Law vs law: what should be done with cryptocurrency regulation in Russia

Context

I will start with the context, namely with references to works that give both a general and detailed idea of the evolution of views on cryptoassets and their legal status in Russia:

• 2013 (revised 2014);
• 2014 (according to the letter of the Central Bank of Russia and practice);
• 2017 (see the following. also on the Bits.media forum);
• 2018: (the paradox of cryptologic);
• 2019:(the largest collection to that point); 

In addition, you can explore the full Bits.media archive by searching “right status of cryptocurrencies in Russia” and similar, and now – let’s get to the main thing. 

To be the first

Either the first or the best always wins. Sometimes these categories are mixed: Facebook wasn’t the first, but it was the best; Western Union transfers were the first and still are. 

The same goes for nations: you can be an innovator, an early adopter, or be part of a majority of some sort. The RF had a chance at primacy and full priority of the legal crypto market between 2011 and 2013. Why? Here are just a few factors.

1. Law No. 161 “On the national payment system” was passed, which could well accommodate bitcoin and other currencies, but lawmakers assessed the market as insignificant, and from that moment the lag began.
2. Mining in the Russian Federation until 2013 was not just in the leaders, but on the first place: and with the birth of ASIC-mining it was possible to develop this vector. But apart from the later appeared barrier in the form of notification of imported equipment nothing was done: the draft law on mining and in 2023 (for the first time?) was postponed “for the fall”.
3. Crypto-enthusiasts and crypto-projects from the Russian Federation and CIS were (and are) quite a lot, and if we expand to the Russian-speaking segment – even more so. The founders of Waves, 1inch, Rarible, Curve, Ethereum, Chronobank, Chainlink, Near, Avrora, The Power and many others are from this region, and if you look at the developers, everything becomes quite obvious. But – all of them are not operating in the Russian Federation.
4. Finally, at that time Bitcoin as a network and bitcoin as a coin have already passed the first tests: this is the closure of Silk Road, and the approaching collapse of Mt.Gox, and the migration of money due to the crisis in Cyprus, and much more. So there was nothing to prevent a live stress test of the system. But instead it started to be disregarded, which is certainly good and right from my position as a crypto-enthusiast, but categorically wrong from a lawyer’s position. 

You can sprinkle ashes on your head as much as you want, but let’s try to understand: how it could be and how it could be, if suddenly, by an incredible coincidence, the Russian Federation assesses the prospects of blockchain, cryptocurrencies,  Web 3.0 in general and starts attracting projects and experts/specialists from the cryptosphere right now. 

RF vs RF

Despite the fact that the Russian legal system is usually criticized, there are rational grains in it and quite working details of the mechanism. If we talk about the legal aspect as such, first of all – it is arbitration. Court for legal entities and entrepreneurs;

Here are a few cases that show both logic and a real connection to reality and opportunities for growth in understanding of cryptoassets and their status:

1. Ruling of the Ninth Arbitration Court of Appeal of the City of Moscow (here and below – links to parses on Bits.media, as there are already direct references to legally relevant documents there).
2. The Arbitration Court of the Omsk region recognized the legitimacy of a transaction for the sale of oil products via blockchain.
3. There are others. 

But that’s not the main point at all. The reason for writing this material was the decision of the Supreme Court of the Russian Federation, where the court considered the conversion of bitcoins into rubles as money laundering. And that seems extremely odd considering that:

1. There is a law on CFA, where (for example, in Articles 1 and 14) it is stated that “the organization of issue and (or) issue, organization of circulation of digital currency in the Russian Federation shall be regulated in accordance with federal laws”- but there are still no laws in place. Six years have passed since the establishment of the expert council at the State Duma in 2017. Three years since the law was enacted. And since the first letter dedicated to the issue of cryptocurrencies the Central Bank of the Russian Federation – it has been nine years. The timeframe is in any case sufficient to formalize the requirements. But instead, the most important instance (which, let me remind you, because it is extremely important, merged with the Supreme Arbitration Court just in the same year 2014) goes against the norms and makes a decision as if there are no federal laws in the Russian Federation, except for the Federal Law of the Russian Federation № 115 “On Combating Legalization…”. 

.

2. There is quite correct court practice regarding mining, acquisition of cryptocurrencies, joint participation in projects, and ak further, but its generalization as a single document still does not exist.. Although there is plenty of research on this subject, including scientific research. This ultimately leads to unlawful decisions against miners, as well as in no way protects the interests of retail crypto investors (more correctly referred to as counterparties).

The same logic as that of the Supreme Court is followed by the RKN, the Federal Tax Service of the Russian Federation, the Ministry of Finance and others. This seems particularly incorrect from a tax perspective.

1. There is no strictly formalized and unified system of accounting for crypto-assets.
2. At the same time, both the Ministry of Finance and FTS constantly insist on the payment of taxes.
3. This results in the fact that in most cases only large and medium-sized miners pay taxes (on a general basis), while the rest of the groups migrate to cryptofshore and/or other jurisdictions. 

The bottom line is:

1. The long and bureaucratically tortured process of creating a legislative framework on cryptocurrencies and tokens, which includes the law on digital assets, amendments to the Civil Code and so on – does not give legal certainty to investors, entrepreneurs, or even ordinary citizens who want to buy crypto-assets on the free market.
2. The constant war of regulators: the position of the Ministry of Finance does not coincide with the position of the Central Bank of the Russian Federation, the position of the Ministry of Economic Development contradicts both of them, the point of view of law enforcement agencies dominates, although it does not have clearly expressed theses, and legislators (State Duma of the Russian Federation in the first place) are not interested in performing their direct duties.
3. And most importantly – outflow of funds from the jurisdiction of the Russian Federation: both those that could lie on bank deposits, and those that would go to pay taxes. 

So what could and should have been done? And what else is possible? I’ll try to look at a number of telling examples. 

Russia vs Switzerland: 2014

Singapore, Estonia, UAE and others could be mentioned in this paragraph at various times, but Switzerland is perfect in many ways:

1. It was here that the once Ethereum Foundation was founded, followed by many other top crypto projects holding ICO/IEO/IDO/etc. 
2. It was here that some of the first legal cryptoasset exchange services for fiat funds (and back) appeared.
3. It was here that many bank accounts were opened, which received profits from ICO/IEO/IDO/etc various Web3 startups. 

Everything it took to make this happen:

1. Clear position of FINMA – the local financial regulator.
2. A friendly law in Liechtenstein and its own full-fledged regulatory framework.
3. And most importantly – transparent, albeit far from simple, rules, due diligence and KYC according to FATF standards. 

Thanks to thisalready in 2017, about ⅓ of all ICO projects with company registration stopped in Switzerland, and the country earned at least 350-400 million USD. The numbers have increased significantly in six years. The budget of the Russian Federation, at best, was replenished from the ICO of the Waves blockchain, possibly RMC, but most of the projects with Russian roots emigrated from the Russian Federation because of:

1. The presence of unclear (not transparent) and rather negative position of the Central Bank of the Russian Federation.
2. The absence of a friendly legal and regulatory framework.
3. The absence of specific regulatory rules for different sectors of the crypto-economy. 

Losses taking into account various factors and industries (ICO, DeFi segment, mining and the like) can range from hundreds of millions to several billion dollars, which even at the exchange rate of 60-85 rubles per dollar looks quite solid. 

What should Russia inherit from Switzerland?

1. Transparent legislation;
2. Clear gradations of assets and other entities (e.g. division into Payment ICO, Utility ICO, Asset ICO);
3. Developed regional legislation (there – cantons, in the Russian Federation – subjects of the Federation).
4. Customized approach to big players (like Tezos, Ethereum, etc).
5. Customized approach to big players (like Tezos, Ethereum, etc).
6. Differentiated tax base (capital gains tax; income tax; VAT; etc).
7. Work with DAOs (on the principle of economic affiliation).
8. And most importantly – openness to innovation, which means: clear principles and approaches should be set out on paper, and the details should be finalized as the play progresses.

For those who want more detail, I recommend studying the position of the Central Bank of Russia from 2014 and comparing it with Swiss practice from the same year. 

RF vs Japan: 2016

If the Russian Federation could settle all the tensions with the crypto market back in 2011, when the law “On the National Payment System” was adopted, that is, a year before the first report on bitcoin in the U.S., then in the end, the first legal act that disclosed, albeit in a very reduced form, the legal status of cryptocurrencies (BTC and ETH in the first place) was law of Japan. 

And while the press often defines the status of BTC in Japan as a “means of payment” this is not entirely true. Most importantly, Japanese people can quite legally use and trade cryptocurrency. In addition, the stablecoin market stablcoin market is also connected in 2022;

What did it do in the end? Let’s look at the numbers and facts – they speak for themselves:

1. Already in 2018, there were over 3,500,000 crypto traders in this jurisdiction, and in 2022, there will be over 7,700,000 (that’s more than the population of St. Petersburg).
2. Companies like Circle have become welcome visitors.
3. In 2021, the DeFi segment began to develop, which, I recall, reached over $230 billion in capitalization. 

In short, despite the negative factors present (primarily hacks and corresponding losses of crypto-investors), Japan’s economy was enriched by innovation, unlike Russia’s economy. 

What could Russia learn from Japan? Here is a partial list:

1. Being an innovator – everyone strives to take vacant places, and with that replenish the budget of the country. The rule works simply: if you don’t have it anywhere else, but you do – they go to you first.
2. Describe clearly the status of cryptoassets, and then move on to ICOs, DeFi, NFT, etc.
3. Select regulatory niches and detail them all the time. 

Now – let’s try to look at another and much more striking example. 

Russian Federation vs Canada: 2017

Mining – RF’s golden rivers, which have been trying to turn into streams for a decade or so now. 

Canada is similar to Russia in climate, territory (Canada is the second largest in the world), many other objective parameters. So it makes sense that after the great move from China – miners ended up here as well. 

For its part, the Canada Revenue Agency (CRA) explained:

1. Miners are required to account for income in their returns.
2. Basically – mining is like barter.
3. All. 

Of course, there are tons of details and so on to these three theses, but there’s no problem with them, since the basis is formalized. As a result, Hut 8 Mining alone has increased by 327% for 2021. 

That said, there are no hard contradictions between the position of, say, the CRA and the CSA (Canada’s securities regulator), which adds to the stability. And here’s what RF can and should inherit from Canada:

1. Formalize everything regarding industrial mining.
2. Forget about home mining (up to 15 KW).
3. And provide a grace period of two to three years for all miners.

The last point is important because RF has lost the race three times: in 2014, 2017, 2021. And recovery now requires much more effort, time and desire than it did three to five to nine years ago;

Not. Tips you need

In this chapter I put reasoning based on my own practice and research (since 2012), which, as seen, can contribute to the development of the crypto market RF:

1. Preventive regulation of industries is needed, and positive rather than negative (prohibitive) regulation is needed. Right now, this could be: a) the programmable asset market; b) ZKP solutions; c) NFT & DeFi, including primarily the – crypto derivatives market, and so on.
2. Exclude from the speech of any officials mentions of any taboos on the part of cryptoassets, except those that are already obvious (according to the same Federal Law of the Russian Federation #115), as negative rhetoric with poor regulation is a catalyst for the outcome, not the arrival.
3. Create offshore zones for pilot projects in mining, trading (DEXs/AMMs/CEXs/etc), staking and other profitable areas with a period of at least three to five years, or better ten: working capital, even if not directly taxed, gives the economy a positive boost. Briefly, the scheme looks like this: the mining company earned money from mining, paid salaries, gave dividends to the founders, everyone paid personal income tax and went to spend the funds, paying VAT and other “included taxes”, and started buying more, replenishing budgets: local, regional and federal. 
4. Basic industries for RF: mining, classic DeFi and affordable Cefi, NFT-art (because such a lot of creativity as in the CIS countries, few places can be found around the world). 

If we divide all this into periods (2023-2025, 2025-2030, 2030-2050) and focus on the creation of a free crypto space, at the time of development of CBDC around the world we can get an economic, legal and, importantly, technologically developed zone for many projects. Including in the most negative scenario, when the Russian Federation remains under sanctions, as there are quite a few other states, including technological ones like Iran, in this zone;

Despite the fact that the plan looks futuristic, it is achievable and realistic, but it requires a systematic and balanced approach, not ad hoc statements that only exacerbate the situation.  

Conclusions and results

As a crypto-enthusiast, cryptofshare is enough for me: it’s safe, secure, not subject to the whims of jurisdictions, and at the forefront of technical and cultural progress. 

But as a lawyer, it is clear to me that there will always be citizens, entrepreneurs, and companies that want to find a compromise with the state. And that group has gotten bigger, not smaller, during the sanctions period. And most importantly, the economy of the 2020-2030s that doesn’t want to come into contact with the crypto world is not the digital economy. And a non-digital economy in a digitized world is a backward economy. 

Therefore, the scenarios described, as well as the experiences of other states and corporations, are something to be implemented here and now. Otherwise, the Russian Federation will lag behind by 2025 by 25 years, and by 2030 – by 100 years: from those states that will follow the way of implementation with Web3-sphere;

The stages in RF could be as follows:

• 2023-2025 – emphasis on mining: clear, simple rules for it and free economic zones (Siberia and the Far East in priority).
• 2025-2030 – compilation of elements of DeFi & CeFi and even Refi.
• 2030-2050 – work on integrating the world’s computers (whether it will be Ethereum, dFinity or something else is not so significant), distributed OS, decentralized storage and other elements.

.

In the end, RF will get what is so often claimed but rarely done:

1. Independence on “dollarization of the economy.”
2. New jobs.
3. International recognition.
4. Money to budgets of all levels.

And that’s minimum. That’s it for me

doh!