The State Duma has adopted the law “On digital financial assets”

Pepeliaev Group advises that a federal law “On digital financial assets, digital currency and amending certain items of Russian legislation” (the “Law”) has been adopted.^[1]

The draft law was submitted to the State Duma in March 2018 to perform the Russian President’s instruction No. Pr-2132 dated 21 October 2017 based on the results of the meeting concerning the use of digital technologies in the financial sector^[2].

The Law regulates relationships arising when digital financial assets are issued, accounted and put into circulation, the specifics of the activity of the operator of information systems in which digital financial assets are issued, and the operator of the exchange of digital financial assets, and also relationship arising when digital currency is circulating in Russia. The text of the Law has significantly changed during its preparation for the second reading, for example, such terms as ‘mining’ and ‘token’ have vanished, and provisions concerning criminal and administrative liability have been removed.

Digital financial assets

The Law introduces the terms that have not been used in Russian legislation before, in particular, the term digital financial assets (the “DFAs”) which means the digital rights provided for by the decision to issue DFAs according to the procedure prescribed by the law, the issue, accounting and circulating of which are possible only by making (amending) entries in the information system using the blockchain technology and in other information systems. Such digital rights may include:

• monetary claims;
• a possibility to execute rights under equity securities;
• rights to participate in the capital of a non-public joint stock company
• a right to claim transfer of equity securities.

The blockchain means the aggregate of databases with installed algorithms that ensure identity of the information contained in them.

The decision to issue DFAs must contain among other things the information concerning the person issuing DFAs, concerning the operator of the information system, types and scope of rights certified by DFAs, their quantity and price. The mandatory condition of issue of DFAs is the publication of the decision to issue them on the website of the person issuing DFAs and the website of the operator of the information system within the framework of which the issue will be performed.

The right to issue DFAs is granted to legal entities – commercial and non-for-profit organisations, and individual entrepreneurs. The right to acquire DFAs is granted to any persons which at the same time are users of the information system in which these assets are accounted and have access to such system. At the same time the Law contains provisions according to which the Bank of Russia is entitled to determine signs of DFAs which will be available for acquisition only for qualified investors, and to determine the signs of DFAs, the purchase of which by unqualified investors will be limited to the specific amount of investment.

The operator ensures access to the information system in which DFAs are issued, maintains the register of users of such information system, as well as the operation of such system. Any legal entity using Russian law as its proper law can be an operator. Such legal entity must be included by the Bank of Russia in the register of operator of information systems which issue DFAs. Among others, a credit institution, a depositary, a person having right to carry out activity of the organiser of trade can be an operator.

In addition, the Law establishes requirements for the qualification and business reputation of persons that manage the legal entity which is the operator of the information system, and some other employees of the operator (for example, for the chief accountant). However, these requirements do not apply to the operators that are credit institutions, organisers of trade, depositories or persons maintaining the register of securities.

In addition to obligations to ensure the operation of the information system, development and approval of the rules of this system, the operator must provide information concerning DFAs and their owner at the request of the court, individual state authorities (for example, tax authorities, authorities performing preliminary investigation of cases under proceedings) and at the request of the receiver during the receivership proceedings with regard to the owner of such assets.

The Law allows the circulation of DFAs in Russia. In particular they can be the subject matter of a sale and purchase transaction, exchanged for other types of DFAs and become a pledge item. The circulation of DFAs is permitted for those DFAs that have been issued in the information systems organised in accordance with a foreign law.

All the above transactions should be performed through the DFAs exchange operator. The operator may carry out its functions both by comparing applications for performing transactions with DFAs filed by the users of the information system and by participating at its own expense in such transactions as a party on behalf of third parties.

The DFAs exchange operator may be credit institutions, organisers of trade, and other legal entities (commercial and non-for-profit organisations), included by the Bank of Russia in the register of DFAs exchange operators. The Law establishes the following requirements for the legal entities that are not credit institutions or organisers of trade:

• the proper law of the legal entity is Russian law;
• the amount of the issued capital must be at least RUB 50 million as at the date when the motion is filed for the inclusion in the register of DFAs exchange operators (does not apply to non-for-profit organisations);
• the amount of net assets for a business entity must be at least RUB 50 million; for non-for-profit organisations – the aggregate annual amount of property contributions of founders must be at least RUB 50 million;
• legal entities registered in offshore zones cannot be participants (members, or shareholders) of such legal entity.

The operator of the information system in which DFAs are issued can engage the DFAs exchange operator for performing transactions in such information system, or to combine its activity with the activity of the DFAs exchange operator.

The Law provides for mechanisms protecting interests of unqualified investors. Therefore, if a person which is not a qualified investor, acquired DFAs which in accordance with a regulation of the Bank of Russia can be acquired only by qualified investors, further to the request of such an entity the DFAs exchange operator must acquire these DFAs from the entity at its own expense and reimburse to the entity the expenses incurred. The similar approach is provided for cases when a person is illegally recognised as a qualified investor through the DFAs exchange operator (such a right is granted to the operator by the law).

The Law sets special requirements to the advertising of DFAs: an advertising message must contain a warning that DFAs are highly risky, and their purchase may result in the full loss of the monetary funds invested. Such advertising must contain the following recommendation: before performing transactions with the proposed DFAs please consider the risks relating to the acquisition of such DFAs.

Digital currencies

With regard to digital currency the Law only provides for regulation of separate issues, such as the status issue and circulation of digital currencies. According to Anatoly Aksakov, the Head of the State Duma's Financial Market Committee, more detailed regulation of digital currencies is planned to be determined in another law which may be adopted during the autumn session^[3].

The digital currency is defined as an aggregate of electronic data (a digital code or symbol) contained in the information system which are proposed or can be accepted as a payment facility which is not a Russian monetary unit, or a monetary unit of a foreign country or an international monetary unit or settlement monetary unit, or as investments and with respect to which no person exists which is has obligations with regard to each[D.1] holder of such electronic data, except for the operator or nodes of information system obliged to ensure only the compliance with the procedure of issue of these electronic data and the making of (amending) entries to such information system according to its rules.

The status of digital currency as an item of civil rights is still not enshrined, but for the purposes of anti-money-laundering law, laws on bankruptcy of legal entities, anti-corruption laws and on law enforcement proceedings the digital currency is recognised as property.

The Law permits issue and transfer of digital currency from one owner to another in Russia, at the same time it is not allowed to pay for goods, work or services using digital currency neither is it allowed to disseminate information concerning the offer or acceptance of digital currency as payment facility.

Court protection with respect to legal entities’ claims associated with the ownership of digital currency will be granted only if such entities have notified the tax authorities of the facts that they own digital currency or performed transactions with it. The notification procedure has not been established yet.

The Federal Law will come into force from 1 January 2021. Entities which are already carrying out activities associated with organising issue, registration and circulation of DFAs or activity associated with organising the consummation of transactions with such assets, are obliged to bring their activity in line with the new requirements before 1 June 2021.

What to think about and what to do

The Law refers a large number of issues to the competence of the Bank of Russia, in particular, determining the threshold for investments in DFAs for unqualified investors, which leaves open the question to what extent the Law adopted meets the needs of civil relationships: whether DFAs will become a real facility for attracting investments or will appear to be outside of the interest of investors because of too tiny amount of permitted investments.

In addition, the fact that the Law has no provisions establishing liability for violating the procedure of issue and circulation of DFAs and digital currencies, does not exclude the possibility that such liability will be established by separate laws.

Operators of information systems which issue DFAs and operators that exchange DFAs are recommended starting the process of bringing their activity in compliance with the requirements of the new Law.

Entities willing to carry out issue and perform transactions with the digital currency are recommended waiting until the relevant law is adopted owing to the absence of legal regulation of the issue and circulation of the digital currency, and the liability for committing offences in this area.

Help from your adviser

Pepeliaev Group’s cross-sectoral Digital Economy Support Group comprises experts in the legal regulation of IT, IP and personal data use. The Group will be happy to provide the full range of legal services concerning any aspects of how information technologies might be applied.