Regulation of Cryptocurrency and Initial Coin Offerings (ICOs) in Russia
Bills “On Digital Rights”, “On Digital Financial Assets” and “On Attracting Investments Using Investment Platforms” passed their first reading in the State Duma of the Russian Federation on 22 May 2018. The second reading of the bills is currently scheduled to occur in autumn 2018 .
The law “On Digital Financial Assets” will introduce a number of new concepts into Russian law. Cryptocurrencies and tokens will be defined as “digital financial assets”, which means “property in electronic form created using cryptographic means”. Rights of ownership to digital assets will be certified by entries in a “registry of digital transactions”, although no details of the registry are provided in the draft law.
The law states that digital financial assets are not a legal means of payment in the territory of the Russian Federation. Thus while they can be bought, they cannot be used as a means of payment. Tokens will only be exchangeable for fiat currencies through “operators of exchange of digital financial assets”. This will require investors to undergo identity verification procedures in accordance with the anti-money laundering law and to open an electronic wallet (“software and hardware that allows you to store information about digital records”) with the operator. As regards cryptocurrencies, the law is not clear as to whether they will be exchangeable for fiat.
The new law creates an official definition of “smart contracts” (“contracts in electronic form, under which the performance of rights and obligations is effected by the automatic transfer of digital transactions”) and allows them to be used to enter into contracts with investors when conducting an ICO. The signing of paper contracts will still be possible.
The law will impose restrictions on ICOs. Only registered businesses and officially registered entrepreneurs will be allowed to conduct an ICO. A maximum limit will be imposed by the Bank of Russia on the amount unqualified investors are permitted to invest in digital coins/tokens. The draft law does not however implement a previously proposed ceiling of 1 billion rubles on the amount a company can raise through an ICO.
The procedure for issuing tokens will consist of the following steps:
- publication via the Internet of an investment memorandum, a public offer containing the conditions for the purchase of the tokens (“public offer”), and other documents as determined by the issuer; and
- the entering into of contracts (which may be in the form of smart contracts) between the issuer and each purchaser for the sale and purchase of the tokens. There must be at least three days between the publication of the public offer and the entering of contracts for the sale of the tokens.
The draft law imposes requirements as to the contents of the investment memorandum and public offer. The investment memorandum will need to disclose information about the beneficiaries of the project, the rights of coin/token holders, and the proposed use of proceeds. Coin issuers will need to be transparent about the token price and how it is determined and will be required to provide information on the process for issuing and storing tokens. The name of the token issuer (the new law provides that tokens have a single issuer), the location of its permanently operating executive body and its website address will also need to be made public.
The law “On Digital Rights” consists of amendments to the Civil Code and introduces new concepts of “digital rights” and “digital money” to define tokens and cryptocurrencies, respectively. Digital rights are defined as a set of digital data (a digital code or symbol) in a decentralised information system that: (i) certifies that a person having sole access to the digital code or symbol has rights to certain assets (“objects of civil rights”) other than intangible assets; and (ii) enables such person to obtain information about those assets. Digital money is defined as a set of digital data (a digital code or symbol) in a decentralised information system that does not certify rights to any assets but is used for making payments. The law provides that digital rights may be transferred by making an entry in the relevant information system. The rules on digital rights will also apply to transfers of digital money.
Note: The above represents Charltons’ current understanding of the regulation of ICOs in different jurisdictions. Charltons advises only on Hong Kong law and while the above represents our understanding of the legal position in certain other jurisdictions, legal advice from qualified lawyers in the relevant jurisdictions should be sought in relation to any particular transaction or situation. Further, this note is intended for educational purposes and it does not constitute Hong Kong legal advice. Specific advice must be sought in relation to any particular situation.
- Cryptonews. Russia Set to Delay its Crypto-laws “Until Autumn”. 29 June 2018 <https://cryptonews.com/news/russia-set-to-delay-its-crypto-laws-until-autumn-2124.htm>