill on Alternative Methods of Attracting Investments (Crowdfunding) provides for regulation of the ICO procedure, which includes publication of an investment memorandum, public offer and other documents required for token issuance on the website by the issuer. The publication must also contain a conclusion of contracts, including those in the form of smart contracts, aimed at the acquisition and payment of tokens. The document clarifies that one token must have only one issuer.
The document defines ‘crowdfunding’ as a service that provides access to an investment platform for conclusion contracts, based on which investment is being raised. The process of crowdfunding implies the simultaneous conclusion of two service contracts:
- a service contract on raising investments between a platform operator and those entities seeking investment; and
- a service contract on the contribution to investment between a platform operator and investors.
Investments to the project through investment platforms can be made by any persons, including unqualified investors and individuals not registered as individual entrepreneurs. The investment platform must be operated by a Russian legal entity with capital of at least Rb5 million ($72,463) and the platform must be included in the special register of investment platforms.
The draft bills were intended to address a perceived gap in the current legislation. Considering the urgency in preparing the documents, the bills will likely be subject to thorough review in order to ensure their compatibility with the existing legal framework and their enforceability.
The State Duma is planning to review the draft bills in their second and third hearing, which will likely bring further changes to the legislation, before adopting them in Autumn 2018.
Although the draft bills received some criticism from business owners for providing fragmentary regulations, their introduction affirms the Russian government’s position as a professional crypto-player on the global cryptocurrency market.
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