On 1 January 2021, most of the provisions of a Federal Law on digital financial assets and digital currency* (the “Law”) will come into force with the remaining provisions to be enacted on 10 January 2021.
This Law is aimed at introducing a legal framework for the circulation of digital financial assets (“DFAs”) and digital currency in Russia. The adoption of this Law is a continuation of the policy of gradual regulation of the digitalisation of the Russian economy.
In the context of this policy, the concept of “digital rights” was introduced into Russian legislation in October 2019 as a starting point for the further development of regulation in this area.
For the most part, the Law is devoted to regulating the circulation of DFAs, while in fact only one article addresses digital currency.
Digital financial assets (DFAs)
Definition of DFAs
The Law defines DFAs as digital rights, which include one of the following rights (the list of which is exhaustive) provided that issuance, accounting and circulation of these rights is carried out electronically by making records in an information system:
- monetary claims;
- the possibility of exercising rights under equity securities;
- the right to participate in the capital of a non-public joint-stock company;
- the right to demand the transfers of issued securities specified in a decision on the issue of DFAs.
Organisation of the circulation of DFAs: information system operators and DFA exchange operators
Legal entities and individual entrepreneurs will be able to issue DFAs based on the relevant formal decision. This issue will be carried out in a specialised information system, which can operate on the basis of distributed-ledger technology. The Bank of Russia will approve the rules for the functioning of this system. DFAs will circulate in the information system in which they were issued.
Specialised entities, information system operators, will maintain information systems. Operators will have to be included in a register which the Bank of Russia will maintain.
The Law regulates with sufficient detail the requirements of information system operators, which, among other things, include the qualification requirements for an operator’s officials.
Information system operators will be responsible for the smooth functioning of their systems, and the integrity and reliability of information stored in their systems. Operators will reimburse users for losses incurred due to system failure in accordance with Russian civil law.
Information system operators will make records of DFAs, including those based on a judicial act, court order, certificate of the right to inheritance, etc. Operators will also have to provide information about DFAs belonging to a specific person to a court, Rosfinmonitoring, investigative and operational-search bodies, as well as a bankruptcy commissioner (at their request).
Transactions with DFAs will be conducted through specialised entities, DFA exchange operators. DFA exchange operators will ensure the conclusion of transactions with DFAs by collecting and comparing multidirectional orders, or by participating in transactions with DFAs as a party to them at their own expense, but in the interests of third parties.
There are separate requirements for DFA exchange operators, as well as a separate register, which the Bank of Russia will maintain. Credit institutions, trade organisers and other legal entities that comply with the requirements of the Bank of Russia (e.g. net assets amount requirements) will be able to serve as DFA exchange operators. The DFA exchange rules, which are adopted by a DFA exchange operator, will also have to be agreed upon by the Bank of Russia.
A draft Regulation* of the Bank of Russia on maintaining the relevant registers is currently under development.
Restrictions for the circulation of DFAs
The Law allows the Bank of Russia to determine a list of DFAs that can only be acquired by qualified investors or, for certain DFAs, the limit under which unqualified investors can acquire such assets.
For example, in accordance with a draft Regulation* of the Bank of Russia, DFAs issued in foreign information systems or whose value exceeds RUB 600,000 (EUR 6,717) will only be accessible to qualified investors.
The Law also establishes the features for the issue of shares in the form of DFAs. Hence, the issue of shares in the form of a DFA is prohibited if a joint-stock company has already issued shares in a form other than a DFA (i.e. in a non-documentary form).
At the same time, if a company decided to issue shares in the form of a DFA, the issue will take place in accordance with the requirements of the Law on the Securities Market, with the specifics established by the Law (e.g. instead of state registration, the issue will be registered by the information system operator).
Special requirements for the advertising of DFAs have been established. These specifically include a mandatory indication of a high degree of risk, the maximum purchase amount and the data of the person issuing the DFA.
The Law defines digital currency as a set of electronic data (i.e. a digital code or designation) contained in an information system:
- which are offered and/or may be accepted as a means of payment;
- which are not a monetary unit of the Russian Federation, a monetary unit of a foreign state and/or an international monetary or account unit; and
- where no one is liable to the owners of the electronic data, except for the operator and/or information system nodes that are only obliged to maintain the procedure for the issue of these electronic data and to make entries in or changes to the information system.
Restrictions on the circulation of digital currency
Russian residents will not be able to use digital currency when making settlements (i.e. to accept or offer digital currency as consideration for goods, works or services). In addition, in the Russian Federation, it will be prohibited to disseminate information about the offer and/or the acceptance of a digital currency as consideration for goods, works or services.
Thus, despite the fact that digital currency is defined as a “means of payment”, Russian residents will not be able to use it as such. In practice, the circulation of digital currency in Russia will amount to operations for the transfer of digital currency from one owner to another using the Russian information infrastructure (i.e. using Russian domain names and network addresses, or using technical means or software and hardware complexes located in Russia).
Russian residents will have to declare their ownership of digital currency and their transactions with digital currency in accordance with Russian tax legislation. Otherwise, their claims related to digital currency will not be enforced in courts.
As this Law only regulates some aspects of the circulation of digital currency, we expect the development and adoption of a separate legislative act with more detailed regulation of issues related to digital currency.
In general, the adoption of the Law is a logical continuation of the gradual introduction of the regulation of digital instruments and mechanisms into Russian legislation. Moreover, this process has just begun, and many issues require further elaboration and more detailed regulation.
In early 2021, we can expect the development by the Bank of Russia and the entry into force of secondary legislation that implements and clarifies certain provisions of the Law.
The Russian Code on Administrative Offences could also be amended* to establish liability for violating the rules for the circulation of DFAs and digital currency.
We will continue to monitor the development of legislation in this area and report on further changes.
If you have any questions on this eAlert, do not hesitate to contact CMS Russia experts Maxim Boulba, Konstantin Baranov, Elena Andrianova, Darya Lukoyanova or your regular contact at CMS Russia.
* In Russian