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Bitcoin and law

How crypto-currencies are regulated in Russia and what approaches have already been tested abroad.

Although the subject of crypto currency is actively discussed in Russia at least since 2013, the legislative base in this area still stands still. In a few years, only a few letters from the Central Bank and the Federal Tax Service appeared, but neither a fundamental law or a presidential decree nor a government decree has yet been issued.

There are several reasons for this. First, the government does not fully form a common position with respect to the crypto currency as a phenomenon. Officials of different levels periodically speak out for and against , and then disavow their statements. Secondly, the domestic legal thought has not yet determined which norms of Russian legislation will regulate this industry. Thirdly, both our judicial and foreign practices have not developed a single approach either.

figured out how lawyers in Russia and abroad are among the bitcoins , what were the precedents and how they have to be wrested out by the judges, who have to deal with the cases of crypto-currencies without having a special law on it.

Question of terminology

The key question determining the attitude of the state to bitcoin is the correct definition of its legal nature. Whether it is possible to consider crypto currency as money or as a monetary surrogate is currently unclear. For example, the state approach to the taxation of operations on the crypto currency is directly influenced by what they consider – property, fiduciary (fiat) money, electronic money, currency, financial instrument or securities.

The resolution of this issue directly affects the further fate of the crypto-currency in Russia – whether they will receive the status recognized by the state or will be banned, and also how tax authorities, prosecutors and courts will behave, regulating affairs with bitcoins.

The position of “bitcoin is money”

Supporters of this position note the similarity of some functions of the crypto currency with cash. Bitcoin can be a means of payment for goods and services, and, for example, the US law specifically stipulates that it can be a payment unit in which wages are paid.

The American Commission on the Investigation of Financial Crimes (FinCEN) announced that operations for the exchange of any crypto-currency for fiat money should be regulated in the same way as transactions for exchanging fiat money among themselves. Thus, legal entities involved in the movement of funds with crypto-currencies had to obtain licenses. Some of them could not do this and had to close down.

The Cabinet of Ministers of Japan recognized that bitcoins are fiat money, have “functions similar to money,” and decided to develop a regulatory framework to fully integrate crypto-currencies into Japan’s banking system. The National Regulator for the crypto currency was the Financial Services Agency of Japan, which regulates issues of the national currency issue.

A similar position in January 2014 was taken by the Tax Service of Singapore.

This means that, at least in some countries, the crypto currency has become a unit of calculation that is recognized and accepted by various entities in the market.

The position “bitcoin is a money surrogate”

Opponents of the perception of bitcoin as ordinary money note: for money, it is characteristic to be a product of the state order. The state issues emission, providing a certain value for money and establishes their obligation as a legal means of payment.

Proceeding from this definition it is obvious that bitcoin is not a monetary instrument, since it is not emitted by the state, it does not guarantee its value and does not establish the duty to accept it.

The ratio of regulators of national financial markets to crypto-currencies is also very diverse. Now the prohibition of bitcoins or deals with their participation exists, for example, in Norway, Thailand, India and China .

In the vast majority of jurisdictions, bitcoin is not recognized as an official means of payment and does not apply to money. For example, the Dutch tax service does not consider bitcoin as a legitimate means of payment, and the Central Bank of Denmark announced in 2014 that bitcoin is not a currency. From the point of view of the Danish regulator, “it has no real trade value compared to gold or silver and is more like glass beads.”

In Russia, the current legislation does not explicitly allow bitcoin (and any other crypto currency) to be attributed to money. The relevant provisions of the Constitution , the Civil Code and the Central Bank Law determine that the introduction and issue of other money, other than the ruble in the Russian Federation, is not allowed.

The position “bitcoin is electronic money”

In international law, the definition of electronic money has been fixed since 1998 in the report on electronic money published by the European Central Bank. The definition is as follows: “Electronic money is broadly defined as the electronic storage of monetary value on a technical device that can be widely used to make payments in favor of not only the issuer but also other firms and that does not require the mandatory use of bank accounts for transactions , but acts as a prepaid instrument to the bearer. ”

Supporters of the theory that the crypto currency is a kind of electronic money, indicate that, just as electronic means of payment, bitcoins do not have issuers. They can be considered as cash, which was previously provided by one person to another, without opening a bank account, for the performance of monetary obligations.

Opponents of this point of view point out that the main difference between the crypto currency and electronic money is the absence of an intermediary in the calculations that verifies the payment. At payment by bitcoin the calculation is carried out from one subject to another directly.

The position “bitcoin is a financial instrument”

A financial instrument under Russian law is a security or its derivative. And the derivative is a contract, one of the implementation options that provides for the obligation to buy or sell securities, currency or goods.

On this basis, the underlying asset of a derivative financial instrument can be currency, commodity, securities, as well as various statistical indicators, indices and percentages. Accordingly, if bitcoin is not a commodity or a security, it will not be the underlying asset for the derivative financial instrument.

The position that bitcoin could be a financial instrument was taken by theGerman Ministry of Finance. In 2013, it passed a resolution recognizing crypto currency as the official means of payment, which, in accordance with German law, led to the qualification of bitcoins as financial instruments.

At the same time, the law clearly delineates this status with the status of a legitimate means of payment – this property has not yet received bitcoin in Germany.

Thus, the next task in this chain is to decide whether bitcoin can be a commodity or a security.

The position “bitcoin is a commodity”

A commodity is a material or non-material object that can be used in an economic sense. In a number of countries, bitcoin is considered just as a property or a commodity and is taxed. The legal systems of these countries qualified bitcoin as an inexhaustible non-material commodity with a value determined at each particular moment in time.

The Australian Tax Service does not consider bitcoin as money or foreign exchange, equating operations with its participation to barter arrangements. The Israeli Tax Service published a draft circular in 2017 , in which the virtual currency is qualified as having a nominal value of a digital unit, which can be used for barter or for investment purposes.

The Commodity Futures Trading Commission of the United States (CFTC) in September 2015 recognized bitcoin as a commodity.

The position “bitcoin is a security”

Securities Russian law recognizes documents that meet established requirements and certify obligations and other rights. Supporters of this position proceed from the belief that the release of bitcoins can be compared with the issue or issue of non-documentary securities.

This approach was demonstrated by the Securities Securities Commission (SEC), pointing out in the report on the investigation of the situation with the blocking start-up The DAO that issued on ICO tokens should be treated as securities regardless of what is called what investors invested in and how it works.

Opponents of this position argue that the bitcoins do not contain mandatory rights and are not a monetary obligation. They proceed from the fact that the relations that are contained in the bitcoin transaction are closest in nature to the barter contract.

Since the issue of bitcoins is carried out on the Internet in a decentralized manner, this does not correspond to the concept of securities issue. The issuer is each participant of the payment system, since the transaction with bitcoin creates a new block in the transaction chain. Proceeding from this, bitcoin does not meet the signs of securities and is not such.

The position “bitcoin is property”

The Internal Revenue Service (IRS) of the United States has issued guidance on the taxation of transactions with bitcoins and other virtual currencies, according to which crypto currencies can be qualified not only as a currency, but also as property , and as an investment instrument (for example, long-term investments in equities).

In accordance with this guide, for the purpose of paying federal taxes, bitcoin is considered as property, upon sale of which the owners will profit from capital gains rather than profit from exchange rate differences. The following rules apply: payment of wages in crypto-currencies is subject to income tax and salary tax, and payments in crypto-currencies to independent contractors are taxed on self-employment.

Other approaches

Until 2014, crypto-currencies were not regulated in the UK and were classified by the Royal Tax and Customs Service as “single purpose vouchers “, subject to taxation from 10% to 20%. In 2015, the government announced a series of measures aimed at creating an enabling environment and supporting business, which should change the status of the crypto currency.

The Central Bank of France has determined that bitcoin can not be considered a real currency in accordance with French law, but it can be considered as a “payment service”.

Evolution of approaches to the regulation of crypto-currency in Russia

The positions of Russian agencies on the issue of market regulation of crypto-currencies have not yet settled and often contradict each other. The General Prosecutor’s Office in February, 2014, at a special meeting, attributed bitcoins to money surrogates, whose circulation in the country is prohibited.

On the same day, Rosfinmonitoring issued an information message in which it indicated that the anonymity of payment and other features of the use of crypto-currencies caused their active use in criminal activities. Although this prohibition did not contain any prohibitions, it became a kind of reference point for other departments.

In the subsequent statement of the Central Bank, the crypto currency was first equated to money surrogates, and the next day it was explained that they did not prohibit it on the territory of the Russian Federation. In March 2017, the Central Bank held a meeting with the Ministry of Finance, the Ministry of Economic Development and the power departments, at which the participants expressed their support for the approach to classify Bitcoins in a digital product. In September 2017, the Central Bank recalled its statement three years ago and again warned of the risks of using ICO and crypto currency.

The relationship with the bitcoins of the Ministry of Finance was the most complicated. In March 2016, the agency drafted a bill that provided for theintroduction of a criminal penalty for the issue, purchase and sale of crypto-currency. However, in July of the same year, the Ministry of Finance changed its anger to mercy and proposed to equate bitcoins with foreign currency, although such a classification would still not allow Russia to pay for goods and services in bitcoins.

The Federal Tax Service in October 2016 issued an explanation of its position on the turnover of the bitcoins, in which it stated directly that transactions involving the acquisition of crypto-currency using foreign currency, securities or currency of the Russian Federation are currency transactions. The procedure for their implementation is established by a special law on currency control, and therefore they must be effected through residents’ accounts opened with authorized banks.

The FTS at the same time took a clear position that the law on the Russian Federation does not contain a ban on conducting operations using crypto currency. The tax paid attention to the fact that although the introduction of monetary surrogates in Russia is prohibited, the law does not officially define the concepts of “money surrogate”, “crypto-currency” and “virtual currency”.

At the same time, the discussion in Russian authorities seems to be close to completion. This is indicated by a number of official statements made by representatives of the Ministry of Finance and the State Duma in August 2017. Deputy Finance Minister Alexei Moiseyev proposed classifying crypto-currencies as a financial asset and attributing it to “other property” of citizens, but only “qualified investors” will be able to trade it.

Chairman of the Association of Regional Banks “Russia” and the State Duma’s Financial Market Committee Anatoly Aksakov said that in autumn of 2017 the parliament could pass a bill on crypto-currencies in which the definition of bitcoin as a financial instrument will be fixed and a regulator of this market will be appointed.

As a financial instrument, crypto assets will be defined-it was not specified, but lawyer Valentin Kislyi drew attention to the fact that the flexibility of the digital environment makes it possible to combine different nature of obligations. For example, the ZRcoin token can combine all three properties that are characteristic of tokens: stock option, certificate and credit commitment.

Judicial practice in Russia

Judicial decisions on cases involving the circulation of crypto-currencies are currently few – literally a few. These first attempts at justice to understand the unsettled sphere of public relations attract increased attention.

Agreeing to the use of virtual currency, the transaction participant must take into account the negative attitude of Russian vessels to it. In one case four contracts of loan of title signs were concluded, concluded between two citizens: on them the plaintiff handed over 1,5 thousand title signs of a certain type to the defendant, and the defendant undertook to return them in a larger volume – 1696.2 characters. The creditor, referring to the non-return of money by the borrower, asked to recover from him the amount of debt in US dollars.

In support of his claims, he referred to the fact that one title in the WebMoney Transfer system is equivalent to one US dollar. However, the St. Petersburg City Court in its appeal dated March 17, 2016 No. 33-4472 / 2016 came to the conclusion that there were no loan relations between the parties at all.

The court refused to consider Webmoney the subject of the transaction, pointing out that “virtual money is not a matter of the material world and does not exist in a physically tangible form.” Having evaluated the evidence in the case, the court came to the conclusion that the claims of the plaintiff about the return of funds to him are not subject to satisfaction.

This court decision has several far-reaching consequences. If this practice continues in the future, then such conclusions follow from it:

– Virtual money can not be the subject of a loan as money;

– The use of the term “title to ownership” is inadmissible to virtual funds, since the loan involves the transfer of funds to the borrower.

Russian courts are currently refusing to extend the virtual currency legislation on electronic funds. In the appellate rulings of the Moscow City Court of 28.03.2014 in the case No. 33-7246 and the Belgorod Regional Court of 07.08.2012 in case No. 33-2273, it is indicated that the same Webmoney title plates can not be regarded as electronic funds. This is due to the fact that an organization issuing a virtual currency is not its operator, which can only be a credit institution.

For the sake of justice it is worth noting that there are still some cases of admitting admissible proofs of statements obtained through the use of the WebMoney system by courts. In this case, the judiciary assesses the concluded contracts as unnamed and applies the rules of the loan agreement to them.

Ambiguous opinion has developed in the courts and about sites that disseminate information about crypto-currencies. In 2015, by decision of the court Roskomnadzor blocked seven sites about bitcoins. The court concluded that crypto-currencies are money substitutes. The Sverdlovsk Regional Court subsequently reversed this decision , but the practice of blocking sites continued.

The St. Petersburg City Court in February 2017 issued an appellate ruling No. 33а-2537/2017. On the site bitcoin.info, the court found “information about the electronic currency bitcoin”, according to which bitcoin was regarded as a “virtual means of payment and accumulation”. The court banned the dissemination of this information on the territory of the Russian Federation, after which Roskomnadzor blocked the site.

The most famous case to date was dealt with by the Sixth Arbitration Appeals Court in Khabarovsk. According to the materials of the case, in 2014 a purchase and sale contract was concluded between AS Abramov AS and LLC “Victoria”. The question of crypto-currencies in the process appeared when a third party was brought to it – the Singapore company Magna Trading Ltd.

As stated, Abramov took from a foreign company 5 million Singapore dollars to buy real estate in the Khabarovsk Territory, but did not give the money in due time. In court, Abramov said that he returned the loan by transferring it in a crypto currency.

This argument was judged by the court critically, because he “does not confirm the fact of payment of money to the defendant under the loan agreement”. Later, the decision of the Arbitration Court of the Far Eastern Okrug that came into force was finally fixed: the currency and the virtual currency are not regarded by the courts as money.

Litigation abroad

Darnitskiy District Court of Kyiv, examining case No. 753/599/16-cent, in March 2016, ruled that the disputed agreement on which the crypto-currencies had been settled was not a service contract, but a barter agreement.

Under this agreement, services were performed, but the payer did not receive payment and demanded to protect his rights in court. The court decided that it is impossible to make payment by crypto currency, since bitcoins are not a currency, but digital products. From the point of view of the court, bitcoin as digital products “is not the subject of the material world, has no individual characteristics and can not be the object of judicial protection”.

A significant decision in 2015 was made by the Court of Justice of the European Union. In accordance with the decree, the operations for the exchange of traditional currencies for bitcoins should be free of value added tax, since the EU rules prohibit the levying of such a tax from operations on currency exchange, banknotes and coins.

In practice, such a court decision equated virtual currencies to traditional ones with respect to taxation. The court recognized crypto-currencies not as goods or services, but as a payment instrument (tender). Thus, he took bitcoin to “contractual means of payment” (contractual means of payment).

Internet addresses that are used to transfer bitcoins and store them from the point of view of the court are a kind of bank accounts. The EU Court ruled that bitcoin differs from ordinary money only in the absence of its physical expression.

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