Legal status of cryptocurrencies in Russia

On June 14, 2022, the State Duma (lower house of the Russian Parliament) approved a bill in the first reading, according to which the use of digital financial assets and utility digital rights as a means of payment in the Russian Federation are prohibited.

Note: the Duma also makes a reservation that
- the ban can be lifted in the cases provided for by federal laws;
- one can store cryptocurrencies without using them as a means of payment.

Despite this new bill, let us try to consider the information we accumulated before this bill and answer the main questions about cryptocurrency.

    We will cover the following question:

    ➡ WHAT IS CRYPTOCURRENCY?
    ➡ ADVANTAGES AND DISADVANTAGES OF CRYPTOCURRENCIES
    ➡ WHICH COINS ARE THE MOST POPULAR?
    ➡ HOW IS IT REFLECTED IN RUSSIAN LEGISLATION?
    ➡ WHAT ARE THE PROBLEMS OF VIRTUAL MONEY?
    ➡ IS IT POSSIBLE TO USE THEM IN NEGOTIATIONS?
    ➡ IS VIRTUAL MONEY INCOME TAXED?

The sanctions imposed by Western countries against Russia have significantly affected the entire economy of the country. The dollar and euro exchange rates are changing all the time, and to this day they are not very stable. And cryptocurrencies are no exception. The rate of digital currencies today is not stable either.

In the past six months, a dispute has flared up in Russian ruling circles about what should be done with the growing industry of cryptocurrencies.

The Central Bank took the position of a complete ban, while the Ministry of Finance insists that the mining and use of cryptocurrencies is an opportunity that, among other things, can bring billions of rubles to the budget annually. It just needs to be properly governed.

After the outright conflict with Ukraine started and numerous sanctions against the financial sector of Russia and its economy as a whole were imposed, the issue seems to be resolved by itself. Many figures in economics and politics believe that cryptocurrencies can be a way to bypass the sanctions, at least in some specific cases. This opinion has a right to exist.

Let us talk in more detail about the crypto circulation in the country.

WHAT ARE CRYPTOCURRENCIES? WHY DO WE NEED THEM IN THE PRESENT DAY? WHAT ARE THEIR BENEFITS AND DRAWBACKS IN OUR OPINION?

CRYPTOCURRENCY is a digital (virtual) currency that has no physical expression. The unit of such currency is a “coin”. Coin is famous for being protected from forgery, since it is actually encrypted information that cannot be copied.

Thus we can say that cryptocurrency is a kind of electronic money.

ADVANTAGES OF CRYPTOCURRENCY

What attracts people to crypto?

✅ Cryptocurrency accessibility at any time. Moreover, it is impossible to freeze an account or withdraw cryptocurrencies.
✅ Open source. Anyone can mint virtual coins.
✅ Anonymity. One cannot obtain information about a cryptocurrency wallet owner. Only the wallet number and limited data on the amount in the account are public.
✅ Cryptocurrency is an independent monetary unit. No one regulates its issue and controls the funds movement between accounts. It is this feature that attracts many Network users.

DISADVANTAGES OF CRYPTOCURRENCY

The disadvantages of cryptocurrencies include the following downsides:

❗ Difficult to control transfers. Banks and other supervisory authorities do not have the ability to control operations for the issuance and movement of cryptocurrencies.
❗ Ban risk. Government bodies are wary of digital currencies. Many countries have restricted their use, and fines can be imposed on violators.
❗ You cannot cancel a payment.
❗ Volatility. Cryptocurrencies are unpredictable, as they depend on current demand, which, in turn, may change as a result of changes in legislation and due to other factors. For this reason, there are significant fluctuations in the virtual money price.
❗ Risk of loss. The access key to electronic money is a special password. If you lose it, the crypto coins in the wallet become inaccessible.
❗ No guarantees. Each user is personally responsible for their savings. There is no control over it, so in case of theft, you will not be able to prove anything and return your money.
❗ No common trade organizer, which reduces the cryptocurrency credibility.
❗ Insufficient security of cryptocurrency on an exchange.

WHAT ABOUT THE LEGAL STATUS OF CRYPTOCURRENCIES IN RUSSIA?

The legal definition of cryptocurrencies is currently contained in the FEDERAL LAW dated July 31, 2020 N 259-FZ "On Digital Financial Assets, Digital Currency ...", according to which a set of electronic data contained in an information system is recognized as a digital currency.

So we can conclude that cryptocurrencies are not considered a means of payment in the Russian Federation.

In accordance with the specified law, as a general rule, business transactions with cryptocurrencies are prohibited, i.e. Russian legal persons (listed in the specified norm by Law N 259 of the Federal Law) cannot accept them as a consideration under a contract.

The consequence of this ban violation is established in paragraph 6 of Art. 14 of this Law, which is, as a general rule, NO JUDICIAL PROTECTION OF THE RIGHTS associated with digital currencies. An exception to this general rule is the judicial protection provision, subject to informing about owning digital currency and making civil law transactions, i.e. subject to paying taxes stipulated by the Tax Code of the Russian Federation for these types of transactions and operations.

In this regard, the official position of the tax authorities proceeds from the fact that no specific features of calculating and paying taxes on transactions with digital rights have been established and transactions with digital rights are taxed in accordance with the procedure generally established by the Tax Code.

That is, the Tax Office collects VAT or income tax if the cryptocurrency owner reports such income.

The Ministry of Finance replied that the logic in the provisions of Ch. 25 of the Tax Code implies the taxation of all income received by the taxpayer for their business activities, with the exception of those named in Art. 251 of the Tax Code. At the same time, the Tax Code does not establish a special procedure for taxing income from CRYPTOCURRENCY transactions. In Letter No. 03-04-07/33234 dated May 17, 2018, the Ministry of Finance clarified that the tax base for cryptocurrency purchase / sale operations is determined in rubles as the excess of the total income amount received by the taxpayer in the tax period from selling the corresponding cryptocurrency over the total amount of documented expenses.

CRYPTOCURRENCY CASE LAW

Arbitration jurisprudence allows for involving cryptocurrencies in civil transactions and generally classifies cryptocurrencies as other property, using a broad interpretation of this term, which is not defined in Russian civil law.

For example, on May 15, 2018, the Ninth Arbitration Court of Appeal ruled that the current civil legislation does not contain the concept of "other property" referred to in Art. 128 of the Civil Code of the Russian Federation, and taking into account modern economic realities and the information technologies development level, its broadest possible interpretation is permissible, in connection with which, the court included the debtor's cryptocurrency in the bankruptcy estate in the bankruptcy case, relying on the fact it is impossible to exclude the debtor's property that has economic value from the bankruptcy estate for creditors (including cryptocurrency).

In our work, we have already encountered the risks individuals face when acquiring and using cryptocurrencies. These risks have already been reflected in court decisions.

HERE IS AN EXAMPLE:

The appeal ruling of the Ulyanovsk Regional Court dated July 31, 2018. An individual (plaintiff) filed a claim to recover from another individual (defendant) unjust enrichment and interest for the use of his money. The crux of the matter was as follows. The plaintiff knew that the defendant, for a fee, sells cryptocurrencies using electronic means and methods on the Internet. The parties agreed that the defendant would acquire a cryptocurrency on a prepaid basis. The plaintiff transferred funds by bank transfer to the defendant's bank account, after which the latter stopped communicating and responding to calls and appeals. The defendant did not transfer the cryptocurrency to the plaintiff and did not return the money received.

THE COURT REFUSED TO SATISFY THE REQUIREMENTS, NOTING THE FOLLOWING:

Since the Russian Federation does not have any legal framework for regulating payments made in a "virtual currency", and there is also no legal regulation of online trading platforms, all "virtual currencies" (cryptocurrencies) owners transfer them at their own risk. The plaintiff, by agreeing to the terms of providing the electronic currencies exchange, assumed the risk of incurring any financial loss or damage.

Under such circumstances, the plaintiff’s arguments that the defendant violated his rights are untenable.


Thus we can conclude that the cryptocurrencies legalization in the country could be a solution to the problem of disabling SWIFT for several banks and the withdrawal of payment systems from Russia.