More and more often the issue of legal regulation of cryptocurrencies is on the agenda, namely, the question of the nature of cryptocurrency and its content (property, liability or virtual), the principles of organization of the legal turnover of cryptocurrencies in terms of legislation, etc. At the same time, the introduction of the concepts of "digital currencies", "digital rights" and "digital financial assets", in turn, also cannot be called monolithic and unambiguous. In fact, there are several legal concepts that are close to cryptocurrencies, but do not correspond to them fully. Anatolii Zazulin, INTELLECT Senior Associate, examines in his article from the perspective of legislation and judicial practice the legal regulation of cryptocurrencies and possible difficulties related to the issues raised above.
For the first time, the concept of cryptocurrency was applied to the Bitcoin system, developed and launched in 2009, but at that time, few people thought about the legal regulation of this technology. The limited circle of users and enthusiasts did not attract the attention of lawmakers at first. Nevertheless, the prevalence and variety of cryptocurrencies increased, as did the number of buyers and sellers willing to exchange not only virtual items for electronic money, but also quite ordinary items of the material world.
The benefits of cryptocurrency
The growing interest in cryptocurrencies has been driven by several factors.
First, almost any digital currency involves the creation of a decentralized registry. This means that there is no external or internal administrator in the system, that is, on the technical side, transactions are being carried out automatically through complex chains of blocks located on different computers. The interconnection of the encryption of these blocks makes the task of hacking the data extremely difficult. From this comes the first advantage of cryptocurrencies: the autonomy of the transaction system and protection from external legal regulation or illegal hacking.
Second, buying and selling with cryptocurrencies is done on the principle of anonymity. In other words, cryptosystem users can act in transactions under pseudonyms without having to reveal their real identity. Although some cryptocurrency platforms require an identification process, the identity data is not publicly available or can be deleted at a later date.
Third, cryptocurrency transactions are self-executable, recording the currency to the seller at the time the transaction is executed within the digital system. In this case, the parties, even if they are in different countries, do not bear the costs of bank transfers and commissions, are not bound by the exchange rate of traditional currencies, and are protected from the risk of not receiving payment/goods. For example, in the traditional market, a Russian seller of a unique digital image (NFT) finding a potential buyer of the product in China is bound by prepayment issues, the exchange rate of the yuan against the ruble, the problem of bank transfer and commission, and feels unprotected in case of contract violation under the uncertainty of jurisdiction. In a cryptosystem, all he has to do is express his will and the product will be automatically rewritten to the buyer and the payment will be transferred to the seller.
Thus, decentralization, anonymity and the absence of transaction costs have become the hallmarks of cryptocurrencies and the main advantages of their use. By 2014, their popularity became so tangible that countries began to think about the need to regulate their circulation, fearing the creation of entire sectors of an anonymous "shadow" economy based on blockchain.
Russia was no exception: in 2017, the Russian president instructed the government and the Bank of Russia to develop a bill to regulate cryptocurrencies and tokens. One of the most tendentious texts developed in this direction was draft law No. 373645-7 "On the Distributed National Mining System." It envisaged the creation of a national cryptocurrency - the digital ruble, which could act along with the traditional ruble as a full-fledged means of payment and settlement between legal entities. This project was not further developed and was not approved by the State Duma.
Instead, laws on amendments to the Civil Code of the Russian Federation (Federal Law of 18.03.2019 № 34-FZ "On Amendments to Parts One, Two and Article 1124 of Part Three of the Civil Code of the Russian Federation", hereinafter - Law № 34-FZ) and on digital financial assets (Federal Law of 31.07.2020 № 259-FZ "On digital financial assets, digital currency and on amendments to certain legislative acts of the Russian Federation", hereinafter - Law №259-FZ) were adopted. They currently bear the main burden of regulating cryptocurrencies, although they do not carry out the latter in full, as will be discussed below.
Digital currencies, rights and financial assets
Modern Russian regulation of cryptoassets cannot be called monolithic and unambiguous. In fact, there are several legal concepts that are close to cryptocurrencies, but do not correspond to them fully.
The first of these concepts is "digital currency," as stipulated by Law No. 259-FZ. In order for a cryptocurrency to be recognized as digital (and therefore legal), it must be issued by a state-certified operator included in the relevant list of the Ministry of Finance. Moreover, such an operator must maintain a centralized registry of users and be able to accurately identify the person holding the digital currency.
In other words, to become a legal "white" digital currency, cryptocurrency must lose its anonymity and decentralization. Otherwise, it will not be perceived by the state as a real means of payment, and all participants in transactions in which it acts in their capacity will be deprived of judicial protection. Moreover, holders of digital currency are obliged to report the facts of its possession and disposal.
The forthcoming changes in the tax legislation (Draft Federal Law "On Amendments to Part One and Part Two of the RF Tax Code" № 1065710-7) are designed to clarify this requirement and provide for mandatory tax declaration of digital currency turnover, if the calendar year total amount of receipts and debits of digital currency exceeded the amount equivalent to 600 thousand rubles. In this case, transactions with digital currency will be perceived by the tax authorities as a subject of taxation when calculating profit tax.
Meanwhile, the question of how the equivalent ruble value of digital currency will be calculated for tax purposes remains unresolved: the draft law provides for the subsequent development and publication of clarifications on this issue by the Federal Tax Service. Although the main criterion is already known - the market price at the time of the transaction - the tax service has to clarify whether the market value will be determined on the basis of the internal rate of the digital site or the conversion rates of payment systems tied to it. In addition, it remains unclear whether transactions involving the exchange of one digital currency for another will be subject to accounting.
Another concept used by the Russian legislator is that of digital rights. In accordance with Article 141.1 of the Russian Civil Code, digital rights are the compulsory and other rights named as such in the law, the content and conditions of which are determined in accordance with the rules of an information system that meets the criteria established by law. Exercise, disposal, including transfer, pledge, encumbrance of a digital right in other ways or limitation of disposal of a digital right is possible only in the information system without recourse to a third party.
The concept of digital rights offers an alternative view of cryptocurrency - not as a means of payment, but as a property right and a kind of electronic security. This is evidenced, in particular, by the text of Article 128 of the Civil Code of the Russian Federation, which attributes digital rights to objects of civil rights and property rights (along with non-cash funds and uncertificated securities). According to the legislator's intention, the cryptocurrency as a digital right may contain the right to receive an item purchased in a store, to receive interest from the funds lent, etc., but only within the framework of goods and services existing in an electronic virtual system (by analogy with bonus systems of online stores).
Despite the broad scope of possible application of such a concept, it has a significant limitation: the question of what can be classified as digital rights is determined by federal law on a case-by-case basis. Currently, digital financial assets (DFAs), which have more in common with ordinary securities than with cryptocurrencies, are given the status of digital rights in this order, as they involve only monetary claims and corporate rights. Like digital currency, the circulation of CFA implies the maintenance of a centralized registry, identification of owners and declaration of the transfer of rights.
It is worth noting that initially draft Law No. 34-FZ, which introduced the concept of digital rights, provided for a different definition: "In cases stipulated by law, rights to objects of civil rights, except for intangible goods, may be certified by an aggregate of electronic data (a digital code or symbol) existing in an information system which meets the characteristics of a decentralized information system stipulated by law, provided that the information technology and technical means of the information system. The named digital code or symbol shall be recognized as a digital right".
There are opinions that the change of the concept was due to the legislator's refusal to link digital rights to decentralized systems, including those based on blockchain. As a result, instead of legalizing cryptocurrencies, the law regulated electronic registers of securities. In addition, the refusal to recognize blockchain led to the automatic withdrawal from the sphere of regulation of self-executable transactions, which is a feature of most cryptocurrency platforms.
Another legal term often associated with cryptocurrencies is "electronic means of payment", as defined in the Federal Law No. 161-FZ of June 27, 2011 "On National Payment System". Despite the name, such means of payment are far from the concept of cryptocurrencies. The legislator understands electronic money as the electronic equivalent of regular money sent and received as non-cash bank transfers without the use of a bank account. In most cases, such transfers are made through quick payment systems, which can be used to pay utility bills or transfer money abroad: the real amount of money in rubles is transferred to the operator, who reflects it in his application already in electronic form and performs a bank transaction - no anonymity, independent currency or alternative to the bank transfer transaction is involved.
Cryptocurrency as a transaction subject
The vast majority of popular cryptocurrencies thus do not fall into the categories of digital currencies and digital financial assets. Cryptocurrencies such as Bitcoin, Etherium, LightCoin and others are not recognized as legal means of payment or electronic analog of traditional money. Meanwhile, their owners in Russia are not completely deprived of protection of their rights, owing to the judicial practice that has changed in recent years.
Particularly strong influence in this area had the Supreme Court of the Russian Federation № 48-KG21-3-K7 of 01.06.2021 in the case № 2-5227/2019. In this act, the highest judicial authority established an important principle of law enforcement: cryptocurrency really cannot be a means of payment, which, however, does not prevent it from acting as a subject of transaction, i.e. a property. The case analyzed by the court consisted in the fact that users of the WebMoney Transfer system concluded a transaction of assignment of rights between them. The subject of the assignment were the cryptocurrency signs WebMoney signs (WMZ) and tied to them requirements to the online store, and as means of payment were real money. Essentially, one user sold cryptocurrency to another user for a sum of money in rubles equivalent to the dollar value agreed upon by the parties. The subject of the transaction was successfully transferred to the buyer, but no payment was received for it, which is why the lawsuit was filed.
Previously, in most cases, courts were extremely critical of any disputes involving cryptocurrencies and similar technologies. Under the "distribution" of total refusals in lawsuits were also those in which the crypto-asset appeared as the subject of the transaction, and the calculation were carried out in the traditional way (Appellate Decision of the Ryazan Regional Court from 27.02.2019 in case №33-483/2019, the Moscow City Court from 08.04.2021 in case №33-106792021).
In these cases, the courts approached the issue of objectivity of virtual currencies in a clumsy manner. Firstly, they linked the ability of virtual currencies to act as objects of civil rights to their liquidity - that is, their ability to serve as legal tender. However, it is one thing to ask for the admissibility of payment for something with virtual marks, and quite another to ask for real money to be collected for the sale of such marks. Secondly, the courts gave special importance to the fact that cryptocurrencies are not objects of the material world and do not exist in physical form, and therefore cannot be considered a subject of the transaction.
The Supreme Court found this practice incorrect, drawing attention to the fact that the list of objects of civil rights set out in Art. 128 of the Civil Code cannot be interpreted restrictively: the parties may choose any tangible and intangible goods as the subject of the transaction, if their circulation is not limited or prohibited by law.
This approach was also previously encountered in judicial acts, although only in relation to bankruptcy. Thus, the Decision of the Ninth Commercial Court of Appeal of 15.05.2018 in case №A40-124668/2017 cryptocurrency was recognized as a debtor's property to be sold to pay the claims of its creditors. However, the obligatory sale of cryptocurrency in bankruptcy was associated only with the case when the debtor himself declared it as property to be sold.
Meanwhile, the application of such an approach largely depends on whether the electronic system, in which the circulation of cryptocurrency is carried out, allows to identify the owners. If such a system operates on the principle of anonymity or the contract does not allow to establish a connection between a particular cryptocurrency wallet and its owner, it becomes virtually impossible to prove the transfer of cryptocurrency from the buyer to the seller.
That is why even in cases where the courts recognize cryptocurrency as an object of legal relations, they refuse to satisfy claims due to the impossibility to establish whether the subject of the transaction was transferred under the contract or not (Decision of the Commercial Court of Khabarovsk Territory from 30.12.2015 in case № A73-7423/2015, Appellate Decision of Ulyanovsk Regional Court from 31.07.2018 in case №33-3142/2018, Tyumen Regional Court from 24.01.2018 in case №33-245/2018).
WebMoney Transfer system allows to identify users of virtual wallets - thanks to this, the Supreme Court in case №2-5227/2019 did not face the issue of proving the transfer of cryptocurrency between the parties to the contract and the plaintiff managed to achieve a review of the dismissal of the claim.
Summarizing the above, it is possible to say that the Russian legislation:
· does not recognize ordinary cryptocurrencies as legal means of payment for items and services of the material world, but allows their use as the subject of a transaction;
· allows their circulation as digital currencies only in case of certification of the relevant exchange and deanonymization of users;
· also perceives cryptocurrencies as an investment instrument (digital rights and digital financial assets) under the same conditions of certification and deanonymization.
Cryptocurrency and the law: the question of compatibility
Obviously, the current regulation of cryptocurrencies is not enough to successfully control their circulation and stabilize the financial system. This problem has already been mentioned in the Concept of Legislative Regulation of Mechanisms of Organization of Digital Currency Circulation, published in February 2022 by the Government of the Russian Federation. The Concept proposes to solve it through the development and implementation of tools to control crypto-exchanges and strengthen the guarantees of the rights of their users. However, the extent to which such measures will be effective is still questionable - the reason for doubts lies in the very nature of cryptocurrencies and the reasons for their popularity.
As stated earlier, the main hallmarks of cryptocurrency are decentralization, anonymity and absence of transaction costs. Obviously, each of these features is inherently contrary to any legal regulation. Decentralization means the impossibility of state control over circulation. Anonymity contradicts the principle of certainty of the parties to the transaction and the protection of their rights. The absence of transaction costs implies exemption from taxes and fees.
Any state regulation, therefore, contradicts the very nature of cryptocurrency, knowingly denying it as a concept. The law could provide (and we see this in today's examples) a centralized registry or mandatory identification. However, such measures will lead to the creation of a new, alternative, "good" cryptocurrency in the eyes of the legislator, which will not be popular a priori just because it is deprived of the advantages that "classic" cryptocurrencies have. This leads us to the question of the justifiability of legislative practice in this direction - countries such as China and the UK, for example, go the way of a complete ban on cryptocurrencies.
In this regard, it is currently very difficult to talk about state regulation of cryptocurrencies, including Russia: in fact, we are talking about the creation by the state of new digital investment instruments that could compete with traditional methods, as well as cryptocurrencies. Time will tell how successful such an approach will be.
Anatolii Zazulin
Senior associate INTELLECT
E-mail: a.zazulin@intellectmail.ru