During the last decade, customary business processes have been disrupted by new financial technologies such as blockchain, cryptocurrencies, blockchain tokens, and smart contracts. The appropriate regulation is on its way in Russia, as Russian regulators have recently shifted their focus from imposing a ban on cryptocurrencies to looking for ways to regulate the new relationships. As a result of prolonged discussion about the legal nature of tokens and cryptocurrencies, the authorities have come up with two bills designed to set a cornerstone for Russian regulation of the digital economy.
In October 2017, Russian President Vladimir Putin expressed his view on cryptocurrency, acknowledging it as a full-fledged means of payment and investment but also noting the associated risks, including money laundering, tax evasion, financing of terrorism. and fraudulent schemes. Such risks have also repeatedly been mentioned by the Central Bank of Russia (CBR). Mr. Putin has stressed that the risk factors should not lead to a ban of cryptocurrencies, but that these risks should be addressed in appropriate regulations.
The first drafts of these regulations were bills on digital financial assets published by the CBR and the Ministry of Finance in January 2018. The more rigorous approach of the CBR was later reflected in the bill on digital financial assets (the “Bill on DFA”) submitted to the State Duma (Russia’s legislative body) on March 20, 2018.
The Bill on DFA recognizes cryptocurrencies and tokens as so-called “digital financial assets” (DFA) constituting “other property” under Russian civil legislation but denying their status as a legal means of payment in Russia. The Bill on DFA provides that tokens can be exchanged for rubles or foreign currency only via exchange operators acting as certain professional securities market participants or trading institutions. The Bill on DFA does not permit the exchange of tokens for cryptocurrency or other type of tokens. The rules of DFA-organized trading applicable to trading institutions are to be adopted by the CBR. The proposed legislation sets forth requirements for initial coin offerings (ICO) as well, including disclosure duties of token issuers, the publication of an investment memorandum (a document similar to a “white paper”), and the description of risks connected with the project for which an ICO is arranged.
In addition, on March 26, 2018, a bill on amendments to the Russian Civil Code regulating tokens as so-called “digital rights” (the “Bill on Digital Rights”) was submitted to the State Duma. The Bill on Digital Rights addresses the procedure for the transfer of rights to “digital rights” and the execution and enforceability of smart contracts. It provides that the transfer of title evidenced by a digital right will occur solely by an entry made to the relevant information system. A digital right may be transferred on the same terms and conditions as the underlying object of civil law rights; the transfer of the digital right will result in the simultaneous transfer of the right/claim represented by such digital right.
The Bill on Digital Rights recognizes smart contracts as legally binding and enforceable but limits the available remedies to the parties. Transactions providing for automatic performance can be challenged in exceptional circumstances only if there is evidence that the parties to the transaction or any third party have interfered in the process of performance.
On May 22, 2018, the Bill on DFA and the Bill on Digital Rights were adopted by the State Duma in the first reading and, going forward, will be considered jointly. The bills are likely to be adopted in September 2018 after further revision.
Although representing a positive shift in the Russian treatment of cryptocurrencies, the proposed legislation does not fully address the challenges of the digital economy. The definitions and rules of digital rights and smart contracts do not fit within the existing civil law framework. For example, the limitation of remedies under smart contracts violates both constitutional and civil law principles. The Russian government has not yet come up with drafts of subordinate legislation or regulation which would fill the gaps in existing drafts. Nevertheless, the bills, if revised as necessary and adopted, would still bring more certainty in Russian regulation of FinTech and would lay the groundwork for further developments.
By Anna Maximenko, International Counsel, and Elena Klutchareva, Associate, Debevoise & Plimpton
This Article was originally published in Issue 5.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.