Finopolis participant flags shortcomings in Russia’s crypto regulation

Regulation of cryptocurrencies in the Russian Federation differs significantly from global practice, drawing criticism from market participants and prompting a response from lawmakers. This was заявил Maxim Bashkatov, head of the \”Legal Development\” direction at the Center for Strategic Developments Foundation, at the Finopolis forum on innovative financial technologies.

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In his words, the current edition of the law \”On Digital Financial Assets (DFA)\” does not create favourable conditions for conducting token sales on Russia’s territory and for attracting Russian retail investors.

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Bashkatov outlined five key elements that, in his view, could be improved in light of positive foreign practice.

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Expansion of the existing catalogue of digital rights in the law

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The laws \”On DFA\” and \”On Crowdfunding\” list four types of digital rights. In the expert’s view, they should add conditional rights, conditional monetary requirements, and \”not-ready\” tokens.

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\”At the product development stage, there is logic in attracting financing in advance. Virtually everywhere in the world such situations are treated with caution, but there is no particular harm if these tokens with an investment element are regulated not as utilitarian rights but as investment tokens or DFAs, I do not yet see any harm,\”

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Clarification of existing regulation

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Primarily this concerns the principle of legitimisation with respect to DFAs.

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\”Legislators laid down the principle of recording DFAs in the ГК and that all transfers of rights must be reflected in an information system, but they did not enshrine that this is the sole source of knowledge about the title. Without this, the turnover of DFAs cannot rely on this public trust,\” – said Maxim Bashkatov.

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He believes that this norm would protect bona fide purchasers of DFAs regardless of the validity or invalidity of the transfer. In turn, issuers of digital assets would not object to new asset purchasers on the basis of relationships with old ones.

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\”This would be a normal, stable turnover with all the developments in relation to non-documentary securities,\” – added the expert.

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Regulation of DFAs issued before the law and not in compliance with it

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There is no mechanism for foreign assets to enter the Russian market, though many market participants already seek to acquire tokens using cryptocurrency.

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\”At present it is unclear whether the law \”On DFA\” applies to a situation where a Russian individual or legal entity issues tokens abroad and places them in Russia,\” Bashkatov noted.

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He proposed arming regulators or DFA turnover operators with additional powers to decide which foreign assets may be admitted to circulation in the Russian Federation. This also concerns domestic assets issued before the effect of the \”On DFA\” law.

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Regulation of digital currency

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The expert recommended the Central Bank to determine the notion of money surrogate and the limits of use of digital currencies. If the regulator intends to allow circulation only of Russian but not foreign cryptocurrency, it should define the conditions under which such transactions would be void.

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\”If the Central Bank regards Bitcoin as a money surrogate, at least state this explicitly and define the consequences of deals with such crypto assets,\” the specialist clarified.

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Expanding tools with respect to asset tokenisation

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Maxim Bashkatov expressed puzzlement as to why the current edition of the law does not permit tokenisation of shares in a limited liability company and why the regulator allows tokenisation of corporate rights only \”at the outset\” when creating a non-public joint-stock company.

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\”So far, market participants cannot change the accounting procedure to another if tokenisation, for example, does not please them. This is not entirely clear even from the standpoint of legal policy,\” he summed up.

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As a reminder, since 1 January 2021 Russia has the law \”On Digital Financial Assets\” in force. DFAs are digital rights whose issuance, accounting and circulation are \”possible only through entries in an information system based on a distributed ledger\”.

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To issue DFAs one must provide information about the issuer, details about the operator of the information system, the type and scope of rights evidenced by the assets, data on the issue and other details.

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The Bank of Russia has set a limit on the acquisition of DFAs by individuals who are not qualified investors at 600,000 roubles per year.

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The limit does not extend to non-qualified investor-legal entities.

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Additionally, non-qualified investors cannot acquire DFAs issued in foreign information systems with the ability to exercise rights in emission securities, nor if the decision on the issue of such assets does not specify the term of obligations.

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In late November 2021 the Bank of Russia proposed to introduce liability for illicit turnover of DFAs and to set the taxation framework for operations with them.

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