The State Duma, the lower chamber of the Russian parliament, has recently approved in the “first reading” three draft laws that address the use of cryptocurrencies, mining, token offerings, and crowdfunding. Existing Russian laws do not directly regulate these matters, and the use of cryptocurrency in Russia is currently subject to legal uncertainty. This LawFlash summarizes key provisions of the draft laws as well as information on likely future legislative action.
One of the draft laws aims to amend the Russian Civil Code to introduce two new concepts: “digital rights” and “digital money”.
A “digital right” is defined as a digital code or enumeration in a decentralized information system that (a) certifies that a person who has "unique access" to such code or enumeration has rights to certain assets (other than intangible assets); and (b) allows such person to obtain information on these assets at any time.
Digital rights are treated in the same manner as book-entry securities and non-cash funds. These may be transferred under the same rules that apply to other assets (for example, pursuant to sale and purchase or gift transactions, or by inheritance). The transfer of digital rights is effected by making a record in the relevant information system.
“Digital money” (i.e., cryptocurrency) is defined as a digital code or enumeration in a decentralized information system that does not certify rights to any assets, but rather is used for making payments. Digital money may be used as payment in Russia in the circumstances and subject to conditions set forth in other laws. Transactions with digital money are subject to the same rules as transactions with digital rights.
The draft law proposes certain other amendments aimed at simplifying transactions with digital assets and governing execution of “smart contracts.” For example, it states that an electronic expression of will (by transmitting a signal, including via the internet) qualifies as a written form of transaction, and recognizes the automated performance of obligations as valid.
Another draft law would establish several important concepts and definitions, and introduce certain key rules with respect to issuance, offering or otherwise transacting with tokens, including initial token offerings (also known as initial coin offerings or ICOs), the mining of cryptocurrency, and the use of digital wallets.
In general, this law would limit the use of cryptocurrencies to certain applications and activities. The apparent goal is to mitigate a number of the risks that investors may face when dealing with cryptocurrencies.
The draft contains certain provisions that would contradict the draft law described above (on proposed amendments to the Civil Code), and these differences will need to be addressed by the legislators. For example, it stipulates that digital assets may not be used as valid means of payment in Russia. Under the draft, digital assets may only be exchanged for fiat currencies (either rubles or foreign currency) through so-called “operators of digital financial assets trade”. Only a Russian legal entity licensed in Russia as a broker or dealer (including foreign exchange dealers) or exchange may serve as such an operator.
The draft law also contemplates that mining of cryptocurrencies will become a taxable business activity when it exceeds certain electricity consumption thresholds to be determined by the Russian government.
In addition, the draft introduces rules for issuing and offering tokens. A token offering would comprise two steps:
The draft lists certain mandatory requirements for the contents of investment memorandum and the public offering. The investment memorandum must include information on the issuer’s shareholders, the purposes of issuing tokens, the planned use of proceeds (for example, it should contain a business plan for any projects being funded), and the description of rights associated with tokens. The public offering must include information on the issuer, the purchase price (or method of its determination), the rules for maintaining the register of transactions with tokens, and the procedure of opening and maintaining digital wallets. Both the investment memorandum and the public offering must be signed by the electronic signature of the issuer’s general director or chief executive officer.
The third draft law seeks to regulate the activities of crowdfunding platforms and related investment activities.
This draft law would introduce the concept of “crowdfunding platform”, requirements for operators of such platforms, certain rules for disclosure of information by the platforms and issuers, and special rules about the advertising of crowdfunding activities.
Notably, the draft law contemplates the following options for investments via crowdfunding:
Only a Russian legal entity registered with the Bank of Russia may be the operator of an investment platform. The draft law would limit investments by individuals who are not “qualified investors” under Russian securities laws. Such individuals would not be able to invest above certain thresholds to be determined by the Bank of Russia. Currently, similar rules apply for non-qualified investors investing via stock exchanges and investments in securities.
Prior to adoption, the above-described draft laws would undergo second and third readings in the State Duma, approval by the Council of Federation (the upper chamber of the Russian parliament), and could then be signed into law by the Russian president. The second readings have not been scheduled yet. It appears likely that the drafts will be further considered by the State Duma this fall.
Substantial revisions may be made before the second reading, especially since the current versions overlap or contradict each other in parts. Reportedly, the head of the State Duma Committee on the Financial Markets has confirmed that the drafts are being revised. For example, it is proposed that the term "digital money" will be removed from the drafts, and instead will be included in "digital rights", while the term "cryptocurrency" will not be used at all. The crowdfunding rules may be included in the draft digital financial assets law. In addition, corresponding changes may be proposed for the Russian Tax Code with respect to taxation of digital rights.
We continue to follow developments in this area and will report further as needed.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Washington, DC /Moscow
Brian L. Zimbler