Since January 1, 2022, a law has been in force in Russia that regulates relations related to the circulation of digital assets and currency, including cryptocurrency. The release of the Law, which would regulate the legal status of cryptocurrency, has been awaited for more than two years.
Before moving on to a discussion of the Law that regulates the market for cryptocurrency and other digital currencies, let’s understand the terminology.
What is cryptocurrency?
It is easy for an uninitiated person to get confused in the “digital” terms that are associated with the circulation of cryptocurrency.
First of all, let’s dwell on the concept of “cryptocurrency”, which is considered an alternative to paper money issued by the state.
On January 1, 2022, the Law of July 31, 2020 No. 259-FZ “On digital financial assets, digital currency” came into force, which does not mention cryptocurrency, but defines digital currency. Cryptocurrency is a type of digital currency.
Note that the definition is quite complex, so let’s highlight its essence.
Cryptocurrency has no material embodiment and is not a monetary unit.
Cryptocurrency, like other digital currencies, is recognized as property.
It is based on a certain technology called “blockchain”. Using a special address that underlies the blockchain, you can make cryptocurrency transfers.
And they “mine” cryptocurrency on special farms, which are called “mining farms.”
In order for a cryptocurrency to exist, there must be a capacity on which it is calculated and exchanged - this is the blockchain platform.
According to experts, “mining equipment is specialized computer equipment designed to generate cryptocurrency (generated mathematical code). The process of generating cryptocurrency is continuous, so the equipment was initially designed for continuous operation, does not require personnel control and operates fully automatically after initial setup” (Resolution 17 AAS dated December 21, 2020 No. A60-1032/2019).
Law No. 259-FZ does not operate with the concept of “blockchain”; instead, the term “ distributed registry ” is used.
The word “transaction” is well known to citizens and in this situation it means an operation that is carried out on the blockchain.
The first cryptocurrency was Bitcoin, which was released 12 years ago.
However, legislation has only now legalized digital currency.
Regulation of transactions with virtual currency in the United States
Cryptocurrency sales operations in the United States are regulated by federal and regional regulations only in the following cases:
- if the virtual currency, in accordance with the law, is a security;
- if the virtual currency has all the parameters of a payment instrument or the company meets all the qualities of a payment service operator.
In addition to the above, all derivative contracts linked to cryptocurrency (swaps, futures, options) are regulated by the CFTC.
FinCEN classifies the following crypto transactions as payment transactions and obliges companies providing such services to obtain a license:
- virtual currency exchange;
- storage of digital money, with the right to redeem and issue it.
Exchangers and crypto exchanges providing payment services are required to comply with the requirements of the Bank Secrecy Act and the Anti-Money Laundering Regulations.
Attention!!! US citizens are prohibited from doing business with aliens who are on the Specially Designated Nationals and Blocked Persons List.
How do courts evaluate the use of cryptocurrency in payments?
There are practically no legal disputes related to the circulation of cryptocurrency. There is a small amount of judicial practice formed before the adoption of Law No. 259-FZ, which once again proves the legal uncertainty of transactions with cryptocurrency.
Thus, individuals went to court to recover funds and interest. The essence of the events was as follows: the plaintiffs, individuals, transferred funds in the amount of 140 thousand dollars to the defendant so that the latter would provide them with mining capacity and carry out the “production” of cryptocurrency. In turn, the defendant had to “mine” the cryptocurrency after a certain period of time after the transfer of money. But the defendant never fulfilled its obligations to provide mining capacity.
The plaintiff went to court. The documents provided included a mining agreement, the condition of which was to provide the client with the right to mine. The contract did not contain a provisional or fixed expiration date, and the service provider is not responsible for any losses that are associated with the fall of the Bitcoin market.
The court refused to return the money and interest to the plaintiff. As the judge emphasized, Bitcoin does not fall within the definition of electronic money or the definition of a payment system. Bitcoin is also not a foreign currency and is not subject to civil rights.
Thus, in Russia there is no legal basis for these payments and all transactions by the parties to the transaction were carried out at their own peril and risk. The contract concluded between the parties was, by its design, a contract for the provision of services for a fee; the parties exercised their right to freedom of contract (Chapter 39 of the Civil Code of the Russian Federation). But the plaintiffs did not prove that they suffered losses as a result of inadequate quality of services, and not as a result of the fall of the Bitcoin market (Appeal ruling of the Moscow City Court dated October 24, 2019 No. 33-45558/2019).
Mining in new laws
Mining, that is, the extraction of cryptocurrency, interested people who were waiting for the adoption of the law, perhaps most of all.
Anatoly Aksakov commented on this topic, saying that miners will be included in the Federal Tax Service register. In this regard, they will have to pay taxes and operate as entrepreneurs with all the ensuing consequences. The parliamentarian also put forward a proposal to introduce a kind of moratorium on taxation for the first couple of years. This will help to smoothly legalize mining activities as a business. For example, for small businesses with small production volumes, Aksakov proposed using a simpler taxation scheme. But representatives of large businesses will be subject to standard taxation, paying income taxes, and possibly even VAT.
In addition, Aksakov stated that, most likely, the definition of mining will have to be refined, since today the main determining indicator is the consumption of electrical energy, which is clearly not enough for full control.
What has changed with the adoption of the “digital” Law?
The Law, in force this year, gave legal status to cryptocurrency, classifying it as digital money. By law, cryptocurrency is equated to property, which means it can be included in the bankruptcy estate in bankruptcy. Note that earlier in some court decisions, cryptocurrency was equated to property (Resolution 9 of the AAS dated May 15, 2018 No. A40-124668/2017).
Now this issue will not be the subject of litigation.
Digital currency is classified as a means of payment (clause 3 of Article 1 of Law No. 259-FZ). However, Article 14 of the Law prohibits accepting cryptocurrency as payment for goods, work, and services. This ban applies to companies, as well as citizens, who are in Russia for at least 183 days during a calendar year.
That is, with cryptocurrency you can carry out any transactions related to purchase and sale, pledge it, exchange it, but you cannot pay for the purchased product, since the official monetary unit in the Russian Federation is the ruble.
China and Russia
Cryptocurrencies in China
China has long been the center of world mining, until one communist party wanted to shoot itself in the foot, which is why their own electricity producers were left without consumers and began to put up entire hydroelectric power plants for sale.
They have long been planning to ban mining, but this year the misunderstanding of cryptocurrencies coincided with attacks from other countries for low environmental standards, because China burns the most coal in the world. So they found the extreme ones, revealingly turning off all the miners, most of whom at the same time consumed electricity from hydroelectric power stations, but who knew?
China is also an important cryptocurrency trading center and the country is the leader in the use of the Tether stablecoin. Even though cryptocurrency trading has been banned in China since 2022, it has still thrived thanks to P2P platforms and simply trading on foreign exchanges. What does it have to do with these foreign exchanges, conditionally, Binance is also a Chinese company, but it does not have any official representative offices there and does not seem to be doing business.
An interesting fact: despite the current situation around the exchange, as it is being pressed by regulators around the world, Chinese traders give Binance the biggest score of trust. Why, if everything is bad at Binance, does the BNB rate not fall? Because everyone believes that these are temporary difficulties and nothing terrible will actually happen.
Cryptocurrencies in Russia
What's happening in Russia? Here you can record a victory over the United States, because we have a law on digital assets, but they do not. And yes, that was sarcasm, although there is a law, it might be better not to have it at all.
What's really cool is that Russia, and neighboring countries, are very active in the cryptocurrency space, if you look at trading activity. And, of course, the authorities could not miss such an opportunity without trying to collect a tax for it. Therefore, a law was adopted where there is such a thing as “digital assets”; they are recognized as property and, as a result, are subject to taxation. According to this law, which is already in force, a Russian can declare cryptocurrency, as well as report the income received from it and share it with the state. That's all, the state can also confiscate cryptocurrency in court if you have previously declared it and there is a necessary reason, for example, debts.
We personally do not advocate cryptoanarchy and are not against the state existing as an adequate manager; we even understand that taxes will be needed for its existence. But here’s an example: a bank deposit has an insurance amount, which the state will compensate if the bank goes bankrupt.
If we lent money to someone or invested in a bankrupt company, there is a procedure by which we can return, if not all, then at least part of the money. However, there is nothing regarding the regulation of cryptocurrencies, why pay taxes on crypto-currency income, if all the state does is warn about the risks. That is, if you earn it, you must share it, but if you lose it, then you yourself are a fool and no one will help you.
We don’t know about you, but we personally cannot call this situation normal and therefore the law that is in force now, which by the way also prohibits the use of Bitcoin as a means of payment, does not suit us at all.
China’s actions have already affected the crypto market, it doesn’t pay much attention to Russia, and now the main protagonist remains the United States, where the authorities have become extremely suspicious. Well, what do you think, are we waiting for a ban or legalization?
Opinion of Russian financial analysts on cryptocurrencies for 2022
Anatoly Aksakov, Chairman of the Financial Market and Securities Committee, speaks out harshly in favor of cryptocurrency. In his opinion, digital money is a bubble; he believes that Bitcoin will reach $40 thousand, after which it will definitely burst. Therefore, he advocates a complete ban on cryptocurrencies, mining and exchange transactions with them. The head of the Central Bank of the Russian Federation also agrees with Anatoly Aksakov, who believes that Bitcoin threatens the entire banking system. But such statements remain just words for now.
Are individuals and legal entities residents of the Russian Federation allowed to operate with cryptocurrencies?
Yes, they are allowed.
The main official document on this issue is the Letter of the Ministry of Finance of the Russian Federation and the Federal Tax Service of the Russian Federation dated October 3, 2016 N OA-18-17/1027 * (the text is also available at https://miningclub.info/threads/fns-i-kriptovaljuty-oficialnye -otvety.1007/), which states:
“the legislation of the Russian Federation does not contain a ban on Russian citizens and organizations conducting transactions using cryptocurrency”
Enterprises, banks and non-bank credit organizations have neither the grounds nor the authority to reject the official position of the Ministry of Finance of the Russian Federation and the Federal Tax Service of the Russian Federation on this issue.
See also: Letters from the Ministry of Finance and the Federal Tax Service: point of view or law?
Options for conducting transactions for the acquisition of cryptocurrency by residents of the Russian Federation
Direct purchase of cryptocurrency for foreign currency.
In this case, an agreement is concluded between a non-resident (for example, an offshore company) and a resident of the Russian Federation that the resident of the Russian Federation transfers funds to the non-resident in US dollars or euros, and the non-resident ensures that entries are made in the Ethereum distributed registry about the transfer to the address specified in the agreement on Ethereum network, owned by a legal entity or individual - a resident of the Russian Federation, the amount of ether or bitcoins specified in the contract.
Another possible option is to use a transferable letter of credit for settlements. The bank opens a letter of credit in favor of the offshore company upon receipt of the amount of cryptocurrency specified in the agreement to the address specified in the agreement in the Ethereum or Bitcoin network, and the offshore company transfers the payment to the cryptocurrency suppliers.
Transfer of funds in trust to an offshore fund, which makes financial investments, including in cryptocurrencies, in the interests of the client.
In this case, the cryptocurrency is formally owned by an offshore investment fund, a share in which is acquired by a company that is a resident of the Russian Federation. At the same time, a scheme can be constructed in which a company that is a resident of the Russian Federation also receives a private key and password to manage an account on Ethereum, or otherwise gets the opportunity to “cash out” (i.e., withdraw in the form of cryptocurrency) its share in the fund at any time. In this option, it may be easier for a bank (or non-bank credit organization) to process a client payment, since payment under the agreement is made not for cryptocurrency, but for a share in an investment fund (which is more common for banks), and the name of the investment fund may appear in the agreement , and not cryptocurrencies directly, and a reference to the conditions of its operation.
In accounting, as shown above, a legal entity reflects its investments in 58 “Financial Investments”, and when converting the deposit into cryptocurrency, you can simply transfer it to another subaccount 58 of the account.
