Cryptocurrency in Russia: shackled again?

On January 1, 2021, the State Duma adopted the long-awaited law “On Digital Financial Assets”, which was considered for about two years. Rejoicing reigned in the crypto community: finally, the virtual currency received official status! However, as it turned out, it was premature to blow the fanfare. A document came out that tightened the requirements for crypto owners. How to explain such zigzags of the authorities – from indulgence to tightening the screws? And isn’t it time for Russian market participants to look for another jurisdiction with more understandable taxation conditions?

When currency is not money

Federal Law No. 259 defined the legal status of cryptocurrency in Russia. Now it is officially considered property. It became possible to sell and buy, exchange, use for savings and investments.

At the same time, it is prohibited to use a digital asset as a means of payment – to pay for goods and services – on the territory of the country. In addition, the authors of the document failed to give an adequate definition of the concept itself. “Cryptocurrency is tokens for which there is no obligated party,” the text says. But such an understanding allows us to attribute to it, for example, electronic currency, accounts, etc. Therefore, a clarification has been introduced into the Law: cryptocurrency is not just any records, but those that can be a means of either payment or investment. It is understood that it is a type of digital financial assets (DFA), which are under the supervision of the regulator.

In particular, DFAs are defined as several types of digital rights:

• issue and transfer of securities;
• monetary claims;
• connection to the capital of a non-public joint-stock company.

The Law also stipulates the standards for the issue, accounting and circulation of such assets. The requirements for their issuers and operators of exchange platforms are specified separately.

Initially, it was planned to equate the CFA with investment instruments, but later this was abandoned. In its final form, the Law defines them as a kind of analogue of property, property. This means that it is possible to invest in an asset, but not to use it as a means of payment. This imposes some restrictions:

• if the issue of a cryptocurrency is not made in the Russian Federation, then it will be available for purchase only on sites with foreign jurisdiction;
• The Central Bank has the right to limit the acquisition of such assets only by qualified investors;
• DFA can be issued by both a legal entity and an individual, but the circulation of assets must be carried out in the same information system (for example, a distributed ledger) where they were issued.

All operations with digital coins are carried out through specialized exchange operators, the register of which is maintained by the Central Bank. It also performs regulatory functions in this area.

However, according to many experts in the field of blockchain and law, Law No. 259-FZ contains many shortcomings. For example, it does not clearly define the rules for the circulation of digital assets between private users. Meanwhile, according to the President of the Russian Association of Cryptoeconomics, Artificial Intelligence and Blockchain (RACIB) Yuri Pripachkin, Russia, with more than 8 million crypto wallets, is among the top three world leaders in the use of virtual money.

Until recently, questions arose about the tax liability of the owners of such a currency. But soon everything can change – and not for the better.

What do tax officials want?

Law No. 259-FZ mentioned the right of cryptocurrency owners to inform the tax authorities about their coins and transactions with them. This gave people the right to judicial protection when making civil law transactions with the CFA. However, there were no set rules.

To eliminate the shortcomings, the Federal Tax Service proposed amendments presented in the draft law No. 1065710-7 “On Amendments to Parts One and Two of the Tax Code of the Russian Federation.” In particular, the fiscals decided to supplement it with the following norms.

• If the amount of transactions with cryptocurrency (purchase, sale, exchange, etc.) exceeds ₽600 thousand during the year, the taxpayer is obliged to report this to the tax authorities.
• The Federal Tax Service is empowered to independently determine the market value of digital assets, which is subsequently used to calculate the tax base and possible fines.
• In case of evading reports or providing false information about transactions with DFA, the taxpayer will be fined. The monetary penalty will be 10% of the volume of receipt or transfer of cryptocurrency (depending on their size).
• If income tax (for legal entities) or income tax (for individuals) from operations with crypto assets is not paid or not paid in full, the taxpayer is obliged to pay this amount and a fine of 40% of it.

The amendments proposed by the Federal Tax Service caused a strong reaction in the crypto community, mostly negative. Thus, Dmitry Ter-Stepanov, deputy director of ANO Tsifrovaya ekonomika, expressed the opinion that it is necessary to specify clear rules for determining the market value of crypto assets and the instruments used in this.

Even more categorical is Dmitry Kirillov, a teacher at the Moscow Digital School. In his opinion, the tax authorities are deliberately replacing the right of information enshrined in the Federal Law about the ownership of cryptocurrency and operations with it with a mandatory notification. In turn, Mikhail Uspensky, a member of the Association of Lawyers of the Russian Federation, believes that this form of reporting will make it possible to hold accountable for its violation. Ordinary users will suffer the most from this, while organized crime will easily find ways to get around the law.

Many experts are convinced that the bill proposed by the Federal Tax Service is premature and needs to be thoroughly revised.

This was also recognized by relevant committees of the State Duma.

• The State Duma Committee on State Construction and Legislation concluded that it is impossible to establish a tax base for cryptocurrencies without clarifying the list of objects classified as them and separating them from existing categories: money and digital rights.
• The State Duma Committee on Budget and Taxes noted several inconsistencies in certain provisions arising from the competence of the Federal Tax Service to determine the market price of a cryptocurrency.

Despite the shortcomings noted, bill No. 1065710-7 was adopted in the first reading on February 18, 2021. There was hope that the second review would be amended, and the document would become more loyal to the owners of cryptoassets. But, as follows from the official response of the Federal Tax Service to the request of ANO Tsifrovaya ekonomika, the department is not going to make concessions.

Fuss around SWIFT

Active lawmaking and increased attention of the Russian authorities to cryptocurrency, some experts associate with the threat of a possible shutdown of SWIFT.

On April 5 this year, Deputy Foreign Minister Alexander Pankin stated bluntly that it is possible to create a base for international settlements in the country, an alternative to the SWIFT interbank system. At the same time, he emphasized that, taking into account the development of digital currencies and blockchain, the platform can be formed on a new technological basis.

Theoretically, this is possible. Talk that Bitcoin will eventually replace the network of interbank payments SWIFT has been going on for a long time and not only in Russia.

However, experts believe that this is not a matter of the near future.

“Soon, bitcoin will definitely not be able to replace SWIFT, although it has shaken its monopoly on international transfers. Everything goes to the fact that within a few years the blockchain will become the standard for transporting banking messages. But hit will be the standard for her, who will manage the network, time will tell”, — thinks Blockchain Research Center Program Manager Ilya Agapkin.

It is also necessary to take into account the fact that Russia is one of the most active and largest users of the system in the world. In 2020 alone, the number of transactions made by its citizens through SWIFT exceeded 150 million.

Experts emphasize that the mere desire to more effectively implement the possibilities of a cryptocurrency or a hypothetical “digital ruble” is not enough. It is also necessary the desire of the second party – the recipient. It is impossible to do without concluding a bilateral agreement on the use, for example, of bitcoin or e-ruble for international settlements with each of the countries.

According to Vasily Solodkov, director of the HSE Banking Institute, at the moment only Iran, Syria, North Korea, Venezuela and, possibly, Burma can do this. Vasily Koltashev, head of the Center for Economic Research at the Institute of Globalization and Social Movements, adds the EEC countries, Turkey and Azerbaijan to this list. In any case, we are not talking about a full-fledged replacement for SWIFT.

The attempt of the Russian authorities to tighten control over the cryptocurrency and operations with it resembles a failed initiative to ban Telegram. It is completely unclear how the Federal Tax Service will recognize which movement of funds in the taxpayer’s accounts is associated with cryptocurrency, and which is not. It is also problematic to determine the very fact of owning virtual assets.

Be that as it may, users who are just tasting the cryptocurrency have nothing to worry about. It is unlikely that the amount of their transactions will exceed the threshold of ₽600 thousand per year. But for businesses, especially those that are going to work “in the open”, if the current version of the bill is adopted, it will be more profitable to look for another jurisdiction – with more attractive and understandable taxation conditions.