On July 31, 2020, Russian Federation President Vladimir Putin signed the Law on Digital Financial Assets and Digital Currency. It comes into force in January 2021.

According to the new law, digital financial assets (DFA) are digital rights that can be viewed as analogues of emission securities, but placed through a blockchain. DFA include monetary claims, the ability to exercise rights to emission securities (including the rights to demand the transfer of the securities), and the right to participate in the capital of non-public stock companies.

The list of operations with DFA is not exhaustive. In particular, DFA can be sold, purchased, pledged, inherited, or exchanged for other digital rights. All transactions with DFA should be conducted through and recorded by specialized "operators" (primarily banks or other credit organizations or exchanges). Operators should be Russian entities included in the register maintained by the regulator – the Central Bank of Russia. Issuance of DFA is accompanied by documentation similar to the prospectus of emission securities and should contain, inter alia, information on the volume of the issue and the scope of rights attributed to their owners.

Digital currency is an analogue of cryptocurrency. According to the new law, digital currency is a collection of electronic data representing currency other than the currency of Russia or other countries. In particular, digital currency can be used as investment or sold from one party to another on the basis of the civil law transaction. Digital currency cannot be used or advertised as a means of payment for goods or services in Russia, thus substantially limiting its circulation. This prohibition applies to digital currency if the two following conditions are met: (i) the digital currency is issued using Russian operational networks; and (ii) transactions are being conducted by legal entities incorporated in Russia, or by branches and representative offices of foreign international organizations and foreign legal entities registered in Russia, or by individuals residing in Russia more than 183 days a year.

Additionally, the law prohibits Russian officials related to national defense and security from owning DFA and cryptocurrency that are issued in foreign information systems. Other Russian residents have the right to purchase foreign DFA and cryptocurrency using a foreign operational platform. Cryptocurrency will likely to be treated as "assets" subject to a mandatory declaration with the Russian tax authorities. Detailed regulations regarding these issues are expected to be forthcoming.

Such widely used concepts as "mining" and "token" were not included in the final version of the new law. It has been reported that they will be included in a separate bill that will further regulate the issuance and operations of digital currency. This bill is expected later in the year, and we will report on its enactment at that time.

In conclusion, though the law legitimizes the operations of DFA and locally issued digital currency, it poses a number of regulatory and tax issues that are yet to be clarified by the Central Bank and Tax Service.