The Russian Government Has Approved The Conceptual Framework To Regulate Digital Currencies and Crypto Exchanges

Crypto

The original document named “The Conceptual Framework for Reglamentation of Mechanisms To Organize The Circulation of Digital Currencies” was published in Russian on February 8, 2022, and is available here: http://government.ru/news/44519/ (“Crypto Framework”).

The Crypto Framework aims to lay down general principles for the circulation and exchange of digital currencies in Russia with a particular focus on cryptocurrency exchanges. The Crypto Framework builds upon the Federal Law No. 259-FZ “On Digital Financial Assets, Digital Currency and Amendments into Certain Statutes of the Russian Federation” dated July 31, 2020 (“Crypto Law”) that has drawn the line between digital financial assets (“DFA”) and digital currencies. While DFAs were brought under the regulation of the Crypto Law, the digital currencies and the exchange thereof were left largely unregulated (apart from the ban to accept digital currencies as payment for goods, services, or work). For more details on the Crypto Law, please refer to this publication: https://www.buzko.legal/content-eng/russia-introduces-cryptocurrency-law.

The Government has set February 18, 2022, as the deadline to develop the legislation implementing the concepts from the Crypto Framework. Given the broad scope of the proposed legislation and the high complexity of the subject, we expect to see the first drafts of the legislation no sooner than within the next several months.

Regulation of Crypto Exchanges

The Crypto Framework, for the first time, proposes to regulate the activities of crypto exchanges in Russia. It introduces the following roles:

  • Exchange organizers, which must be Russian banks with universal (full) banking license (“Exchange Organizer”);
  • Exchange operators (“Exchange Operator”), including P2P exchanges and traditional exchanges (“P2P Exchanges” and “Traditional Exchanges" respectively); and
  • Clients.

Notably, the Crypto Framework allows local and foreign crypto exchanges to operate on the Russian market, subject to certain conditions.

Therefore, foreign cryptocurrency exchanges can either (i) establish a legal presence in Russia and operate as a local crypto exchange or (ii) operate in the form of a representative office of a foreign crypto exchange.

Requirements for Local Crypto Exchanges

The Crypto Framework introduces two types of local crypto exchanges:

  • P2P Exchanges, which are allowed to buy and sell digital currencies to their clients for fiat money or digital currencies. P2P Exchange acts only on its behalf and in its interest; and
  • Traditional Exchanges, which can carry out orders of their clients and facilitate P2P transactions.

The requirements for each type of exchange are almost the same:

  • a Russian legal entity; 
  • that complies with local AML/KYC rules (particularly the Federal Law “On Countering the Legalization (Laundering) of Proceeds from Crime and the Financing of Terrorism”); 
  • has the appropriate amount of share capital (the amount is not defined yet);
  • is registered in the Register of Digital Currency Exchange Operators, indicating the type of exchange;
  • fulfills security system requirements (applies to Traditional Exchanges only);
  • has rules for the exchanges approved by the authorized body (such is not defined yet);
  • has a bank account or electronic wallet opened with the Exchange Organizer;
  • has technical integration with the digital currency exchange system of the Exchange Organizer.

Requirements for Foreign Crypto Exchanges

Foreign Crypto Exchange must:

  • have a representative office in Russia;
  • have technical integration with the digital currency exchange system of the Exchange Organizer;
  • an agreement with the Exchange Organizer establishing a ban on the withdrawal of client funds from a foreign exchange to bank accounts or electronic wallets other than the bank account or electronic wallet of the client with the Exchange Organizer. The agreement also must provide for the provision of all necessary information about the client’s operations to the Exchange Organizer;
  • not act as foreign exchanges for offshore legal entities, the list of which is approved by the Ministry of Finance of Russia;
  • have a permit or license of the exchange in its jurisdiction allowing operations with digital currencies (if required by applicable law).

Role of Exchange Organizers

The Exchange Organizer is a kind of chief administrator of the entire system of digital currency exchange. Its key duties are controlling transactions, movement of funds and digital currencies, storing information about transactions, and identifying qualified investors. The transaction on a cryptocurrency exchange is not supposed to be completed if the Exchange Organizer does not approve it.

The Exchange Organizers also monitor operations on the blockchain, including information from the Internet and the DarkNet. The Framework proposes to use the “Transparent Blockchain” service from Rosfinmonitoring for such monitoring.

There can be several Exchange Organizers, and each must have its digital currency exchange system.

Customer Journey

The Crypto Framework goes as far as proposing the customer journey that should look like this (also see the scheme below):

  1. The Exchange Organizer identifies the сlient.
  2. The сlient opens an account with the Exchange Organizer. In most cases, points 1 and 2 are already completed since clients already have accounts with their bank of choice.
  3. The exchange identifies the сlient.
  4. The сlient opens an account with the exchange.
  5. The client creates an order, and the exchange informs the Exchange Organizer about the cryptocurrency wallet of the client who plans to make a transaction and the transaction details.
  6. The Exchange Organizer checks the order for possible connections with illegal activities.
  7. Upon review, the Exchange Organizer confirms the possibility of the transaction to the Exchange Operator.
  8. After receiving confirmation from the Exchange Organizer, the Exchange Operator executes the corresponding order and transfers the digital currency to the client’s cryptocurrency wallet.
  9. Fiat funds are debited from the bank account or electronic wallet of the client and are transferred to the bank account or electronic wallet of the Exchange Operator (or vice versa). The movement of fiat funds is carried out exclusively on the bank accounts or electronic wallets of the client that the Exchange Operator opened with the Exchange Organizer. It is not clear at this time whether foreign exchanges must open such bank accounts with local Exchange Organizers.
  10. The Exchange Organizer’s information system for exchanging digital currencies creates a record of the transaction performed, indicating the unique ID of the digital currency wallet and the amount.

When making transactions with fiat funds on a foreign exchange, the client must indicate to the Exchange Organizer the unique ID of the client’s wallet used for operations on such a foreign exchange.

Fiat settlements on a foreign cryptocurrency exchange must be made exclusively using the client’s bank accounts or wallet opened with the Exchange Organizer.

We note that the contemplated customer journey is rather provisional and presented here for illustration purposes. It will likely be improved in the actual legislation since it already misses a few critical steps, such as the funding of the exchange account.

Next Steps

As outlined above, the Crypto Framework provides basic rules for regulating the circulation of digital currencies in Russia. If the regulators indeed move forward as fast as planned, we expect to see more detailed regulations in the near future. We will be publishing updates in English on this page on our website: https://buzko.legal/crypto-regulation-in-russia. If you have any questions, feel free to contact Roman Buzko at roman.buzko@buzko.legal.

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