The use of digital currencies as a means of payment on the territory of the Russian Federation will continue to be prohibited. Under the proposed regulation, digital currencies are considered solely as an investment vehicle.

The bill defines the requirements for exchanges and exchangers (operators) that can carry out activities related to the organisation of the circulation of digital currencies. For this, a special register of operators will be created. 

The requirements relate to corporate governance, reporting, information storage, internal control and audit, risk management system and the amount of funds. The activities of such companies will be licensed and controlled by an authorised body determined by the Government. Foreign cryptocurrency exchanges will have to register in Russia to obtain a license.

The Bank of Russia will be able to stipulate the characteristics of DFAs that may be acquired by non-qualified investors and the threshold of investment in such assets.

Further, all transactions with DFAs may be conducted only through digital financial asset exchange operators, which can be banks and exchanges, as well as other legal entities, provided they meet specific criteria.

The draft law also introduces the definition of digital currency that may not be a means of payment. Moreover, digital currency holdings, receipt and transfers will be deemed to be lawful only on their declaration.

Any organization can issue digital tokens on the site, the CBR said.

“This was one of the largest sandbox projects. We studied in detail the new business model and its relevance to market needs. An important detail of the service is the use of hybrid tokens, which makes it easy to adapt to the needs of business and consumers and provide flexible solutions for attracting investments. Based on the results of the piloting, the Bank of Russia proposed to include in the draft federal law 'On Digital Financial Assets' the provisions necessary for the introduction and development of such decisions in the emerging digital assets market, which were supported by government bodies and businesses, ”said Ivan Bank, Director of Financial Technologies Department Zimin.

A report by the Parliamentary Gazette, the official publication of the Russian Parliament, explains that Russian President Vladimir Putin has instructed that a regulatory framework in respect of cryptocurrencies should be ready by 1 July 2018.

Two draft bills on the regulation of the cryptocurrency market have been developed.

The first one was drafted by the Central Bank of Russia and deals with alternative ways of attracting investment, such as crowdfunding, while the second was put together by the Ministry of Finance and concerns digital financial assets.

The two documents establish the legal basis for initial coin offerings (ICOs) in Russia and regulate, among other things, the turnover of the cryptocurrency market and mining.

The two drafts concur on the main elements around the regulation of cryptocurrencies, but a key contradiction remains between the two offices on the status of cryptocurrency exchange operations, according to the Chairman of the State Duma Committee for the Financial Market Anatoly Aksakov.

"The Central Bank is against the legalisation of this type of digital currency because, in this case, citizens can start actively investing in crypto assets, without having considered the potential risks," Aksakov explained.

Under the Central Bank's draft law, only commercial organisations and individual entrepreneurs can attract investments in crowdfunding.

This means that non-profit organisations will not be able to attract investments, according to Venera Shaydullina, a senior lecturer at the Department for Legal Regulation of Economic Activity at the Financial University.

Foreign start-ups that have not registered a branch in Russia will also be barred from taking part in the process, as the Civil Code stipulates that they are not legal entities.

Aksakov indicated that both draft bills will be presented to the State Duma, the lower house of the Russian Parliament, this month.

The draft law, called the Federal law "On digital financial assets", outlines the requirements for projects that launch ICOs and for investors who want to participate in the token sales.

The draft law contains a number of definitions.

For example, "digital financial assets" are assets in electronic form created using encryption devices and include cryptocurrencies and tokens, which may not be used as official means of payment.

"Mining" is defined as a business activity that aims to create cryptocurrency or validation (to receive cryptocurrency as a reward), which means that companies and individual entrepreneurs are allowed to engage in this activity.

Yet, the draft law does not set any requirements to mining activity.

The draft law does not provide an investment limit for qualified investors, but caps investment at RUB50,000 (£625) from each non-qualified investor participating in a single token issue.

Token regulators are also required to disclose various information before the offering, including:

• information on token Regulator and its beneficiaries;
• the token owners’ rights and the procedure of their exercising;
• the price of the issued tokens or the procedure of its determination;
• information on formation and access to digital wallets used for the storage of data on purchased tokens;
• the main purposes of token issue and spending of funds raised at the ICO; and
• the rules of maintenance of digital transactions registry.

Advertising the release of tokens is also prohibited, according to the draft law.

Finally, the law allows to trade digital financial assets for other digital financial assets, cash and other assets, but only through special exchange operators.

Trading through such operator, being a trade organiser will be subject to additional regulations to be adopted by the Bank of Russia.

The draft still has to be approved by both houses of the Russian Parliament, the State Duma and the Federation Council, and be signed by the president to become effective law.

Sergei Shvetsov cited the "unreasonably high risks" involved in cryptocurrency investment as a reason for the proposed measure, adding: "We cannot give direct and easy access to such dubious instruments for [investors]".

As such, the Russian financial regulator will be working with the General Prosecutor's Office to close websites offering these services – a crackdown that should extend to "all cryptocurrency derivatives".

He said:

"We consider all cryptocurrency derivatives to be a negative development on the Russian market and do not consider it possible to support it, and will even assume measures to restrict potential operations with such instruments made by the regulated part of the Russian market. Meanwhile, we will make efforts aimed at closing external websites that allow Russian citizens to acquire such assets with the General Prosecutor's Office."

This development is the latest episode in a debate over cryptocurrency in Russia, with various high-profile entities giving conflicting views as to what the future will hold in terms of regulation.

It also follows the recent announcement by the Russian Association of Cryptocurrency and Blockchain to send a draft law to the Russian Parliament on the legalisation of initial coin offerings.

Meanwhile, Russian President Vladimir Putting has also said that cryptocurrencies were risky.

"The usage of cryptocurrencies carries serious risks. I know the Central Bank's position on that," he said.

However, he acknowledged that new technology solutions in the banking area should not be unduly restricted.

"We should use advantages provided by new technology solutions in the banking sphere. It is important at the same time not to make extra barriers; required conditions should be created instead for further growth and improvement of the national financial system."