Director of the Central Bank's Legal Department Alexei Guznov: We are against institutions that might organize the issuance of a cryptocurrency in Russia

A bill on digital financial assets was passed at its first reading nearly two years ago, but the text has undergone considerable changes since then. Alexei Guznov, Director of the Central Bank of Russia's Legal Department, tells Interfax in an interview about what consensus the Russian authorities have reached regarding the circulation of cryptocurrencies in the country and what new terms and concepts have appeared in the bill. He also talks about other draft legislation of importance to the Central Bank.

Question: Work on amendments for the second reading of the digital financial assets bill has been in progress for more than a year. What other changes have been prepared for the second reading? The latest version aired by deputies envisaged allowing the use of closed-blockchain crypto tools, and, with the Central Bank’s consent, the use of open-blockchain tools. What stage has that discussion reached?

Answer: The bill passed at its first reading back in 2018 was geared towards defining digital assets, and hardly contained any rules for their circulation. We had done a lot of work to revise the text by the autumn of 2019. The main issue that arose at the time was whether digital currency ought to be included in the scope of regulation. And this proved to be a stumbling block.

What is in the bill now? Firstly a definition of digital financial assets. It’s a type of digital rights associated with financial obligations, and also requirements proceeding from securities turnover. In a sense, the construction is similar to uncertificated securities because they are also an electronic form of existence of legal and economic essence. The differences between uncertificated securities and digital financial assets lie in the method for organizing accounting and circulation.

Besides, the updated document defines a distributed registry of financial assets, a distributed registry being an independent original information system.

It was also important to us that digital financial assets do not overlap with those areas already regulated by law. The bill defines digital financial assets and at the same time draws a dividing line to prevent digital financial assets from mixing with securities and non-cash money.

The bill also determines the main infrastructure of the organization of the issue and circulation of digital financial assets, information system operators, and the requirements on these institutions and their heads. For example, an operator of an information system should have the competences and actual capabilities to develop and maintain the infrastructure of an information system issuing digital financial assets. An operator of digital financial assets exchange has to have a financial strength reserve, the amount of net assets of such legal entity cannot be less than 50 million rubles. The bill also states the main obligations of both types of operators, in particular, what they are obligated to do from the point of view of information security, internal control systems, what services they provide to people who plan to issue digital financial assets and plan to conduct transactions with these assets.

Q.: Who will regulate the operators of information systems and exchange operators?

A.: Bearing in mind that it is an element of the financial market, such institutions – information system operators and exchange operators – will be recognized by non-credit financial organizations, at least the project envisages that, and, consequently, they will be supervised by the Bank of Russia.

The problem of cryptocurrency and crypto assets in general is that it is not very clear how to ensure in their regard the enforcement of court decisions on recovery proceedings. For example a husband spends all the family income on crypto assets and keeps them in a crypto wallet. There is a dispute over the property, for example as part of a divorce, and the court rules yes, all income has to be split. The court is even prepared to issue a writ. But I’d like to see a bailiff try and do anything on the basis of that writ. Where does he go? What does he take? How does he make the person who holds the keys to the crypto wallet open that wallet? Theoretically, it can be done, but the owner can just as easily say oh, I forgot, oh, I lost them. Unfortunately a great deal of crypto assets are already in wallets, the keys to which have bene lost, and that causes problems by itself. We could not neglect this, so the bill proposes obligating operators of information systems where digital financial assets will be issued to provide access to them if need be. Technologically, as our colleagues say, it is possible, although maybe it is somewhat against the ideology of the infamous bitcoin, which is based on anonymity and on the fact that no one except for the owner can receive access to the relevant hypothetical property in the form of bitcoins, which are in some wallet.

Besides, the bill resolves the problem of the issue of secured digital financial assets. Thus, a decision on the issue can state that digital financial assets are issued as secured by the property of their issuer or third parties, a description of the collateral and the conditions of the collateral.

Q.: Has a consensus been found in the bill regarding cryptocurrency and its circulation?

A.: The Central Bank's position remains unchanged. We believe that there are large risks in legalizing circulation of cryptocurrency, both from the point of view of financial stability and the system for countering laundering of income, as well as from the point of view of protecting consumers' rights. Therefore while discussing the bill, we opposed this, so to say, instrument being legalized as an object of circulation. What did our opponents propose? For example, considering cryptocurrency as equivalent to foreign currency and regulating it in an equivalent manner, that is applying the rules there were in the 90s within the framework of the law on currency regulation and on currency control. There were other proposals too.

Now we have come close to a consensus with the market and other participants of the discussion. It may consist of no one banning ownership of digital currency. That's both absurd to a certain degree, and, well, basically there's no need for that; at the end of the day it not drugs or weapons. But from the point of view of functioning of the financial system and the system for protecting the rights of consumers, legalization of launching and, which is the main thing, organizing circulation of cryptocurrency, is a risk that isn't work taking. For that reason, in the bill there is a direct formulation of a ban on launching and also organizing circulation of cryptocurrency, and liability is introduced for violating this ban.

Q.: So you are against the option to convert digital currency into rubles or a foreign currency?

A.: The Central Bank is against institutions which would organize the issuance of cryptocurrency and facilitate its circulation. However, if an individual owning, for example, bitcoins conducts a deal in a jurisdiction which does not place a ban on this, the Central Bank can hardly restrict them in this.

Q.: But there won’t be that opportunity in Russia?

A.: The problem here is in the fact that the right that was being developed up to recent times - this right is above all a national one. What we're encountering is extraterritorial regulation of relations, and presence of cryptocurrency is also in large part extraterritorial. Therefore, it is very important, on the one hand, that legal regulation in the territory of the country does not hinder development of new technology and, on the other hand, that in terms of technology we can implement restrictions which we consider important to introduce.

I think we are now approaching a text which can combine all these conditions for the system of regulation's functioning.

Q.: Are you hoping the bill on digital financial assets will be approved in the second reading in the State Duma's spring session?

A.: I'm hoping every session. I'll choose my words carefully: there are certain chances of getting the wording that would enable the bill to be approved.

Q.: The Central Bank recently said its regulatory sandbox contained a pilot project for the issue and circulation of digital rights using the blockchain platform of the company Norilsk Nickel. The company’s head and co-owner, Vladimir Potanin, said back in 2018 that the company was launching its own stablecoin, backed by metals. Do the amendments for the second reading contain the term stablecoin?

A.: As a term, no. This is not necessary from my point of view. It is a technicism, like the word cryptocurrency. We use somewhat different concepts. Like I said, there is a possibility of issuing digital financial secured by property. The stablecoin meets this parameter. This project, implemented in the Central Bank’s regulatory sandbox, is largely based on the approaches outlined in the bill on digital financial assets

Q.: The latest version of the law that limits the state’s expansion in the financial sector contains a standard limiting the Central Bank’s ownership of banks to five years. Does the Central Bank still agree with that proposal?

A.: We’ve submitted our own comments. I think a rigid time limit might not be quite right from the point of view of balance of interests. How economically beneficial would the sale by the Central Bank of a stake in a bank by a specific date be for society? Let’s imagine there are no institutional investors willing to buy a bank from the Central Bank.

Q.: There are, but they are government-related.

A.: Yes, but all the same it is more important to us, and this has been declared, that a bank that has undergone financial recovery ends up in the hands of a market owner, and that the government’s stake in it decreases. Safeguarding competition at this stage is about setting up private organizations that, in terms of their opportunities, are commensurate in scale with government-related organizations. And the idea of selling them in five years come what may could result in only a government-related institution being able to buy them. Either that or shares would have to be sold at a big discount. That would be either be economically unviable or it would mean the objectives that the bill is design to protect will be missed. We are talking about protecting competition, but this measure would be at odds with protecting competition. So the proposals will be discussed further.