Experts call prison term for Bitcoin traders an ‘inadequate measure’.

Amendments by the Russian Finance Ministry to the Digital Financial Assets Act (DFA), which provide for imprisonment for cryptocurrency trades not reported in tax declarations, are unlikely to be adopted in their current form. That was the view of experts polled by ForkLog.

According to the proposed amendments, participants in cryptocurrency trades with a volume over 45 million rubles threaten up to three years in prison if they do not report to the Federal Tax Service at least twice within three years.

All individuals and organizations with annual transaction volumes of 600,000 rubles or more will have to declare cryptocurrency receipts and wallet balances.

The proposed measures are utterly inadequate, and are unlikely to be adopted in this form, said Anatoly Knyazev, co-founder of Exante, in comments to ForkLog. He noted that the United States has a similar tax authority requirement, but it does not entail criminal prosecutions.

“The illegal circulation of cryptocurrencies is not a problem for Russia, because it is too small here. The turnover is a sign that the country is getting wealthier. Unfortunately, you can’t say that about Russia at present,” added Knyazev.

The Finance Ministry’s initiative shows that the Russian authorities are not prepared to support promising sectors of the economy that could lessen the country’s dependence on natural resources. Many steps are aimed at preserving the status quo with regard to resource rents that benefit certain stakeholders, says Grigory Klimov, founder of stablecoin platform Stasis.

“Such harsh measures could trigger a brain drain of specialists abroad or drive the cryptocurrency sector deeper into the grey zone. Probably, in this form the rules will not be adopted, but the seriousness of the Russian authorities’ intent to control the sector has already been signalled,” the expert noted.

It is unclear how these norms will fit with preceding bills, requiring declarations of balances on foreign accounts, including crypto accounts and payment systems, says Sergey Troshin, head of the Six Nines data center.

“There is no clarity on many points. What constitutes a crypto wallet in this case? Could a payment system that can hold tokens such as USDT, USDC or EURS be considered such? Do exchange accounts count as wallets?”

The volumes of trading cited in the amendments would affect a large portion of traders.

“If a trader has $5,000, that is around a third of a Bitcoin, on a crypto exchange, and a high-frequency robot is actively buying and selling, the 45 million rubles volume can be reached easily even in a day,” Troshin explains.

Overall, the expert does not see much point in introducing a separate criminal penalty for cryptocurrencies.

“Logically, violations in this sphere should be brought under existing statutes, for example for tax non-payment. In their current form the proposed norms look odd,” notes Sergey Troshin.

The amendments bring fairly clear rules for interacting with tax authorities and Rosfinmonitoring, says Mikhail Tretyak, head of the IP/IT practice at Digital Rights Center. This is good news for “white” market participants, who will be able to pay taxes officially and file official tax declarations.

In terms of criminal liability, the proposed amendments are notably softer than those proposed in the spring of 2020.

“Several offences, including organisation of the turnover of digital currency and providing funds for digital currency (i.e., the activities of crypto exchanges), were replaced by one. Now criminal liability applies only for systematic failure to file tax declarations, committed in large and especially large sizes. Yet even that is excessive,” explains Tretyak.

A fine of 500,000 rubles for most individuals is not sustainable.

“This could deter market participants from engaging in cryptocurrencies altogether and demonstrates the state’s not very adequate assessment of citizens’ welfare.”

The expert regards the annual threshold of 600,000 rubles as too low, after which reporting is required. He suggests that the Finance Ministry’s proposals are aimed at intimidating the crypto market due to the impossibility of direct oversight.

“Such measures will surely backfire and part of the market will have already migrated to the darknet. An alternative could be business migration to other jurisdictions with softer crypto regulation — this is also evidenced by the weekly rise in inquiries to our law firm for such services,” explains Mikhail Tretyak.

It is clear that the DFA law is a “tree without branches” and for its effective functioning it requires changes to existing federal laws and subordinate acts, says Andrey Tugarin, managing partner at GMT Legal.

“It is encouraging that the legislature is listening to market opinion and is making some concessions. For example, the maximum amount for triggering a criminal offence has risen from 5 to 45 million rubles. Nevertheless, the stated norms remain fairly strict,” the expert reasons.

It remains unclear how the executive branch will ensure practical compliance with the new requirements if they are approved.

“But I would recommend that cryptocurrency holders file a declaration and not push it to showy measures,” adds Andrey Tugarin.

As a reminder, the Digital Financial Assets Act will come into force on 1 January 2021. It recognises cryptocurrencies as property and prohibits their use to pay for goods and services within Russia.

In May 2020, proposals for administrative and criminal liability for violations of the rules governing digital currencies were submitted to the Ministry of Economic Development for consideration.

In November the Ministry of Finance prepared a new version of the amendments; details can be read here:

Минфин РФ дополнил поправки об уголовной ответственности за незадекларированные биткоины

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