The past 12 months, and the next 12, have involved, and are likely to involve, the most important developments so far in Russian law relating to the blockchain market.
Until October 2019, assets and rights established and exercised in the blockchain market were not provided for under law. This created tremendous uncertainty, which was partially resolved by amendments to the Russian Civil Code coming into force on 1 October 2019, establishing a new category of property rights known as "digital rights." While blockchain is not specifically mentioned in the law, digital rights are essentially those types of assets and rights established and maintained through systems such as blockchain.
The amendments set a foundation but are only the first step toward comprehensive regulation of digital rights and distributed ledgers. More specific draft laws, particularly a law focused upon digital financial assets are under discussion and may be passed soon. As the legal basis for digital rights is only a few months old, the next 12 months are expected to present important new rules and practices.
Following the amendments to the Civil Code, blockchain has been used for the crowdfunding and tokenisation of various assets. In perhaps the most well-known case, Norilsk Nickel, a Russian nickel and palladium mining and smelting company, in co-operation with the Central Bank of Russia, has successfully tested its own blockchain for digitalising assets. The project was implemented in the Central Bank of Russia's regulatory sandbox and it is expected that once the more specific rules expected in the law on digital financial assets are passed, the company will be use blockchain for issuing its own stablecoin.
As illustrated by the Norilsk Nickel example, the market is essentially waiting for more detailed rules to be promulgated regarding digital assets and the blockchain market. A draft law has been proposed with the expectation that it will be passed within the next 12 months. The draft is under active discussion but it is not yet clear what the law will ultimately provide. That said, there are some indications – from lawmakers, regulators and law enforcement – that, while the law embraces blockchain technology and digital assets generally, there is open hostility to cryptocurrencies. Again, the details are yet to develop, but this appears to be an important trend in the thinking.
Because of uncertainty over its regulation, blockchain technology is not widely used in Russia. In addition, the infrastructure for blockchain is not fully developed. Implementation of blockchain in business processes is still expensive, cumbersome and time-consuming. More importantly, most businesses do not see a value addition from blockchain technology. Putting this into perspective, Russian organisations have yet to fully embrace digital documentation and contracting, although the law is firmly established in support of it. That said though, a number of businesses (primarily banks and large, forward-thinking corporations) are experimenting with blockchain.
Examples of this experimentation include:
The most important consideration in the development of business models using blockchain is that the market is to a large degree holding back, pending the establishment of a more detailed legal and regulatory structure.
As noted in 1.1 Evolution of the Blockchain Market, Russian law on blockchain technology and cryptocurrencies has been sparse. The October 2019 introduction of the concept of digital assets to the Civil Code created a very basic legal framework for digital assets, blockchain and smart contracts but further legislation is being prepared to provide details.
Digital rights are rights determined in accordance with the rules of an information system that meets the criteria established by law. So far, though, there is no detail in the law specifically for blockchain or even digital assets, but there is a law regarding investment platforms, which might be applied indirectly to the system. In any event, for the time being, there are no solid rules defining the criteria for such an information system. This leaves a grey area. In order to confidently create digital rights with respect of a certain asset, one might want to wait for more specific legislation to be in place. The market is currently waiting for the law on digital assets which will provide details for the creation of digital rights, including tokenisation of assets and their circulation.
While working with cryptocurrencies is not explicitly prohibited, indicators from lawmakers and regulators are that, when more detailed rules for digital rights are passed, it is likely that any work with cryptocurrencies will be very restricted, if not prohibited entirely.
Another concept to note is smart contracts. General contract law allows parties to use digital technology and to choose how the contracts will be formed and implemented, but the changes to the Civil Code also provide specifics for a smart contract approach for digital assets. According to the law, the terms and conditions of a transaction may enable the parties to perform their obligations thereunder through the use of information technology, as defined by the terms and conditions of the transaction. In other words, the parties are allowed to use smart contracts to perform their obligations.
Russia has implemented both domestic and international anti-money laundering standards for all transactions, including the blockchain sector.
Russian anti-money laundering legislation includes a specific ant-money laundering law, the Federal Law "On Countering the Legalisation of Illegal Earnings (Money Laundering) and the Financing of Terrorism". Russia is also member of the Financial Action Task Force (FATF) and follows FATF standards. In addition, starting from 2019, Russia has been by filing localised banking statistics to the Bank of International Settlements (BIS) .
While transactions involving digital rights and cryptocurrencies are subject to general rules, formally cryptocurrency transactions are not yet specifically regulated. There is great concern from regulators, tax authorities and law enforcement that cryptocurrency transactions are not transparent and may be used for illegal purposes. In 2014, RosFinMonitoring, the Russian regulator for anti-money laundering, issued a warning that the use of cryptocurrencies in a transaction could serve as legal grounds for considering that transaction to be aimed at laundering money and financing terrorism.
Given the fact that, currently, neither blockchain nor cryptocurrencies are formally regulated, there are no regulatory agencies with specific authority to regulate blockchain, but general authority will be applied. For example, the Central Bank of Russia and the Ministry of Finance are actively involved in the work on the development of digital rights legislation and will certainly be expected to have some level of authority over blockchain, especially with regard to cryptocurrencies. Other interested agencies would include:
There are no formal self-regulatory organisations performing regulatory or quasi-regulatory roles with respect to blockchain. There are some industry organisations aiming at developing standards for distributed ledgers, such as the FinTech Association and the Russian Association of Crypto Industry and Blockchain (RACIB).
There are only a few court decisions concerning the legal regime for blockchain or the status of cryptocurrency. The main issue in these cases involve whether cryptocurrency constitutes an asset or property under law. Most of the cases relate to bankruptcy when the court has considered whether cryptocurrency could be included as assets in the bankruptcy estate. Other cases involve whether cryptocurrency constitutes a taxable asset.
The main issues in these cases have largely been resolved by the amendments to the Civil Code in recognising digital rights.
In perhaps the most notable case, a financial administrator proposed that the debtor’s cryptocurrency be included in the debtor's estate, arguing that cryptocurrency has a high pecuniary value and so the exclusion of the debtor’s cryptocurrency from the debtor's estate would infringe upon creditors’ rights (see case No А40-124668/17-71-160).
The appellate court required the debtor to provide the financial administrator with the relevant access key (password) for the cryptocurrency holdings. The court ruled that cryptocurrency should be regulated as an object of civil rights on the grounds of a broad interpretation of the Civil Code of Russia and, hence, should be considered a pecuniary asset (in other words, a type of property). The appellate court also stressed that – since the debtor himself was able to freely use, possess and dispose of the cryptocurrency – his status should be similar to the owner thereof.
Financial administrators now actively try to include cryptocurrency in a bankruptcy estate. In another case, a financial administrator of an individual debtor filed a motion with the court to receive documents required to evaluate the debtor’s financial position as well as information on transactions in digital assets such as bitcoins and litecoins. The court granted the motion and obliged the debtor to provide the financial administrator with the requested documents (see case No А13-15648/2015).
As the legal status of digital rights were only established under law in October of 2019, the precedents for enforcement actions are all from before this time, so the complexion of enforcement could be different now. The main issue regarding enforcement has been the legal status and nature of the various digital rights. The most hotly contested has been related to cryptocurrencies. As described below, where a cryptocurrency is considered to be a "currency surrogate", as held by the Central Bank of Russia, there is an opinion that the cryptocurrency is illegal under law. Where it is considered to be a property right, it is considered legal and subject to taxation or other regulatory measures for property rights. Unfortunately, while the Civil Code has now established digital rights under law, this contention over the nature of cryptocurrencies remains.
We also note that attitudes on enforcement will depend upon the context of the enforcement. For example, the Central Bank of Russia is concerned with currencies, so it will look at digital rights in that context. The Tax Service is concerned with applying tax rules, so it is focused accordingly. Ultimately, the conclusion of the legal nature of specific digital rights or cryptocurrency will often depend upon their context.
The Russian Constitution, the Federal Law "On the Central Bank of Russia" and the Civil Code state that the rouble is the exclusive form of legal tender in Russia and the creation or introduction of new currencies or currency surrogates is prohibited. Based on these provisions, the Central Bank of Russia holds the view that circulation of cryptocurrencies is illegal. In 2014, the Central Bank of Russia compared cryptocurrencies with monetary surrogates, which are prohibited, and noted the risk of penalties for issuers and owners of cryptocurrencies.
On the other hand, in 2016, the Federal Tax Authorities expressed a view that cryptocurrency is a type of property and there was no formal ban on Russian citizens performing any transactions in cryptocurrency. In 2017, the Ministry of Finance shared the view that cryptocurrency was a type of property; however, only qualified investors should be allowed to purchase and sell cryptocurrency.
Currently, the details of a new law on digital assets are being actively debated, but indications from lawmakers and regulators have been that cryptocurrencies are likely to be considered to violate the exclusivity of the rouble. It appears that there are plans to introduce fines for the illegal creation or circulation of cryptocurrencies in Russia with administrative and criminal liability. It is not clear what the final wording of the law will be, but we do not expect that the circulation of cryptocurrency will be legal in the near future.
While the Central Bank of Russia has been consistently sceptical (if not hostile) to cryptocurrency, it is supportive of blockchain.
The Central Bank of Russia has established a regulatory sandbox for piloting various projects in the fintech industry, despite the ambiguity of the applicable regulatory standards. For example, the Norilsk Nickel project, discussed in 1.2 Business Models, relating to the building of a platform for issuing stablecoins was implemented in the regulatory sandbox, but until passage of additional legislation, the legal status of stablecoins is unclear.
There is no specific tax regime regarding the use of blockchain and cryptocurrencies. With clarification of the legal status of digital assets, we would expect an update of applicable tax rules. For the time being, general taxation rules are applied, with the presumption that digital rights (in particular, as they relate to cryptocurrencies) are property rights.
The interpretations of the tax status of different digital assets that are discussed below were all issued prior to the passage of the new rules in October 2019, through which the legal status of digital rights was established. While this information is indicative of the issues faced by the tax authorities, there is a likelihood that some of the positions might be different if articulated today.
The Ministry of Finance has issued several explanatory letters regarding some aspects of the taxation of digital assets in Russia. The general approach is that any cryptocurrency income associated with digital rights (especially cybercurrency) is subject to taxation.
For example, cryptocurrency income received by an organisation was determined to be subject to Russian corporate income tax (see Ministry of Finance letters No 03-03-06/1/61152 dated 28 August 2018, No 03-03-06/1/58171 dated 16 August 2018 and No 03-03-06/1/40729 dated 14 June 2018).
As for the taxation of individuals, the position of the Ministry of Finance is that individuals cannot apply preferential tax treatment that is available when receiving some types of property to cryptocurrency income, since cryptocurrency is not the type of property for which the preferential tax treatment is applied. However, in accordance with the basic principles of taxation, individuals have a right to reduce their taxable cryptocurrency income by the amount of expenses incurred in association with that cryptocurrency income (see Ministry of Finance letters No 03-04-07/80764 dated 8 November 2018, No 03-04-05/63144 dated 4 September 2018, No. 03-04-05/46553 dated 5 July 2018).
We note that even official letters of the Russian Ministry of Finance are of an advisory nature and are not law. For now, there is no prevailing court or law enforcement practice regarding the taxation of digital assets in Russia.
Enforcement of tax rules is particularly complicated with regard to digital assets, as the Federal Tax Service of Russia often does not have the technical ability to trace cryptotransactions and link them to a specific taxpayer. Russian financial and tax authorities still need to develop the legal mechanisms necessary for the taxation of digital assets and we expect development in this area.
All indications are that the Russian government will strongly support the digital economy generally and blockchain specifically, but that a very negative view will be taken of cryptocurrency.
From time to time, a number of state bodies establish various committees and advisory councils on blockchain and the digital economy. For example, there is an expert council on the digital economy and blockchain under the State Duma (the lower chamber of the Russian parliament).
As a general matter, the transfer of the ownership of a digital asset is determined by the terms of the information system handling the digital asset. This is provided for under both the Civil Code (generally) and Federal Law 259-ФЗ "On Attracting Investments Using Investment Platforms and on Amending Certain Legislative Acts of the Russian Federation".
More specifically, under the law on Investment Platforms, ownership transfer will occur from the moment that the information on that transfer is entered into the system under the operating terms of the system. Under the Civil Code, this transaction should be undertaken without the involvement of third parties – it should be automatically performed by the system.
Russian law currently provides only generally for digital rights, which would encompass a wide variety of digital assets. The intention of lawmakers and regulators is to add detail to this broad category of rights through the passage of specific legislation, but this detail has not yet been established. New rules, both in terms of regulations and proposed legislation are pending and are being actively discussed, so these distinctions will emerge as the new rules are promulgated. There are specific considerations being made to distinguish cryptocurrencies from other types of digital asset, but again, these rules have yet to be passed and are still under discussion.
As a general matter, though, the definition of digital rights covers those rights which are very closely associated with and managed by an appropriate "information system". If the proposed digital assets do not fit under the characterisation under law, they may be construed as securities, as other types of assets, or (as was the case before 2019)be considered to not exist at all under Russian law.
Russian law does not currently have specific rules for stablecoins and they would fall mainly within the rules associated with digital rights. As noted, however, the rules are in flux, so more specific rules should be expected. Informal indicators are currently that Russian lawmakers and regulators are not particularly hostile to stablecoins, but that there is strong opposition to anything which may appear to be a currency or currency equivalent.
For the time being, there is no specific provision for stablecoins but also none against them, so technically, they are not "illegal". That said, certain general rules will still apply, depending upon how the stablecoins are configured. For example, if they are established to satisfy the criteria of being a security, security rules will apply to them.
We are aware of certain major market actors (in particular, Norilsk Nickel) who have plans to issue stablecoins in Russia, but who have held off, pending clarity in legislation. This type of caution is likely to continue to be a very common approach until comprehensive legislation is passed.
Cryptocurrencies are used for payments in a very limited capacity. The legal status of cryptocurrencies is in a grey area, as there is a conceptual conflict between the rules (sparse as they are) for digital rights and for currencies. Cryptocurrencies are in the category of digital rights, so they are an asset under law and may be traded as such. At the same time, however, Russian law clearly establishes the rouble as the exclusive currency and prohibits the introduction of new currencies or currency surrogates, so to the extent a cybercurrency is considered a currency surrogate (as asserted by the Central Bank of Russia), use of cybercurrency for payment is not allowed.
For the time being, there is no specific prohibition against effecting transactions in cryptocurrency, but there is great scepticism with regard to transactions involving them. Tax authorities, law enforcement and other authorities are concerned about the lack of transparency involved in using cryptocurrencies. Lawmakers and regulators have clearly expressed their intention to prohibit the use of cryptocurrencies as a currency surrogate.
We expect that, upon the passage of more specific rules governing cryptocurrencies, it will be expressly prohibited to effect payments with them.
As with other types of digital rights, there are no specific regulations in place for non-fungible tokens (NFTs). That said, however, as NFTs are not really cryptocurrencies, many of the negative attitudes toward cryptocurrencies may not be directed to NFTs.
For the time being, NFTs are not illegal under Russian rules and should generally be handled as digital rights.
The attitudes of lawmakers and regulators are very different toward digital rights generally and cryptocurrencies specifically.
Firstly, it should be noted that exchanges for cryptocurrencies are not regulated in Russia and operate in a grey area. Various state authorities have expressed opposing points of view as to the legality of cryptocurrencies and exchanges. According to the draft law on digital assets, which is expected to be passed this year, circulation of cryptocurrencies, their advertising and mining would be prohibited. The draft law has certain limited exceptions, but still the law may significantly affect the market.
Currently, natural persons may use various crypto-exchanges for sale and purchase of cryptocurrencies. The largest are: Binanca, Exmo, BTC-Alpha, Yobit, and KuCoin.
As to the market in digital rights more generally (eg stablecoins), currently the market essentially does not exist, and potential market players are waiting for the law on digital assets to be passed.
Exchange of fiat currency for cryptocurrencies is usually done through exchanges registered outside Russia. In Russia, the exchange of fiat currency for cryptocurrencies is in a grey area of legality under currency rules and may potentially result in adverse legal consequences. For example, in 2017, the Ministry of Internal Affairs initiated a criminal case in the Kostroma Region against persons who exchanged bitcoins for fiat currency.
As transactions in digital assets in Russia are not regulated, there are no specific formal “know your customer” (KYC) and anti-money laundering procedures applicable to such transactions. However, banks are likely to take a cautious approach to any cryptocurrency-related payment, and this may result in more thorough inspections, delays in payments or even a refusal to provide payment services if the bank is not able to assess whether the transaction is aimed at laundering money and financing terrorism.
Currently, markets for digital rights are not regulated in Russia. In May 2020, an updated draft law on digital financial assets was scheduled for consideration by the Russian Parliament in Autumn 2020. This draft law is controversial because it could ban almost all transactions in cryptocurrencies in Russia and is being debated on various levels. Until it is passed in the final reading, it is hard to predict what the regulatory landscape will be and the impact it could have on the market.
Currently there is no specific regulation for the market in digital rights. The re-hypothecation of digital assets is not contemplated in the existing regulations.
There is no regulation of businesses that provide storage solutions for cryptographic keys.
Russia has specific regulations for the securities market, with special definitions and some quite unique concepts and specific requirements, which differ from regulations typically applied in Western countries. Generally, tokens and other digital rights do not meet the criteria applicable to be securities, because securities (including so-called "uncertified" securities) must meet various mandatory requirements under law. For example, only rights that are issued in compliance with applicable laws – and which may be exercised and recorded in compliance with the rules applicable to registration of those rights – may be recognised as uncertified securities in Russia. Accordingly, this definition limits the securities only to instruments that are explicitly mentioned as securities in the law.
Foreign Financial Instruments
There are provisions of Russian law applicable to so-called "foreign financial instruments" and "foreign securities". Accordingly, tokens originating from outside Russia may be viewed as "foreign financial instruments".
This term is not clearly defined, but an initial offering of foreign financial instruments in Russia is prohibited without registration of a prospectus. In addition, any transactions in Russia with foreign financial instruments which do not meet certain minimal criteria and cannot be classified as securities in accordance with international standards are not permitted. Foreign securities that have not been admitted to public placement and/or "circulation" (trading) in Russia – as well as foreign financial instruments that have not been recognised as securities in accordance with procedures established under Russian law – may not be offered in any form or by any means, including advertisement, to an unlimited (unidentified) number of investors or to persons who are not "qualified investors" as that term is defined under Russian law.
In addition, it is prohibited by law to offer or publicly advertise, without Russian prospectus registration, foreign financial instruments in Russia to persons, who are not qualified investors. There are also further restrictions and requirements for transacting with foreign securities with the participation of unqualified investors, including, a requirement to effect transactions via a Russian licensed broker and an obligation to hold foreign securities with a Russian depositary.
The Crowdfunding Law
Recent changes in the Civil Code introduced a definition of digital rights, which is also linked to requirements to be set out in special federal laws.
The Federal Law No. 259-FZ "On Raising Investments via Investment Platforms and on the Amendments to Certain Legislative Acts of the Russian Federation" (the Crowdfunding Law) came into force on 1 January 2020, creating a complex regime for the operators of crowdfunding platforms in Russia and for fundraising through the sale of digital utility rights. The law permits only three types of investments via investment platforms:
According to the Crowdfunding Law, the digital utility rights include only three types of digital rights:
The law sets forth, among other things, the following features of digital utility rights:
The digital utility rights are meant to be different from financial digital assets (including cryptocurrencies) that are expected to be regulated by a special law, which is still being considered by the Russian parliament.
Finally, it should be noted that the Bank of Russia and Rosfinmonitoring (the Russian anti-money laundering authority) issued several public statements in respect of cryptocurrencies (such as Bitcoin) and initial coin offerings (ICOs) containing warnings that:
Within the current legal environment, only the operators of the crowdfunding platforms providing investment facilitating services in respect of the digital utility rights may be seen as some sort of analogue to a "digital asset exchange" in Russia. One of the changes introduced to existing law in connection with the regulation of crowdfunding classifies operators of the crowdfunding platforms as non-credit financial organisations, whose activities are regulated, controlled and supervised by the Central Bank of Russia. As a result, foreign operators are no longer allowed to conduct business similar to the business of operators of crowdfunding platforms in Russia, and only Russian legal entities specially registered with the Central Bank of Russia and complying with all relevant provisions of the Crowdfunding Law are eligible.
Investment Platform Operators
So-called "operators of the investment platforms" (Russian Operators) must, in addition to standard Russian corporate law requirements, meet some further special requirements of the Crowdfunding Law, among other things, a Russian Operator:
Fundraiser and Investor Requirements
The Crowdfunding Law also introduced special requirements for fundraisers and investors. In particular, the fundraiser should be a Russian legal entity or individual entrepreneur in compliance with the requirements of the rules of the investment platform and Russian law. The fundraiser must provide the Russian Operator with information about itself and the investment proposal (offer) in Russian and in a standard form prescribed by the rules of the investment platform. The investor and fundraiser must enter into an investment agreement using the investment platform's infrastructure, through acceptance of the investment offer by the investor. The investment agreement is deemed to have been executed only upon transfer of the investor's funds from the escrow account of the Russian Operator to the bank account of the fundraiser.
The Crowdfunding Law sets forth various restrictions applicable to the size and type of investments. In particular, the fundraiser may attract, in total, investments worth not more than RUB1 billion (approximately USD14 million) via investment platforms during one calendar year. This limitation is not applicable to Russian public joint-stock companies raising investments by issuance of utility tokens (digital utility rights).
The Crowdfunding Law also sets forth special rules for the investments made by the natural persons:
The size of the aggregate investments of an individual via investment platforms (taken together) may not exceed RUB600,000 (approximately USD8,000) during one calendar year.
Should such limit be exceeded, the Russian Operator will be required to purchase, from the individual investor, rights, securities and/or utility tokens acquired on the investment platform of the Russian Operator in the amount exceeding the established limit.
The Russian Operator may rely on the representations of the investor regarding compliance with the above limit. Such representation should be provided in accordance with the rules of the investment platform.
The above limit for the size of the investments of an individual is not applicable to individuals who are:
It is expected that the future law on digital financial assets will introduce another two types of regulated operators: "operators of the information system issuing digital financial assets" and "operators of the digital financial assets exchange".
The warning of the Russian regulators issued in respect of the use of, and investment in, cryptocurrencies and tokens in ICOs were explicitly addressed primarily to the banks and non-credit financial organisations, but also to all other legal entities and persons. It is not possible for fund managers and specialised depositaries of investment funds, being regulated non-credit financial organisations, to disregard the position of the regulator.
Generally, the investments of investments funds and other collective investment schemes are regulated and controlled by the Central Bank of Russia. The composition and structure of the assets held by the funds is prescribed by the Central Bank of Russia for each type of fund. The ability of the Russian investment funds to invest directly into digital rights is currently heavily restricted by the regulator if at all possible.
Currently general provisions regulating brokerage, dealership and other activities of financial intermediaries are applicable to the extent that dealing in digital assets is permitted by Russian law. Relevant professionals, being regulated non-credit financial organisations, also have to take into account in their activities the position of the Bank of Russia expressed in respect of the cryptocurrencies and ICOs.
Russian law allows parties significant flexibility in establishing their contractual relationships, and there are provisions that appear to be aimed at smart contracts for digital rights. That said, the provisions are general and sparse, there is no specific rule providing for the legal enforceability of smart contracts.
Under general Russian contract law, it is possible for private parties to agree to contractual arrangements through various types of digital means, arguably including the use of a blockchain-based network, so long as the basics of contract formation are met. These basic requirements include identification of the parties, the subject, rights and obligations of the contract and assent to the contract.
With regard to digital rights more directly, the provision in the Civil Code describing digital rights provides that transactions with these digital rights are to be carried out through the relevant system (presumably, but not necessarily a blockchain) without the involvement of third parties. Moreover, similar provisions are found in the law governing investment platforms. With this in mind, one can conclude that smart contracts are enforceable with regard to digital rights, so long as the parties have agreed to the use of the investment platform or system for this purpose.
Russian law would not consider developers as fiduciaries, but there could be liability under more general provisions of civil law.
As mentioned above in 2 Regulation in General, major digital assets like cryptocurrencies are still unregulated in Russia. The draft law on digital assets, does not specifically regulate loans of digital assets.
Digital assets like utility digital rights (that denote the digital right to goods, services, IP or IP rights) (UDRs) are regulated and may originate from decentralised finance (DeFi) crowdfunding platforms called "investment platforms" according to the new legislation enacted in 2019. The existing operators of the crowdfunding platforms are obliged to have registered with the Central Bank of Russia by 1 July 2020 to be able to hold offerings of UDRs on their platforms.
Current Russian law allows loans of fiat money, things of generic description and securities, but does not allow loans of digital assets like UDRs. Therefore, the direct lending of UDRs pursuant to a loan agreement is not regulated and seems to not be possible under current laws. The law, however, generally allows transactions in UDRs on crowdfunding platforms and therefore the possibility of transactions that have the same economic effect as a loan may be possible, subject to the rules of the relevant crowdfunding platform.
To date only UDRs are regulated. A UDR, being a right by its nature, is capable of being subject to a security interest according to the general provisions of Russian law relating to the creation of security over rights, for example a pledge of rights, with peculiarities attributable to such UDRs. UDRs can be acquired, alienated and otherwise exercised within the investment platform from which such UDRs originate according to the rules of that investment platform. Therefore, primarily, a security interest over UDRs, such as a pledge of UDRs, can be taken according to the rules of the investment platform. The current law does not give any further details of how such security is recorded, maintained and released, apparently leaving those details to be determined by the rules of each particular investment platform.
The UDRs can be held by the owner thereof directly in the investment platform's information system or via a depositary. In the latter case the holder of the UDRs can instruct the depositary to pledge or otherwise encumber such digital rights in the investment platform's information system.
Another possible option for taking security over UDRs is via the issue of a digital certificate of the UDRs. The digital certificate is a dematerialised security that certifies the UDRs held by the owner of the digital certificate. The rights to the dematerialised securities are recorded by a depositary. A digital certificate, being a security, is capable of being subject to pledge and other encumbrances applicable to dematerialised securities. The effect of taking security over the digital certificate would be equivalent to taking security over the respective UDRs themselves.
The draft law on digital assets does not specifically regulate taking security over digital assets.
As previously mentioned, the major digital assets like cryptocurrencies are still unregulated in Russia. Therefore, transfer of digital rights to a custodian and the activity of custodians is regulated only in respect of UDRs.
There is no mandatory requirement to transfer UDRs to a custodian (called a depositary in Russia). The UDRs can be held by their owner directly in the investment platform's information system or via a depositary. The depositary may issue a digital certificate of the UDRs that is a dematerialised security certifying the UDRs held by the owner of the digital certificate.
There are currently no regulatory requirements specific to acting as a depositary in respect of UDRs. The depositaries are subject to the regulatory requirements generally applicable to depositaries of securities in Russia, and should adopt internal rules in respect of their depository activity in respect of UDRs and adhere to the relevant laws regulating UDRs.
Russian data privacy law will apply to blockchain-based products or services to the extent that the personal data of Russian individuals (citizens and residents) is involved. Russian law construes "personal data" as that which may be used to identify an individual. This definition is very broad, but so far, Russian regulators have applied it rather narrowly. We do, however, expect that, over time, the application will be applied more widely.
Where the data is anonymous or encrypted, the data would not fall within the definition of personal data under the law, but if there is a key, which can be used by people with access to the data, and which will allow the identification of the individuals involved, the data would be personal data under the law.
Russian law requires consent for disclosure or transfer of personal data, especially where the transfer is made abroad, so, to the extent that the personal data is available through the blockchain, we would expect that formal consent would be required. This consent can be made in a separate document or as part of a larger agreement.
Regarding the right to be forgotten, the general rule under Russian law is that a holder of personal data is to hold the data for as long as necessary for the purpose at hand or as otherwise agreed or required under law (for an example, see the discussion on requirements for document retention under the Crowdfunding Law in 5.2 Initial Exchange Offerings). Given the concerns of tax authorities and law enforcement, we would advise looking at data retention less with concern about the right to be forgotten and more with a view towards the retention periods required under law.
Under general rules of Russian law, a holder of personal data must have measures in place to avoid unauthorised use or disclosure of personal data. As the regulatory framework for digital rights develops, we would expect more specific data protection rules to be applied to blockchain-based products and services.
Mining of cryptocurrencies is presently allowed in Russia, but the legal basis for it is currently undefined. Moreover, lawmakers and regulators have expressed a desire to prohibit cryptocurrency mining in the future.
Currently, mining of cryptocurrencies is neither prohibited nor provided for under law, therefore it is legal. The activity of mining is, however, open to interpretation and can be construed in a number of ways. As cryptocurrencies have recently been recognised as a type of asset (a digital right), any transaction through which cryptocurrencies are earned may be construed as a commercial transaction (for example, a services transaction through which verification is provided for value), subject to reporting and taxation. If the mining is undertaken on a regular basis, it could be considered an "entrepreneurial activity" much like operating a business, entailing registration, reporting and taxation compliance. Ultimately, though, no consistent approach has been applied to the regulatory aspects of cryptocurrency mining and legislation to prohibit cryptocurrency mining is expected in the future.
The logic behind the desire to prohibit cryptocurrency mining rests in the violation of the exclusive status of the rouble as the national currency. Russian law prohibits the introduction of alternative currencies and some believe that cryptocurrency mining is part of the creation and introduction of an alternative currency. In addition to this concern, however, some lawmakers, regulators and law enforcement officials are concerned that cryptocurrency mining may be used for money laundering and other criminal activity. While these negative sentiments toward cryptocurrency mining are clear, it is not clear when and in which form any specific rules prohibiting mining will be enacted.
Russian law does not specifically regulate the staking of tokens. Staking as a service is currently not prohibited in Russia, but would be operated as a commercial service.