The State Duma proposed to introduce a crypto ruble, the Ministry of Economic Development of the Russian Federation has taken the initiative to introduce “regulatory sandboxes,” Japan is tightening the rules for ICO registration and intends to imprison the former Mt.Gox CEO for fraud, and the G20 countries have signed a declaration according to which they should solve cryptocurrency regulation- and taxation-related problems in 2019. DeCenter talked about these and other news with Maria Agranovskaya, a Managing Partner at GRAD Legal and Financial Advisory Services.

Maria Agranovskaya

Managing Partner and Head of the Fintech, Blockchain, and Cryptocurrency Practice at the Moscow-based GRAD Attorney Bar

The Crypto Ruble Is Not Important. Regulatory Sandboxes Are

On January 15, Chairman of the State Duma Committee on the Financial Markets, Anatoly Aksakov, has said that despite the decline in prices for cryptocurrencies, the blockchain technology remains relevant for the global economy. Therefore, the emergence of the Russian national cryptocurrency is a matter of the next 2–3 years. The introduction of a crypto ruble will depend on the speed and breadth of the blockchain spread in the Russian economic system, Aksakov said. So far, all financial technologies in Russia are being tested as part of the Central Bank’s “regulatory sandbox,” but after the adoption of the law on digital financial assets, the implementation of projects to create various digital currencies will become more defined and systematic.

Maria Agranovskaya believes, however, that for now, this is unrealistic. “It is not worth waiting for a crypto ruble in the near future. Many countries are trying to introduce a ‘duplicate’ of official money in the form of a digital currency. Moreover, these coins are not like cryptocurrencies: in such situation, the blockchain is not needed at all. Therefore, ‘digital government money’ and cryptocurrencies are not the same thing. In this context, these concepts are not identical. Moreover, there is no direct need that would lead to the introduction of a crypto ruble.”

A few days earlier, on January 11, the Ministry of Economic Development stated that it was going to launch experimental legal regimes to test new technologies, including the blockchain. Existing laws, according to representatives of the Ministry, often hinder the introduction of innovations into everyday life because business is afraid to use new developments. Regulatory sandboxes, which were presented in the draft law “On Experimental Legal Regimes in the Field of Digital Innovations,” will help improve the unadjusted legal system.

Maria Agranovskaya is confident that it is these “sandboxes” that will become the basis and one of the main experiments to help improve the industry with the latest technologies. “I think that the law on the sandboxes from the Ministry of Economic Development and Trade is much more important and effective than the adoption of poorly-prepared, artificially-composed contradictory projects that were presented at the end of last year. Sandboxes are more efficient for working out digital law mechanisms in regulating our practice since they interact with the regulator, including the tax authority, and with the Central Bank.”

Indeed, the sandboxes bill implies the organization of the prototype of the new regulation, which will create a “space where you can do something that is not quite allowed yet.” More specifically, the Ministry of Economic Development proposes to create experimental groups for systems based on big data, blockchain, neurotechnology and artificial intelligence, quantum technologies, robotics, wireless communications, virtual and augmented realities, and other latest developments. “This will reduce legal uncertainty, speed up the launch of new solutions on the market, sift out non-working models, and reduce costs," the Ministry said. In addition to legal easing, the bill guarantees no increase in tax burden for participants in the experiment.

And this, according to lawyer Maria Agranovskaya, is the right decision. “After all, new laws can be passed on this basis. Interaction with regulators is much more important than the adoption of any new laws. The regulator should use the existing legislation and interpret it under the circumstances and emerging trends, improve it for the benefit of the development of new projects. Again, many of these projects, let’s say, their investment component needs finalized terminology from a technological point of view. But this also applies to artificial intelligence, robotics, and so on. As for the attracting of investments and crowdfunding, this is a more general concept. They need regulation. But considering how this regulation is currently taking place, in my opinion, it seems to work more efficiently through sandboxes and the formation of normal practice that contributes to the adoption of balanced acts. The main thing is that the regulatory sandboxes can really work in the conditions of our country.”

A similar legal regime in the form of regulatory sandboxes is currently in effect from April 2018 in the space of the Central Bank of the Russian Federation. The program is designed for new financial technologies and services and has already gained popularity among companies such as Sberbank—which has tested the service with the ability to remotely control the power of corporate client accounts to conduct operations in bank branches. ICO organization services underwent trialing successfully, too.

Main Moving Trend

According to Maria Agranovskaya, the primary trend of the past year in the global community to regulate the crypto industry, which continues today, is the emergence of a “right practice,” which is organized together with the regulator of small, mostly island states. Countries are trying to support the development of the ICO market and other types of fundraising, the industry of technology projects and innovations, to promote investment in their country.

“Russia should focus on world experience and apply existing developments in the regions. To me, this seems acceptable and adequate because there were many successful and unsuccessful practices in promoting projects. Based on this, experience has been formed—thanks for what it is—and now it is important to analyze it correctly. Accordingly, last year, the market maintained a certain tendency toward normalization. Yes, cryptocurrency prices fell, but many serious players are seeking regulation, licensing,” says Agranovskaya.

The lawyer notes that there is a tendency toward the inevitable globalization of cryptographic regulation. Without drawing up clear laws, normal technological development is impossible, and the adjustment has helped the industry not to die. After all, the amount of money that is in the crypto industry (as of this writing, the total crypto market capitalization is about $120 billion) is not comparable with the volumes that exist in ordinary financial markets, therefore, of course, regulation is necessary.

“I want to note that these two markets, cryptocurrency and stock, should not compete. The hype is now spinning around digital assets, which is harmful to the ‘seriousness’ of the industry, but is good from the marketing side because it’s hype that draws attention to problems and needs in the market. The society is now drawing lessons from what happened earlier when many thoughtlessly entered the crypto industry. This movement, however, gave way to the entrepreneurial initiative: the real needs of the market for various instruments, including crowdfunding tools, became apparent,” Agranovskaya thinks.

Worldwide Regulatory Crypto Practice

At the end of last year, the G20 countries signed a declaration, according to which in 2019, they should solve the problems of regulation and taxation of cryptocurrency. After all, the attitude of states to cryptocurrencies—despite the ten-year existence of the leading digital asset, Bitcoin—is still ambiguous. For example, Estonia is tightening the regulation of cryptocurrencies following the requirements of the E.U.’s “Fourth Money Laundering Prevention Directive,” although initially, the country treated the digital assets favorably.

Maria Agranovskaya believes that Estonia is good for registering cheap and simple projects, and, for example, Switzerland is an expensive, but stable country. “The choice of jurisdiction depends on the needs of the projects themselves: how the idea will be implemented and realized, what the clientele is, where the cash flows will be going. The choice, for example, between Singapore and Switzerland depends on the market for this company. Although, both jurisdictions are very interesting in terms of stability and attractiveness.”

The story of Malta is also interesting, says the lawyer. Back in July of last year, the local Parliament passed three bills in the third reading that concern cryptocurrencies and blockchain. The island country, according to local authorities, is fully prepared to work with crypto projects from around the world. But Maria Agranovskaya believes that “this story [Malta’s jurisdiction] is not yet ready, it is very raw.” Another peninsular area, Gibraltar, is now too regulated. Last year, there were attempts to legitimize cryptocurrencies finally. “Gibraltar is just as interesting as it will be,” the lawyer says.

At the end of last year, Singapore’s regulators amended the rules for conducting ICOs, and now the campaign organizer must obtain a license to provide services, their recommenders are to be licensed by financial consultants, and the exchanges are required to pass checks of the Monetary Authority. “It is not surprising that Singapore is constantly working on laws. The state is regularly developing. It can be said with confidence that their legal practice has already taken shape, and local authorities are adopting amendments, making new recommendations. But again, look: all this is based on existing legislation. Singapore will be good for projects that provide financial services,” explains Agranovskaya.

Taxation of the cryptocurrency industry remains one of the most pressing issues. Although Bitcoin can be used already to pay taxes in several states of the United States, large mandatory payments to the state treasury are killing businesses in many countries. In Japan, the companies that hypothetically would like to develop in this state and attract Japanese money cannot afford this because of high taxes. “In addition, we should not forget that projects that are located in Japan should have their main activity in this country. The Japanese market is regulated, perhaps, stronger than the rest. There is a tendency that local managers of regulated institutions are prone to tightening the rules and regulations for the cryptocurrency industry,” says Maria Agranovskaya.

The expert’s comment on the regulation of the digital assets market in Japan underlines the Financial Services Agency’s new standards for ICOs that oblige all participants in the initial coin offering to register. In addition, the Japanese authorities intend to imprison the former executive director of Mt.Gox, Mark Karpeles, for ten years over embezzling user funds.

Commenting on this news, Agranovskaya noted that the theft of money occurred in a cryptocurrency world with a specific course, which has now changed. “How are we to return the money, based on what parameters? This is a big gap in regulation, the problems of which are not fully resolved. Crypto crimes are punished depending on their nature. Besides, the Criminal Code has not been canceled. Fraud is fraud. But to prove that you had something, and it was something that was stolen, and to assure that it was done by illegal means is quite difficult due to the lack of legal tools, and here, of course, you need a specific, clear vision and understanding of a story,” reflects the lawyer.

Regulation Affects the Market, and the Market Affects Regulation

According to Maria Agranovskaya, the abovementioned rule on the mutual influence of the regulator and the market on the industry as a whole is central to the formation of the structure, which will then be written down in the regulatory acts of digital law. Therefore, the joint work of all structures of the crypto industry will help form a high-quality regulatory framework for the digital industry.