Cryptocurrency regulations in Russia
There has been a dramatic shift in the rhetoric used by Russian officials about cryptocurrencies and blockchain assets in recent months. In a little under a year, officials have gone from proposing that cryptocurrencies be banned and users imprisoned, to suggesting legalization as a potential solution. Let’s look back into the history of cryptocurrencies and analyze the developments of the regulations of cryptocurrencies within the Russian Federation.
On January 2014, the Central Bank of the Russian Federation issued its first statement about cryptocurrencies. They referred to them as speculative, high-risk, and not backed by state entities.
Then a few years later, in September 2016, the Russian Central Bank issued a statement warning the public about investing in cryptocurrencies. It mentioned that it would be monitoring cryptocurrencies and developing, together with the state, a legal framework to regulate crypto.
At the end of August 2016, Russia’s deputy minister of finance, Alexey Moiseev, likened Bitcoin to a high-risk “financial pyramid” which warranted tighter regulation. The Ministry of Finance chimed in and stated that it had plans to prohibit private investors from accessing Bitcoin exchanges. Only qualified traders would be allowed to invest in it.
Fortunately, last October, Russian President Vladimir Putin ordered the government to create legislation for cryptocurrencies, including determining their status and creating a legal framework for crypto mining and initial coin offerings (ICOs).
This is how the official draft of the federal law “On Digital Financial Assets” was adopted. It was to address the use of cryptocurrencies, mining, token offerings, and crowdfunding in Russia. This law is supposed to be enforced in the summer of 2018.
For the first time, the draft law provided Russia’s cryptocurrency-related definitions of cryptocurrency, tokens, smart contracts, crypto exchanges, and mining. Furthermore, the document clarified that Russians had the right to trade their cryptocurrencies for other digital assets and for fiat currency. I find it interesting that Russian regulators also plan to tax crypto mining as a business venture when it exceeds certain electricity consumption thresholds. These thresholds are also to be determined by the government.
To find out more about the regulatory environment and perception of blockchain technology and cryptocurrencies in Russia, I turned to two Russian lawyers specialising in cryptocurrencies and ICO regulations. Maria Agranovskaya, blockchain attorney and Managing Partner of GRAD Legal & Financial Advisory and Artem Tolkachev, Director at Deloitte, gave me a good perspective on the adoption of cryptocurrency in the country.
What has the Russian government’s regulatory stance been in the last several months?
Blockchain does not exist in a vacuum as the existing norms are still applicable to all participants. There is no enforcement-specific regulation yet as sporadic case law but not giving rise to a precedent. There are also several explanatory letters from the tax inspection department, with no clear guidance and negative comments from the Central Bank. We hope to have at least some rules of the game uncovered soon.
In the last several month, Russian State Duma passed a number of bills in the first reading that proposed a regulatory framework for crypto and ICOs. From a practical point of view, the proposed legislation (if enacted as it is) would make it nearly impossible to conduct an ICO and / or exchange digital assets in Russia. It would change the way that it is being done currently by the global community.
For example under the proposed regulation funds during an ICO, it can only be attracted in fiat money (Russian Rubles or foreign currency) and in non-cash form. It also has to be deposited to a so-called nominee account of an ICO operator. In addition, a cryptocurrency will not have the status of legal tender, and its exchange will be heavily limited and highly regulated.
These bills were prepared independently from each other. The lack of any rules relating to taxes, accounting and enforcement of contracts also make this legislation rather ineffective. The reaction among the crypto community in Russia is that current version of the bills will not be able to establish a feasible regulatory framework. This will affect the cryptocurrency trading and ICO in Russia while requiring amendments.
Attitude towards cryptocurrency and blockchain in Russia
According to Token’s Report, Moscow has the second largest number of ICOs launched in 2017. So it seems that the country’s entrepreneurs have a very positive attitude towards using blockchain cases to raise money. In terms of adoption of blockchain technology, I think that the pathway is not very clear for the market players yet. There are a limited number of successful use-cases in Russia compared to other countries.
Maria Agranovskaya regretted that banks are not legally allowed to work with the crypto related businesses though they are very eager to do so. However, through regulated entities, financial institutions in Russia are still trying to develop crypto based products for private clients. But so far they cannot let go of the “payment for tokens” or accept funds from “crypto exchanges”.
Artem Tolkachev empathised that, in terms of blockchain, there are no relevant restrictions because it is merely technology. But sometimes its applications need amendments to current Russian legislation, depending on the use-case. There is a tendency amongst major Russian instructional players that are looking to implement blockchain in their business processes. This tendency is to promote the legislative changes that would be relevant for their cases. But this process is highly time consuming. However, it is an official position that blockchain usage will be fostered in the frames of digital economy development. We can, therefore, expect significant developments in this area in the near future.
We can’t say that the government and large financial institutions have shifted their attitudes towards blockchain technology. On the contrary, there have already been successful cases of testing blockchain implementation within the Russian financial industry. The participation of the Russian Central Bank and large players such as National Settlement Depository, Alfa-Bank and others have fueled it. There is also a large ongoing blockchain project in the financial industry called Masterchain. It is led by Sberbank and other important financial institutions.
The situation around cryptocurrency is the opposite right now. Several Russian authorities considered cryptocurrency and activities related to it as illegal, but there was no direct legal ground for this opinion. Therefore, it would be fair to say that crypto trading has been in a so-called “grey zone” in Russia for now.
The proposed regulation on cryptocurrencies is aimed to provide Russian regulators with heavy control over the industry. Any transactions with digital assets can only be conducted through exchange operators in Russia (it is necessary to have a crypto wallet operated by them, and that would be the only legal crypto wallet).
Operators will have to conduct a full AML/ KYC in order to open a crypto wallet, without possibility of remote identification (which limits the participation of foreign investors as well as the whole process of investing in and exchanging of tokens / cryptocurrency even between Russian investors).
Crypto trading will be possible only through Russian organizations that are required to obtain an exchange or broker / dealer license from the Russian Central Bank. They are also going to be fully supervised by it.
In addition, the Russian Central Bank will supervise operators of crowdfunding platforms (including ICO operators). It can also set in its future legislative acts restricted maximum amounts of investment that can be raised by a crowdfunding project (including ICO). They can also set the maximum amount of investment in a single project by non-accredited investors and their total investments in crowdfunding projects per year.
The above regulation could lead to a conclusion that the current tendency regarding the cryptocurrency trading and ICOs is to impose serious limitations. This could create a very difficult operational infrastructure for traders and investors, thereby significantly reducing practical feasibility and interest in participating in crypto.
What do you think the future of official state treatment of cryptocurrencies and blockchains will be? Even if the Russian government is interested in adopting some of these possible new ventures, is it likely that they will be applied on a fairly tight leash?
We are awaiting the birth of a new legislation. There are about 20 working groups in Duma, but so far the quality of the acts is ambiguous. More importantly it is not clear how that will be implemented in real life. First of all, for the support of crowdfunding via Blockchain, and second, mining activities and payments by crypto, it is still not clear. The law on mining draft has been sent for amendment, and we do not know what will happen with it yet.
We believe that the Russian government, as well as large Russian institutional players, are interested in the implementation of blockchain as technology and will make efforts in increasing the scale of its development.
In terms of cryptocurrency, the proposed legislation will impose some really unfavourable restrictions pursuing essentially an aim to protect Russian investors and the economy. But the balance of interests is determined improperly. It is retail investors who are primarily interested in crypto-assets, whereas larger institutions prefer conventional fundraising schemes governed by securities law.
Instead of actually protecting retail investors, the proposed legislation tends to prevent them from participating in these types of projects. Some restrictions directly contravene to well established practices and make cryptocurrency related projects not feasible in Russia.
The future centres of the Russian cryptocurrency industry, if any, could develop within the sandbox regime provided by Central Bank or other specific regimes that would be less restrictive but under more control of the regulator. However despite several propositions for now there is still no operational framework for the projects to apply for sandbox or similar regimes. This could change in the future depending on the position of the regulator.
In conclusion, Russia is curious and careful at the same time about the cryptocurrency market and strives to catch up with the trend. As the ICOs continuously grow, the interest in Bitcoin and other cryptocurrencies will eventually grow as well. The potential for this technology is promising as it’s driven by education standards and new cryptocurrency regulations to be passed this summer. It is true that everything unknown seems risky and dubious at first. However, let’s not look at the future that way, but explore and be positive.