This article was originally published on May 18, 2018 in IAM and has been republished with permission.
From Russian rapper Basta launching his own cryptocurrency in December 2017 to top businesses exploring initial coin offerings (ICOs) and other alternative funding models, the Russian market is investing rapidly in blockchain technology and fintech.
As is often the case with proactive markets, regulators have largely been forced to catch up. There is no legal framework in Russia for cryptocurrencies, ICOs and crowdfunding, leading many to question whether they are legal.
However, two draft bills regulating digital financial assets and alternative means of investment generation (crowdfunding) have been developed, with the former having been introduced to the State Duma in late March. The State Duma is planning to adopt the bills as soon as possible, with a target of July 1 2018.
Digital financial assets
The bill on digital financial assets defines 'mining' and 'digital financial assets', which include cryptocurrencies and tokens. The bill provides that owners of digital financial assets will be entitled to effect only one type of transaction which pertains to the exchange of tokens to roubles or foreign currency.
While the existing legal framework provides for an exhaustive list of civil rights objects, it does not include cryptocurrency. Market participants have different views on where the regulation places cryptocurrency; some class it as a surrogate, which is forbidden, while others believe that it is a grey area and therefore not directly prohibited.
Lawyers and regulators must still determine the legal status of cryptocurrency for other banking, currency and accounting regulatory purposes; the new law is not expected to solve all of these problems, given that this would require the amendment of several core laws, including the Civil Code.
At present, cryptocurrency is not classified as money in Russia, as this would result in the loss of state sovereignty. Further, it cannot be classified as means of payment, as value added tax does not apply to cryptocurrency transactions in Russia.
Alternative means of investment generation (crowdfunding)
The bill on alternative means of investment generation (crowdfunding):
- defines 'crowdfunding';
- establishes requirements for crowdfunding platforms; and
- introduces the concept of qualified and unqualified investors.
Individuals are not expected to be allowed to invest more than Rb20 million in one project, with the limit for individual entrepreneurs set at Rb100 million. There would be no investment limit for other legal entities.
Significantly, the bill defines 'distributed register' and requires all crowdfunding platforms to register in blockchains (similar to the requirement that emerging legal entities register with the tax authority's state unified registry).
Before these new laws come into effect, companies wishing to explore these avenues would be advised to hold off or consider foreign jurisdictions (to date, all ICOs carried out by Russian businesses have technically been conducted in foreign jurisdictions).
Regarding IP-related blockchains, including the recent announcement of a future all-Russia blockchain platform for copyright objects, it is doubtful that a separate regulation is necessary. Part IV of the Civil Code already allows for the smooth operation of blockchain-based registers for copyright recordal and further licensing and royalty processing.
As always, before launching a cryptocurrency, ICO or other alternative funding strategy, it is prudent to seek legal advice to assist with managing the many complex corporate, tax and regulatory issues that may arise.