Russian Regulation of Tokens
The topic of token issuance and making transactions with cryptocurrency is on the agenda today in almost all jurisdictions. Each country creates its own watchdogs who regulate digital assets and virtual currency. The Russian Federation also has a large number of citizens and entities exploring the filed of cryptocurrency and starting projects aimed at issuing tokenized securities. In this article, we will consider how token is defined in accordance with Russian financial legislation, as well as cover the topic of token issuance in the Russian Federation.
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Regulation for digital financial assets in Russia
Russian legislation regulating virtual currency, digital financial assets (hereinafter referred to as the DFA) and procedure of their issuing consists of several legal acts. First, we should consider the Federal Law of 02.08.2019 N 259-FZ "On attracting investments using investment platforms and on amendments to certain legislative acts of the Russian Federation", the matter of which are relations regarding the attraction of investments through investment platforms and the investment process itself. This act defines utility tokens as tokenized digital rights.
Secondly, it is necessary to consider the provisions of the relatively new Federal Act of 31.07.2020 No. 259-FZ "On Digital Financial Assets, Digital Currency and on Amendments to Certain Legislative Acts of the Russian Federation", which, despite its incompleteness, establishes the status of digital currency and DFA, and also indicates new entities through which digital financial assets will be issued and which will create a kind of register of DFA available for purchase. This new type of subjects are operators of information systems. As the financial watchdog is the Central Bank, he gets more competence in respect to information system. It might look as unwarranted expansion of competence, because not all the information systems use DLT or crypto-encryption.
In addition to these new legislation comes the Federal Act "On the Securities Market" of 22.04.1996 No. 39-FZ, which extends its effect to DFA.
What is a token?
On July 31, 2020, Federal Act No. 259-FZ "On Digital Financial Assets, Digital Currency and on Amendments to Certain Legislative Acts of the Russian Federation" was published (hereinafter referred to as FZ No. 259). On January 1, 2021, this law entered into force. It regulates relations concerning (1) the issue of digital financial assets and (2) digital currency, introduces new entities into the investment field - "information system operator" and "digital financial assets exchange operator", defines features of their status and activity, and also regulates relations arising with transaction with digital currency in the Russian Federation. According to Clause 2 of Article 1, digital financial assets (DFA) are digital rights, including
- monetary claims,
- the right to claim the transfer of securities and exercise the rights certified by these securities,
- the membership in non-public joint stock company.
Since the definition in the law is rather broad, a special reservation is made and law does not cover non-cash funds and non-documentary securities, as well as shares of Limited Liability Companies (LLC).
Depending on what rights are granted in accordance with the DFA, tokens are divided into utility and security tokens. A utility token is a digital asset that gives its owner the right to access a particular platform and the ability to use its services and purchase its products. The new law lacks a definition of a utility token, as well as a procedure for companies to issue such tokens as internal currency. In comparison to security tokens, utility tokens do not allow you to buy a share in a company. And tokenized securities give you the ability to exercise rights on equity securities, the right to participate in the capital of a non-public joint stock company, and the right to demand the transfer of equity securities.
Utility tokens are typically used in an initial coin offering (ICO) and are given to a group of people as part of a specific project. The owners of these tokens receive the right to use project’s services and goods. This approach allows companies to receive funding without losing their own independence. However, the current legislation has not yet provided a clear procedure for companies to issue utility tokens. This theoretical provision reveal the key problem of the Law. Despite generally accepted terms and definitions, Law uses new categories and it might be difficult to match Law terms with usual. Moreover, Law No. 259 also gives too broad definition of digital currency. It consists of two elements: (1) there is no obliged person on digital currency and (2) they might be payment mean and investment tool. Some good certificates or even bonuses might be considered as digital currency according to the Law. At the same time Russian legal entities and resident individuals, have no right to accept digital currency as payment for goods, works and services.
Based on all of the above, there is legislation for tokens in Russia. However it has some gaps and it is controversial. In spite of that lawyers of A4 Law Firm are always ready to provide legal support to companies that plan to launch a crypto project in Russia.
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