The topic of state regulation of cryptocurrencies is, from the legal point of view, one of the most significant and exciting. Elina Sidorenko, Doctor of Law and Director of the Center for Digital Economy and Financial Innovation, told DeCenter about what steps are needed to recognize cryptocurrencies, and what Pavel Durov did to minimize the legal risks of his project.
Draft Laws on Cryptocurrency in Russia
The draft laws currently lying in the State Duma resemble Krylov's famous fable "The Swan, the Lobster, and the Pike," where all the characters are pulling a cart in different directions. The law on digital financial assets, which denies the possible turnover of cryptocurrency on the territory of our country, does not rhyme at all with the bill that was introduced by Volodin and Krasheninnikov regarding amendments to Article 128 of the Civil Code of the Russian Federation. Let us take a closer look at all the inconsistencies.
Smart Contracts. The Problem of Concepts
It is extremely difficult to explain what a smart contract is. If we begin to define smart contracts as a contract, then tomorrow all courts will be at a deadlock and will not be able to make decisions, because the civil law does not provide for a single phrase that at least in general terms defines anything like a smart contract. There is only the concept of a contract (Article 421 of the Civil Code of the Russian Federation), which refers to the freedom of agreements, the possibility of drawing up a nonspecific contract with the phrase "if it comes to court, the court must take into account the contracts that are close by nature." We do not, however, even have such agreements that could explain the essence of the smart contract based on the draft law on digital financial assets. That is, if we launch a bunch of enticing projects, nothing will change, only a lot of papers will appear in courts on cases related to smart contracts.
The cryptocurrency community should sit down at the negotiating table and determine for itself the basic legal parameters. The first of them pertains to whether there will be a unified concept of cryptocurrency and how this concept will correlate with the definition of the State Duma. After all, to date, none of these laws give us a clear understanding of the subject matter. The law on settlement operations in Japan, which legalized cryptocurrency assets, provides different concepts for cryptocurrencies and tokens. Only Bitcoin is a second level cryptocurrency; all the rest are coins. And an individual legal regime has been drawn up for each definition.
In the sense in which the current draft laws are written in Russia, it is impossible to implement smart contracts, since we will not have any normal legal instruments.
Are Smart Contracts Really Contracts, or Just Electronic Forms?
A smart contract can be defined in one of two groups. Either make it a real separate contract (we sit down to write the next volume of the Russian Civil Code, which is unlikely to be successful). Or refer it to the category of simple electronic forms. If we recognize a smart contract as an electronic form, the digital manifestation of an existing contract, then several problems will be solved at once. The first is that this agreement becomes legitimate, the second is protection on the basis of the current Russian legislation, and the third is the opportunity to present a smart contract as electronic evidence. At the moment, no country in the world has a provision authorizing the entry and recognition of succession under a smart contract.
Cryptocurrency Hype and Pavel Durov
The fourth important component is directly related to the introduction of new digital technologies. They say a lot about the fact that the hype in cryptocurrencies and blockchain will disappear. In fact, it will simply change. Now we are dealing with a new mega-entity, which tomorrow will no longer be a blockchain as such. It will be a blockchain in symbiosis with artificial intelligence.
Interest in cryptocurrencies is constantly growing not only because of their value but also because of the hype that spreads around the projects themselves. After certain disputes and conflicts, there is a need to regulate the process from a legal point of view. However, the projects themselves can be tailored to the existing system, and in this case, the founders of the ICOs can avoid some problems.
So, for example, the idea of Pavel Durov with TON is very good. It can be realized already in the Russian legal field, although it is, unfortunately, being realized in another country. After all, we are dealing with tokens, which are sold for fiat. Durov did his utmost in order to minimize the risks associated with his ICO. He appealed to the SEC and demanded that experts carry out an analysis of his tokens. It is not officially said that these are securities tokens as of yet. This means that a very serious procedure for legalization must be carried out regarding these tokens. And Durov agreed to this procedure. The tokens will be released only after all the permitting documents have been drawn up. In fact, if this is all implemented as Durov conceives, then we have the makings of a very good story since the recommendations of the SEC of the US will open doors around the world.
Responsibility for Blockchain Technologies
In March 2018, the first tragic incident occurred in the USA, which, unfortunately, will not be the last. A machine controlled by a robot ran a man over and killed him. But how do we identify the perpetrators and those who will be held accountable? This case showed that you cannot implement what is not yet regulated. Blockchain is a rather dumb robot in its current stage, just like a taxi with artificial intelligence at the wheel.
The Lack of FATF Recommendations
No matter who says what about the possibilities of turnover of cryptocurrencies and fiat, there cannot be anything like this for one simple reason, and that is the lack of recommendations from the FATF. You can calmly exchange currencies until you come to an ordinary bank, which will show you that FATF recommendations now only deal with real fiat, cashless, or cash currencies. As a result, the bank requests information, asks to confirm the legality of the origin of the funds, and you cannot do so anywhere, not even in Switzerland. With the exception of Japan, which is now drafting laws on ICOs and their liabilities.
Legalization in Return for Anonymity
Mankind needs to decide on an important moral component. Are we ready to sacrifice the freedom that blockchain gives and the benefits that its legislative regulation grants? After all, if we are all for security, we need to identify cryptocurrencies and determine their owners. Are we ready for this? Otherwise, if we are not, then we will never legalize blockchain and tokens, because not one country in the world, or the world community as a whole, in the context of complications in relations, counter-terrorism actions and the growth of terrorism, will allow itself to enter this unregulated system.
Now many people say that cryptocurrencies feature in criminal activities like drug trafficking and pornography. So far, fortunately, cryptocurrencies are rarely used to finance terrorism, but that is only temporary. Because terrorists are traditional people, they prefer the most anonymous currency in the world—cash. Nevertheless, tomorrow we can observe terrorism financed with cryptocurrencies. And it will be scary.
Why Russia Can Become a Pioneer in the Legalization of Cryptocurrencies
In the crypto industry, there are many problems that need to be addressed. Many states choose the well-trodden path of letting someone apply the technology, and then repeat their approach and thereby reduce risks and expenses. Russia can become a pioneer in the regulation of the system, and we have all the necessary resources for this.
First, the country ranks 41st in the development of digital technology. The program of the digital economy of Russia of June 2017 contains a lot of provisions pertaining to cryptocurrencies and blockchain. This is encouraging, because, alas, our state cannot boast much about any other types of technologies.
The second component, which allows us to hope for our good future, is that no country has seriously advanced over the past year on the issue of real legalization of cryptocurrencies.
Thirdly, the geopolitical situation. The presence of Russia between Europe and Asia allows our country to assume all the risks associated with the interaction of these two completely different worlds and, possibly, become a platform for negotiations.
Questions That Scare the Regulators
A unique derivational mechanism will allow solving serious economic integration issues. For example, integration within global communities, such as the EAС. Why not introduce a proprietary digital unit here? The Eurasian Economic Commission itself already speaks about this quite a lot. There is a but, however, as all countries that are members of this union have no single program, unified standards, or B2B platforms as of yet. The same model can now be developed within the framework of the BRICS, within ASEAN and in many other directions. The derivative inherent in this essence must inspire us.
Recently, the first meeting on digital currencies was held in the OSCE, where three main issues were raised that scare most states. The first is the legalization of criminal proceeds, the second is the protection of personal data, and the third is the loss of jobs. The introduction of the digital economy will indeed lead to the fact that many people will lose their jobs. However, at the same time, 4 new vacancies will be assigned to each remote workplace. This will undoubtedly be another economy, and we will develop it.