Toward tougher regulation: regulatory trends shaping Russia’s crypto industry

In 2014 the Russian central bank named bitcoin a “monetary surrogate”, and in 2020 the State Duma passed a law regulating the circulation of cryptocurrencies on the territory of the country. Nevertheless, the Federal Law “On Digital Financial Assets (DFA)” and amendments thereto are largely prohibitive in nature.

Together with the Russian cryptocurrency service Alfacash, we analyze the regulatory trends shaping Russia’s crypto industry and explain how they will affect business.

How the State Duma and the Finance Ministry’s stance toward cryptocurrency has evolved

In 2014 the Bank of Russia issued a press release on the use of “virtual currencies”, in which it linked cryptocurrencies to money laundering and financing of terrorism.

In 2017 the Ministry of Finance proposed to introduce criminal liability for the organization of cryptocurrency turnover exceeding 45 million rubles.

In 2018 the Госдума, in the first reading, approved the bill “On DFA”. The document equated cryptocurrencies with property in digital form that cannot be a means of payment on the territory of Russia.

In 2019 deputies approved the draft Civil Code article on tokens. The document enshrined the basic concept of “digital right” (the legal analogue of the term “token”) and recognised remote transactions as valid. The authors intentionally did not include the concept of cryptocurrency in the bill. In the same year Deputy Secretary of the Security Council Yuri Kokov stated that terrorists actively use cryptocurrencies to finance their activities.

In May 2020 the head of the Duma committee on financial markets Anatoly Aksakov sent to the Ministry of Economic Development several bills regulating cryptocurrencies. The documents proposed introducing administrative and criminal liability for violations of the rules for dealing with digital currencies described in the law “On DFA”.

In September this year the Ministry of Finance published amendments to the law “On DFA”. The document introduced reporting of operations with digital assets for amounts over 100 thousand rubles per year and fines for non-declaration of cryptocurrencies.

One month later the Ministry raised the limit on undeclared cryptocurrency operations to 600 thousand rubles. The law also introduced the deadline by which you must report ownership of crypto assets — 30 April 2022.

Legal regime of cryptocurrencies in 2021: key provisions

The law “On DFA” comes into force on 1 January 2021. The document places cryptocurrencies within the legal framework and clarifies the rules for working with them:

• cryptocurrencies cannot be a payment instrument;
• The Bank of Russia may prohibit non-qualified investors from buying certain digital assets. At the same time, the Bank of Russia itself selects the criteria for the prohibition;
• exchanging cryptocurrency within Russia can be done only by DFA operators — licensed exchangers and exchanges. For this they must coordinate with the Bank of Russia the rules for exchanging cryptocurrency;
• issuing digital assets in Russia can only be done by DFA operators — legal entities that have obtained the corresponding license from the Bank of Russia.

Also the government submitted to the Duma amendments to the Tax Code:

• Users must report to the Federal Tax Service about cryptocurrency transactions and balances in wallets, even if they deal with coins through third parties;
• Failure to report obtaining the right to dispose of cryptocurrency results in a fine of 50 thousand rubles;
• Failure to declare a crypto wallet with annual turnover over 600 thousand rubles results in a fine of 50 thousand rubles. A wallet holder with annual turnover up to 600 thousand rubles may not declare cryptocurrency, but in such a case loses judicial protection;
• The procedure for determining the price of cryptocurrency is set by the authorized supervisory body.

The draft bill on taxing digital currency No. 1065710-7 equates cryptocurrency to property. If adopted, individuals and legal entities will pay tax on the difference between the purchase and sale amounts of the asset, and in the absence of documents confirming a purchase — tax on the entire sale amount.

Penalties threaten 40% of the amount of unpaid tax. For non-declaration and submission of incorrect information about cryptocurrency transactions a penalty of 10% of these transactions is provided.

In the draft amendments to the Tax Code and the law on DFA there is no description of how to prove the fact of purchasing cryptocurrency, the date of the transaction and the rate at the time of the deal. It is also not clear whether tax deductions will apply and whether there is a provision for tax exemptions for holding cryptocurrency for more than three years.

According to the latest version of the pending amendments to the Criminal Code, non-declaration of a crypto wallet with annual turnover over 45 million rubles carries a fine of 2 million rubles or imprisonment for up to 3 years.

The only advantage of the new law is the ability to prove ownership of cryptocurrencies and the legality of operations with them. Meanwhile, the DFA law applies only to owners of declared cryptocurrency.

CEO of the cryptocurrency exchange Alfacash, Nikita Soshnikov, is confident that sensible regulation will positively affect Russia’s crypto industry:

“The need to define the rules of the game has existed for at least seven years. The government is taking important steps toward creating a regulatory framework for cryptocurrencies. Regulators need to craft high-quality laws that will make Russia a competitive jurisdiction for crypto business. Unfortunately, for now we mostly see prohibitive measures.”

In September the Ministry of Finance published the first draft amendments to the law “On countering money laundering.” The agency proposed obligating exchanges and brokers to collect data on Russians’ cryptocurrency transactions. In the ministry’s view, these measures will help combat money laundering and tax evasion.

According to the amendments, DFA operators will identify Russians by IP address and bank card details, and will quarterly report on users’ cryptocurrency transactions.

“It is unclear how business will implement collecting information about IP addresses and reconcile it with other remote identification procedures. For example, a user may hide the IP address using a VPN,” comments Nikita Soshnikov.

Digital ruble: an alternative to cashless payments

The Bank of Russia advocates restricting the turnover of cryptocurrencies and at the same time is developing a digital ruble using distributed ledger technology.

At a press conference on 23 October Elvira Nabiullina said the Bank may issue a digital ruble in pilot mode by the end of 2021. By her words, the digital ruble is the next step in the development of Russia’s financial settlement system.

Data on issuance and owners of the digital ruble will be stored on the Bank of Russia’s servers. In addition, in the Bank of Russia’s report the following properties of the digital national currency are defined:

• offline operation — transferring funds to another user or paying for purchases without internet connectivity;
• confidentiality of information — transactions contain minimum information about the recipient and purpose of payment;
• ease of use — support for typical payment scenarios, for example transfers by phone number.

According to Alfacash CEO Nikita Soshnikov, the BoR report does not clarify what distinguishes the digital ruble from the cash ruble:

“It is not yet clear what the key advantage of the digital ruble is and what drives the need for a new form of national currency. The Bank of Russia could modernize the money circulation process with the experience of the crypto industry, but I don’t think it is worth issuing yet another form of money,” he notes.

According to Article 75 of the Constitution of the Russian Federation, the monetary unit of Russia is the ruble and only the central bank can issue new monetary units. The digital ruble fits these parameters, and therefore launching it does not require changing the country’s fundamental law.

By the time cryptocurrencies came along: how lawmakers regulated payment systems

By the time the DFA law was enacted, the Russian government already had experience regulating electronic payment instruments.

In 2012 the Federal Law “On the National Payment System”. The document equated electronic monetary funds (EMF) with funds provided to the EMF operator without opening a bank account. It also limited the turnover for unidentified users — 40 thousand rubles per month and no more than 15 thousand rubles on an electronic wallet.

The “On the National Payment System” law required EMF operators to report user transactions, but at the same time allowed market participants to continue operating with KYC/AML in mind.

In 2019 the President signed Draft Law No. 264-FZ on changes to the regulation of payment systems. The law introduced additional restrictions on electronic wallets: they could be topped up only after identity verification. According to Anatoly Aksakov, these measures are aimed at countering terrorism financing and money laundering.

In December 2020 the State Duma adopted further amendments to the payment systems law. Russians were required to report to the Federal Tax Service on the use of foreign payment systems if the annual volume of operations on an electronic wallet exceeded 600 thousand rubles.

“The government already has experience regulating electronic money without developing a separate form of settlement and emission rules. Yet the payments market has, over the past eight years, been successfully reorganised and meets key requirements for user identification and transaction reporting for tax purposes,” explains Alfacash CEO Nikita Soshnikov.

Conclusions

Russia’s cryptocurrency legislation is aimed at fighting fraud and money laundering. Authorities cannot ban or fully control cryptocurrency, and therefore restrict operations with fiat gateways: exchanges and brokers.

Judging by the experience regulating payment systems, the crypto industry should expect further tightening of the law. Most likely large exchanges and exchangers will comply with the new rules, while some users may move to the grey market.

Subscribe to Forklog’s channel on YouTube!