We continue our series of articles on cryptocurrency regulation in countries where the policy on cryptocurrency is not so clear with our next installation. Last time, we talked about India and the possible ban on cryptocurrencies there. Now, we will take a look at Russia, the homeland of brilliant programmers and cumbersome bureaucracy.
The research and the writing are done by Lumi Wallet team, secure and anonymous multi-wallet for your crypto.
Russia is a major player on the world stage, outweighing its relatively weak economy with increasing political influence. Also, as the successor to the Soviet system of mathematical education, Russia is rich in technical talent: for example, Ethereum was created by Vitalik Buterin, a Russian resident. There are a lot of talented technical specialists in Russia and its internet has fair coverage even compared to European countries.
On the other hand, the Russian government has repeatedly stated that control over cryptocurrencies and any activity related to them is required. Recently, the country has seen a tightening of its financial control policy in general with the mandatory introduction of online cash registers in retail sales and, in general, stricter control over transactions in national and foreign currencies. All of this is being done to combat the “shadow economy” and the Russian government, in a deep need to finance itself during the crisis and under sanctions, cannot afford to leave a blindspot in the form of cryptocurrencies.
During the G20 Summit in June, President Putin said that liberalism is “obsolete”, which is also not the best call for free market instruments, which is what cryptocurrencies are. An example of a country that does not recognize liberal ideas is China, where the state already took hold over crypto. But what real political steps have been taken regarding cryptocurrencies in Russia?
Policy regarding cryptocurrency
The dynamics of the change in attitude to the tools on the blockchain can be clearly seen by the headlines in the press and government communiqués:
In January 2014, The Bank of Russia issued an informational letter warning that “virtual currencies” could be used in money laundering and terrorist financing.
Also, the entity reminded that since 2002, under the Federal Law of the Central Bank of the Russian Federation, the rouble is the only national currency, and the introduction of other currencies or the issuance of currency surrogates on Russian territory is prohibited.
In September, The Bank of Russia established a working group to study blockchain technologies and to explore potential applications, including in financial markets.
“The Bank of Russia has set up a special working group to study blockchain technologies,” said Olga Skorobogatova, Deputy Chairman of the Central Bank of Russia, at the Kazan Forum of Innovative Technologies Finnopolis.
In May 2016, the Ministry of Labour and Social Security of the Russian Federation issued reporting guidelines. Specifically, it stated that public and government officials don’t have to disclose the ownership of “virtual currencies”. Simply speaking, those guidelines assumed that cryptocurrencies are not property.
There are several contradictory statements about possible criminal liability for the circulation of cryptocurrencies:
-There will be no criminal penalty in Russia for the use of cryptocurrencies
-Russian authorities suggest imprisoning for 7 years for bitcoins
The Ministry of Finance really proposed amendments to certain laws, imposing large administrative fines and criminal penalties for other operations with bitcoins, but those amendments have not been introduced.
Minister of Finance, Anton Siluanov, commenting on the perspectives of the law that would regulate cryptocurrencies, stated:
“Only professional market participants, not ordinary citizens, have to work with cryptocurrencies.”
Regarding his recommendations to the public on the use of cryptocurrencies, he noted with laconicism – “It is better not to”.
The minister explained this by the fact that the country’s existing digital currencies are more speculative in nature, which means that the average citizen has a high probability of being cheated.
“The concern of the financial authorities is understandable, especially since the president has already instructed the regulation of cryptocurrencies,” said InvestForSight analyst of the Investment Company, BCS, Dmitri Alexandrov. The main thing is not to postpone the adoption of the law and cryptocurrencies have to have at least some status so that they can be controlled.
President Vladimir Putin instructed the Bank of Russia to develop regulation of cryptocurrencies, mining and ICO. He set July 1, 2018 as the date for the adoption of laws.
According to his instruction, the law should define the key concepts: what is the technology of distributed registers, digital letter of credit, digital mortgage, token, smart contract and the very concept of cryptocurrency.
In addition, the requirements for the organization and implementation of the cryptocurrency extraction (mining), registration of economic entities and the procedure for taxation of income received from mining should be developed. Also, the system of regulation ICO (Initial Coin Offering) should be created, that is “public attraction of money resources and cryptocurrencies by placing tokens“.
In November, the Ministry of Finance confirmed that Bitcoin is subject to personal income tax according to the general rules.
A bill regulating cryptocurrencies has been submitted to the State Duma. Russia to limit mining and purchase of tokens to single hands
A draft law “On Digital Financial Assets” regulating the status and use of cryptocurrencies in Russia has been submitted to the State Duma.
According to the draft law on the regulation of cryptocurrencies in Russia, which has already been submitted to the State Duma, cryptocurrencies will not receive the status of legal tender but will be considered only as digital assets. Mining will not be considered an entrepreneurial activity if there is no overspending of electricity.
Also, the law would regulate the issuance, offering, and transactions of tokens including ICOs, mining, and the use of digital wallets.
the State Duma (the lower chamber of the Russian parliament) approved in their first reading another two draft laws related to digital legislation:
A draft law “On the Introduction of Changes to Parts One, Two, and Four of the Civil Code of the Russian Federation”, primarily aimed at amending the Civil Code, with core concepts related to cryptocurrencies: “digital rights” and “digital money”.
A draft law “On Attracting Investments with the Use of Investment Platforms” that would regulate the activities of crowdfunding platforms and related investment activities.
Those three draft laws aim to cover all the basic blindspots of cryptocurrency regulations. Any draft law must, in order to become a law, be approved by the State Duma in the second and third readings, and then be approved by the Council of Federation and signed into law by the Russian president.
This is important: no draft law is a functioning law!
In our previous article on India, we gave an example of how lousy, sensation-seeking journalism can affect the market and businesses, passing a draft note by a member of parliament for a bill on the verge of adoption.
Meanwhile, on May 8, the Moscow arbitration appeals court recognized cryptocurrency as property. Previously, cryptocurrency was considered by the court to be a set of symbols and was not transferable. The court decision notes that cryptocurrency is not considered to be a legal tender.
“At the same time, Russian citizens and organizations are not prohibited from conducting transactions using the cryptocurrency by Russian laws. However, a fundamental feature that distinguishes cryptocurrencies from money as such is the way it is generated in the digital space. Thus, the real means of payment must first be deposited into a certain account or electronic wallet, and the cryptocurrency units appear in electronic form,” – says the court decision.
The court determined cryptocurrency as the debtor’s property and transferred it for debt repayment. This is the first court decision in Russia, which, in fact, legalizes the use of cryptocurrency.
Virtual assets have received a criminal definition: The Supreme Court has recognized cryptocurrency as one a means of money laundering.
As specified in the decision of the session, changes are introduced in connection with the recommendations of the FATF (Financial Action Task Force, the international Financial Action Task Force).
“The position expressed by the Russian Armed Forces is a call for the formation of a common practice in such cases. This is unlikely to have any impact on the normal use of cryptocurrencies (outside of criminal cases),” Frolov said. If money laundering occurs through the use of cryptocurrency, it is logical that these actions should fall under Article 174.1 of the Criminal Code. Moreover, law enforcement agencies are already applying this article in cases where the cryptocurrency is used to launder criminal profits.
The current state of affairs (Summer 2019)
The lower house of the Russian parliament has adopted the “Crowdfunding Law” in its third and final reading.
The draft law sets rules and regulations for crowdfunding platforms. Being one of three laws that relate to crypto, it also applies to crypto entities. For example, as the news outlet states, they have to secure at least 5 million rubles (~$80,000) as their capital.
Also, unqualified investors won’t be allowed to invest more than 600,000 rubles (~$9,500) within a calendar year within the framework of all investment platforms in Russia.
If passed into law, the law is expected to take effect in January 2020.
And Deputy Minister of Finance Alexi Moiseyev was quoted saying last month that the Russian Ministry of Finance may allow the buying and selling of cryptocurrency in the forthcoming bill on the circulation of cryptocurrencies in the Russian Federation.
After a meeting of the Russian Committee for Digital Economy, it was decided that the federation will implement guidelines for taxing cryptocurrencies before legislative processes for regulating digital assets are finalized.
According to representatives of the Committee, having no guidelines on how to treat crypto taxes is going to create unnecessary issues for people involved in the industry. This targets not only institutional players, but retail as well.
The committee also discussed the taxation of mining operations within Russia. It’s not clear whether or not the government recognizes mining as a legitimate industry yet, but due tax will also be required from both corporate and entrepreneurial miners in the future.
Dmitry Medvedev has ordered the enactment of the bill on digital assets by November 1. The bill “On Digital Financial Assets” is to be approved by November 1, 2019 – the relevant order of the Ministry of Finance and the State Duma was given by Prime Minister Dmitry Medvedev.
As a result, the legislator has got a three-layer digital cake: “Practice-Law-Central Bank”. The Civil Code is ready to recognize only those assets that are directly named in the law as digital rights. However, the second layer of the cake is still in the oven – the specialized law “On Digital Financial Assets” stalled in the bowels of the State Duma. And even the recipe for the third layer is still unknown as the specifics of digital rights circulation will be regulated by separate instructions of the Central Bank, the terms of which have not even been discussed yet.
Russia is definitely opening up to cryptocurrencies, but it is doing it slowly, delaying the adoption of a final system of regulation – apparently, developing an entirely new system of digital economy and not allowing cryptocurrencies to break out of regulatory limbo first. However, movement is happening and the state’s attitude towards cryptocurrencies, in general, can be described as cautiously positive. And, in this case, the absence of sudden steps and hot news, replaced by bureaucratic red tape and slowness of the state apparatus, can be perceived as an optimistic sign for the future of crypto in Russia.