Infrastructure of the market for digital financial assets

Elena Mashina

The release of security tokens in Russia is a complex and complex process. Despite the fact that since 2021, the Federal Law of July 31, 2020 N 259-FZ "On digital financial assets, digital currency and on amendments to certain legislative acts of the Russian Federation" has been in force, from a practical point of view, the process of issuing digital financial assets is still difficult feasible due to the lack of specialized entities that are legally authorized to exercise control and regulatory functions. In this article, we will talk about how the infrastructure of digital and investment platforms works.

Contents

Fintech legislation in Russia

In our previous article, we partially covered the topic related to the legal status of digital financial assets, relying on Federal Law of July 31, 2020 N 259-FZ "On digital financial assets, digital currency and on amendments to certain legislative acts of the Russian Federation" (hereinafter - Federal Law "On DFA" 2021). After analyzing the term "tokens", which in favorable crypto jurisdictions is defined as digital securities, we came to the conclusion that by digital financial assets (DFA) the Russian legislator means security tokens, which from February 2021 can be freely issued. However, fintech legislation in Russia is not yet complete, as amendments are also expected to the Tax and Criminal Codes, as well as to the Code of Administrative Offenses. Moreover, with the adoption of the law on DFA, the question of why it is prohibited to use digital currency as a counter-provision for goods or services remains unresolved. Such a legal flaw does not allow individuals and legal entities to use cryptocurrency as a means of payment, which extremely restricts its use in the Russian Federation and makes ownership of cryptocurrency impractical. The second gap in fintech legislation is the lack of regulation of the procedure for the acquisition of foreign DFA on the territory of Russia. Based on all of the above, it seems obvious that in the Russian Federation there is no clear legal framework capable of solving systemic issues. Therefore, the prospects for the development of cryptoeconomics in the Russian Federation are vague.

The legal framework that we will use to determine the procedure for issuing security tokens and utilized digital rights by Russian legal entities and individual entrepreneurs:

Federal Law of July 31, 2020 N 259-FZ "On digital financial assets, digital currency and on amendments to certain legislative acts of the Russian Federation";
Federal Law of 02.08.2019 N 259-FZ (as amended on 31.07.2020) "On attracting investments using investment platforms and on amending certain legislative acts of the Russian Federation";
Federal Law of 22.04.1996 N 39-FZ "On the Securities Market";
Federal Law of 27.07.2006 N 149-FZ (as amended on 30.12.2020) "On Information, Information Technologies and Information Protection";
Ordinance of the Bank of Russia dated November 25, 2020 N 5635-U;
Bank of Russia Regulation No. 746-P dated December 16, 2020;
Bank of Russia Ordinance of 29.04.2015 N 3629-U "On Recognizing Persons as Qualified Investors and the Procedure for Maintaining the Register of Persons Recognized as Qualified Investors" (Registered with the Ministry of Justice of Russia on 28.05.2015 N 37415);

Requirements for the subjects of the DFA market

Information system operator

The 2021 DFA Law defines the basic infrastructure for organizing the issuance of DFAs and introduces to the market two specialized entities - the operator of the information system and the operator of the exchange of digital financial assets. We will determine what is the peculiarity of their activities and what criteria of compliance are presented to them.

The release and circulation of DFA is possible only by adding records to an information system based on a distributed ledger. It is in such a system that the release of digital financial assets is supposed. To control and regulate the process of issuing and accounting for DFA, such an entity is introduced as an operator of the information system.

For a clearer understanding, we recall that earlier in the Federal Law of 27.07.2006 N 149-FZ (as amended on 30.12.2020) "On information, information technology and information protection", the term "information system operator" was already a citizen or a legal entity operating the information system, including the processing of information contained in its databases; as well as the definition of the concept "information system" - a set of information contained in databases and information technologies and technical means ensuring its processing.

Consider the requirements for an information system operator:

General requirements

In accordance with the new legislation, the operator of the information system and its activities are fully accountable to the Bank of Russia. Before starting activities to control the issue of digital assets, the operator must be included in a special register of information system operators created and controlled by the Bank of Russia;
Information system operators can only be a legal entity whose personal law is Russian law. It can be a credit organization, a person entitled to carry out depository activities, a person entitled to carry out the activities of a trade organizer;
The operator of the information system is obliged to develop and agree on the rules for the functioning of the information system, which will serve as a platform for the issuance of DFA with the Bank of Russia. The rules should reflect the procedure for making changes to the algorithm of the system's operation, requirements should be imposed on users of the information system, and most importantly, the procedure for issuing digital financial assets and their accounting should be determined. The operator is also obliged to provide for the process of creating and filling in the register of users of the information system;

Qualification Requirements

In accordance with parts 5 and 7 of Art. 5 of the Federal Law "On DFA" 2021, all management bodies, both individual and collegial, as well as the chief accountant, the head of the internal control service (controller), the head of the risk management service (the person responsible for organizing the risk management system) must comply with:

business requirements, such as, for example, the absence of an outstanding criminal record and information about their involvement in extremist or terrorist activities;
qualification criteria, which include proper education and experience of managing a financial institution for at least 2 years (for each governing body and other persons listed above, the requirements are different, so we describe general eligibility criteria).

DFA exchange operator

The operator of the exchange of digital assets performs his function (operator of the exchange) - all transactions related to the digital asset are made through him. Unfortunately, the legislator does not provide an exhaustive list of transactions with DFA, but only mentions the purchase and sale transaction of DFA and the exchange of one type of DFA for another. The exchange operator, in accordance with Part 3 of Art. 10 Federal Law on DFA 2021. is included in a special register of operators for the exchange of digital financial assets, which is maintained by the Bank of Russia. The exchange operator is also tested for compliance with the requirements established by law.

First, an exchange operator can only be a legal entity that is not a credit institution or trade organizer; it can be either a commercial or a non-commercial organization. The general requirements are:

personal law of the organization - Russian law;
the size of the authorized capital - at least 50 million rubles;
the size of the organization's net assets - at least 50 million rubles;
the organization has created a collegial management body responsible for risk management, that is, it monitors the passage of compliance procedures by users of the information system.

Persons issuing DFA

Given that the activity of issuing digital rights is entrepreneurial, it can only be carried out by legal entities and individuals registered as individual entrepreneurs in the manner prescribed by law (part 3 of article 2 of the Federal Law "On DFA" 2021). The issuance of digital rights by non-entrepreneurs is not provided. Therefore, if an individual plans to issue a digital asset, he first of all should go through the registration process as an individual entrepreneur.

Persons purchasing DFA

Both individuals and legal entities can purchase digital financial assets, however, a restriction is imposed on the implementation of transactions by DFAs that meet certain criteria. Thus, exclusively qualified investors have the right to acquire DFA (Ordinance of the Bank of Russia dated November 25, 2020 N 5635-U):

issued in information systems based in accordance with foreign law;
certifying the possibility of exercising rights under equity securities, which can only be purchased by qualified investors.

Due to the fact that at the moment the registration of operators of information systems and exchange operators of DFA in the unified register of the Bank of Russia has not yet been launched, it is still quite difficult to establish the procedure for acquiring security tokens in Russia.

As for the issue of utility tokens, which we talked about in the previous article, the process of issuing such digital assets is regulated by the Federal Law of 02.08.2019 N 259-FZ (as amended on 31.07.2020) "On attracting investments using investment platforms and making amendments to certain legislative acts of the Russian Federation ".

Utility tokens are typically used in the Initial Token Offering (ICO) process and are provided to a group of people as part of a specific project. Suppose a company plans to create a new product and launch it on the market, but an impressive investment is required to develop and manufacture it. To finance its project, the company attracts investments: by issuing utilitarian digital rights, which in the future will allow purchasing the company's product, for example, for one or two tokens. The price of the product will actually be $ 5,000, and the token can be bought for $ 1,000. Thus, by purchasing a token for $ 1000, the savings are $ 4000. This is what utilitarian digital rights are. Perhaps the question arises: how do security tokens differ from utilitarian digital rights? The fact is that by purchasing a token, the acquirer will not receive a share in the company, but will only be able to demand the provision of a service or the provision of goods.

Federal Law of 02.08.2019 N 259-FZ (as amended on 31.07.2020) "On attracting investments using investment platforms and on amending certain legislative acts of the Russian Federation" introduces the concept of utilitarian digital rights, which are rights of claim:

transfer of things;
transfer of exclusive rights to the results of intellectual activity and (or) the rights to use the results of intellectual activity;
performance of work and (or) provision of services.

That is, utilitarian digital rights can be acquired, alienated and exercised on a specialized investment platform provided for in Part 5 of Art. 11 of this Law, under the control of the operator of the investment platform. It also has requirements for compliance with the law:

The operator of the investment platform must be a legal entity;
The operator of the investment platform does not have the right to combine his activities with any other activities in a financial institution, except for those that are directly provided for by law (part 2 of article 10 of the Federal Law of 02.08.2019 N 259-FZ (as amended on 31.07. 2020) "On attracting investments using investment platforms and on amendments to certain legislative acts of the Russian Federation");
This entity must be financially stable, therefore, the size of its equity capital must be at least 5 million rubles;
The operator of the investment platform is obliged to approve the internal document (documents) for the management of conflicts of interest.

Thus, the issuance of utilitarian digital rights takes place on an investment platform under the control of its operator, and the release of digital rights takes place on a digital platform. The requirements for the operator of the platform on which the utilitarian digital rights are issued are lower (in particular, the requirements for the amount of capital), in comparison with the requirements for the operator of the DFA and the operator of the exchange of DFA. As we have already noted, the infrastructure of digital financial assets is just beginning to form and registered, let's call them a general term - there are no operators yet.