General context

The statutory regulation of cryptocurrency in Russia is yet to be made compatible with the current dynamics of digital assets.

In 2014 the Central Bank of Russia warned potential users about the absence of legislative control over virtual currency. The Central Bank stressed the fact that transactions with cryptocurrency are based on speculative premises and thus involve a substantial risk of depreciation and financial losses. It was also mentioned that due to the anonymity of cryptocurrency issuance, users may become unintentionally involved in illegal activities such as money laundering and terrorism financing.

This position was later supported by the Bank in 2017 when, despite admitting the increasing interest in cryptocurrencies in Russia, it was pointed out that the circulation and the usage of cryptocurrencies as well as any financial instruments nominated or associated therewith poses legal and technological risks.

In 2018 the president of Russia instructed the government to determine the definition and status of cryptocurrency, as well as to introduce relevant registry and taxation systems. As a result of the said orders, on 20 March 2018 a draft Law on Digital Financial Assets was introduced to the State Duma. It contains regulations of the mining process, defines the pecuniary status of cryptocurrency, crypto wallets and tokens. So far the draft is still being negotiated in parliament.

Cryptocurrency in bankruptcy

Before the introduction of the draft Law on Digital Financial Assets, the status of cryptocurrency was unclear and, therefore, from a practical standpoint, it has been debated whether cryptocurrency may be included in a bankruptcy estate.

In a recent case of individual insolvency, a financial administrator proposed to include the debtor’s crypto wallet in the bankruptcy estate. According to the documents on file, the financial administrator considered cryptocurrency to have a high pecuniary value and, thus, the exclusion of the debtor’s crypto wallet would violate creditors’ rights (see case #А40-124668/17-71-160, Arbitrazh [State Commercial] Court of Moscow).

The trial court dismissed the financial administrator’s claim. The court concluded that cryptocurrency appears to be some sort of symbols, which unlike the usual means of exchange, “appear literally from the Internet.” The trial court found it difficult to determine whether cryptocurrency is some sort of asset or information on decentralized servers. Therefore, from a Russian law standpoint, the court was unable to consider the insolvent debtor as the owner of the crypto wallet. The court referred to the abovementioned position of the Central Bank and stated that due to the lack of statutory regulation and the indefinite status of cryptocurrency, the court was unable to apply an analogy of the law to cryptocurrency and include it in the bankruptcy estate.

The financial administrator filed an appeal. On 15 May 2018 the court of appeal set aside the ruling of the trial court and included the crypto wallet in the bankruptcy estate. The appellate court obliged the debtor to provide the financial administrator with the relevant access key (password).

According to the resolution of the appellate court, cryptocurrency should be regulated as the object of civil rights on the grounds of the broad interpretation of the Civil Code of Russia and, hence, should be considered a pecuniary asset. The appellate court stated that as far as the debtor himself is able to freely use, possess and dispose of the crypto wallet, his status should be similar to the owner thereof. Notably, the appellate court stressed the fact that any asset of certain economic merit should be included in the bankruptcy estate unless otherwise directly provided for by the bankruptcy law. In this context, the appellate court concluded that the approach taken by the trial court deprived bankruptcy creditors of the right to have their claims satisfied in full.

In another case, an individual debtor filed a bankruptcy petition seeking relief from debts incurred due to unsuccessful mining operations of cryptocurrencies. However, the court refused to declare bankruptcy and to commence the sale of assets procedure. The court concluded that the debtor, acting in bad faith, deliberately increased the amount of outstanding loan obligations by being involved in operations with cryptocurrencies, official usage of which as a means of exchange is prohibited in Russia (see case #А70-15360/2015, Arbitrazh [State Commercial] Court for Tyumen Oblast). The appeal court reversed the decision indicating the lack of evidence of the bad faith of the debtor.

In yet another case, a financial administrator of an individual debtor filed a motion with the trial court to receive documents required to evaluate the debtor’s financial state. The financial administrator requested information on transactions with digital assets, such as bitcoins and litecoins. The court granted the motion and obliged the debtor to provide the financial administrator with the requested documents (see case #А13-15648/2015, Arbitrazh [State Commercial] Court for Volgograd Oblast).

Practical conclusions

Before the introduction of the draft Law on Digital Financial Assets, the courts tended to deny the pecuniary status of cryptocurrency. However, since bitcoins, tokens and other cryptocurrencies are likely to be determined as digital assets under the new law, it seems like the courts will now treat such assets as a part of a bankruptcy estate.

Despite this trend, the forthcoming enactment of the said law will require subsequent changes to the Russian Bankruptcy Law and the Law on Enforcement Proceedings as the selling-out procedure of digital assets is still ambiguous. As Russian law is yet to determine the specifics of the pecuniary status of cryptocurrency, the acquisition of or investment in the latter may entail certain risks for both the creditors and the debtors.