Lawyers on the ‘Digital Currency’ Bill: It’s Easier to Give Up Bitcoin Than to Work Under These Rules

The draft law ‘On Digital Currency’ contains a number of technical typos and does not answer the question of who will regulate the cryptocurrency market in the Russian Federation. This was stated by ForkLog lawyers who had reviewed the document.

Who will oversee the industry?

The bill does not name a specific department responsible for regulating the crypto market. The government should determine the empowered body. However, based on the list of powers provided, GMT Legal partner Andrey Tugarin suggested that the finance ministry could be the competent body.

Maria Agranovskaya, partner at Grad law firm, did not rule out that, in the context of mining regulation, Rosfinmonitoring could be involved.

Typos in the document

One of the errors lies in the definitional framework of the bill. The document defines “digital currency” as “the set of electronic data (digital code or designation) contained in an information system, which are accepted and (or) may be accepted as a means of payment”.

This definition is copied from the law “On Digital Financial Assets” with a slight inaccuracy.

“The phrase “are accepted and may be accepted” resembles an obvious semantic error. I think the word should be “proposed”,” explained Andrey Tugarin.

The mention of “means of payment” in the definition is nothing more than a description of the function of electronic data to specify that the law applies to cryptocurrencies. At the same time, in Russia digital currency will not be a means of payment.

Another error noted by lawyers concerns Part 5 of Article 13 on cryptocurrency mining, which refers to a non-existent part of the bill.

Requirements for operators and problems with P2P

Unlike the government-approved concept, the bill does not include the operators of the exchange system who were supposed to become banks.

Instead, two new entities are defined — the operator of a digital trading platform (cryptocurrency exchanges) and the operator of a digital currency exchange (exchanges).

They may only be corporate entities.

“This means that operators can only take the form of ООО or АО (public and non-public),” said Tugarin.

Exchanges will have to open nominal accounts with a credit organization in the Russian Federation. This, the lawyers said, means that platforms may handle “live” fiat currency, not its digital counterpart.

Regulation of operators largely resembles the existing mechanism in the financial services market, noted Nikita Istomin, a lawyer at DRC.

For instance, they include the capital requirements: at least 100 million rubles for operators of digital trading platforms and at least 50 million rubles for operators of digital currency exchanges.

The bill also contains a provision on insuring the risks of liability to market participants. Agranovskaya called such a provision progressive, but pointed to problems with valuing such risks and finding insurers willing to work with them.

From the document it follows that only the exchange operators have the right to offer trading of cryptocurrencies within the Russian Federation, “except for submitting buy or sell orders for digital currency on organized trading.”

Agranovskaya called the provision highly controversial. She noted that the bill authors probably intended that no one publicly may offer to buy or sell cryptocurrencies, but private deals between citizens should not be prohibited.

The lawyers also noted uncertainty about interaction with platforms. The text of the bill does not make clear whether this will be done directly or through professional market participants, Istomin says.

Agranovskaya also pointed out that one should not restrict the right to transfer digital currencies outside the information system or by a method not provided for by law. In her words, this would infringe the right to transfer property between private individuals, which is a fundamental provision of the Civil Code.

Under the bill, digital currencies are explicitly classified as property.

“If I transfer my property to another person on a USB drive, I have full right to do so under the Civil Code and the fundamental principles of our legislation, including the constitutional ones,” Agranovskaya said.

Within six months, a transaction for buying/selling cryptocurrency may be declared invalid in court. However, digital currency cannot be recovered from a good-faith acquirer who did not know or could not have known that the counterparty to the deal was not entitled to sell the asset, explained Andrey Tugarin.

Wallet certification

The bill focuses on buying and selling of cryptocurrencies but does not regulate operations where assets end up in wallets on other grounds, noted Tugarin.

Transactions with digital currencies are permitted only if certified electronic wallets are used, but the certification mechanism is not set out in the document.

In the spirit of the bill, users will not be able to work with other wallets, said Tugarin.

Agranovskaya, however, considered the wallet-certification provisions overly detailed and stated that such matters should be governed by government regulations:

“Details and specifics of using technologies should be applied by market participants themselves, not at the state level. Technologies are evolving quickly, and the method of protecting information, including cryptographic protection, should be determined at the level of the trading organizer.”

She also noted that introducing additional wallet certification delays the law’s implementation until further acts are adopted.

The document also does not regulate the issuance of digital currencies.

“It is unclear who, and under what circumstances, could be an issuer,” said Tugarin.

Mining

In the view of experts, mining should have been singled out in a separate law. The current draft devotes at most one and a half articles to it. For full regulation of cryptocurrency mining, additional government acts and corresponding ministries would be required, argues Maria Agranovskaya.

“One must amend the provisions that define mining. In particular, define it as generation, not as acquisition of digital currency. This is similar to Civil Code provisions dealing with creation of a thing,” she added.

The current version of the bill exempts individual miners from the need to register as individual entrepreneurs if they “do not exceed the energy consumption limits set by the government.” At the same time, the document obliges miners to declare information about the mined digital currency. Andrey Tugarin expects that if the bill is adopted a special form for reporting mined digital currency to the Tax Service will be developed.

Agranovskaya believes the bill lacks a legal definition of a mining pool: whether it should be a commercial/non-commercial organization or a business entity. In her words, this is necessary so that the pool could perform the role of tax agent, provide access to a common socket and organise the activities of private miners, mitigating the central bank risks described.

Only a worse compromise

The Finance Ministry’s bill leaves a mixed impression, says Dmitry Kirillov, adviser at Lidings and lecturer at the Moscow Digital School.

In his view, on the one hand, unlike the Bank of Russia’s prohibitionist bill, the document broadly allows the circulation of cryptocurrencies and regulates mining. On the other hand, it makes cryptocurrency operations so overly regulated that “it is easier to abandon using cryptocurrencies altogether than to operate under such rules.”

“The only thing worse than that would be a compromise between the two bills, where the Finance Ministry’s proposed over-regulation is imported and the Bank of Russia’s liability for violations is adopted,” summarized the lawyer.

Andrey Tugarin noted that the bill’s provisions are largely built on old approaches:

“The framework takes the regulation of stock exchanges as a baseline and shows only minor orientation toward blockchain technology and the crypto industry.”

Agranovskaya thinks the draft is well thought out but needs further discussion with market participants, especially on the technological aspects.

The bill is drafted with an eye to future amendments, both during upcoming readings and changes to separate federal laws, says Nikita Istomin of DRC.

As noted, if the Digital Currency bill is approved, it would come into force on January 1, 2023. Read a detailed analysis of the provisions in ForkLog.

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