The new legislation may act as a catalyst for a crypto-evolution within Russian law.

By Andrew C. Moyle and Elizaveta Bacheyeva

On 18 March 2019, the Russian legislator took the first step in introducing the Russian civil law system to the new universe of digital assets. The Russian Civil Code was amended to include concepts of digital right and smart contracts, and the legislator also recognized digital rights as an independent object of civil law regulation.

By way of background, the Russian civil law system is based on laws rather than precedents, and — unless a particular concept is explicitly mentioned in the legislation — then the concept is non-existent for civil law regulation and falls outside any legal protection. Prior to these amendments to the Civil Code, digital assets or cryptocurrencies did not fall within any category of assets recognized by the Civil Code, and there was much uncertainty on how these digital asserts were regulated and how transactions with such assets should be structured. In one instance, a Russian court failed to recognize Bitcoin as an asset and, on those grounds, refused to include the Bitcoin in a debtor’s insolvency estate.

These amendments to the Civil Code will come into force on 1 October 2019 and will apply to all transactions made after that date. The new legislation is only the starting point for a crypto-evolution within Russian law, as the Russian legislator is currently considering two draft laws “On digital finance assets” and “On crowdfunding.” These laws would provide more in-depth regulation of cryptocurrencies, tokens, and investments through digital platforms.

What are digital rights?

Digital rights are defined as contractual and other civil rights that are specified in an information system (like Blockchain). However, not all rights can become digital rights, only those rights that are specified as such in the law. Russian law should also define the information system and how that system should work. No such legislation has been enacted yet, but, as mentioned above, two draft laws are under consideration.

Digital rights are not new species of civil rights, rather they are a new form of fixing civil rights. In that respect, digital rights are similar to securities, which are a non-documentary form of fixing certain rights to which the holder of such securities is entitled.

Any transaction involving digital rights will be made within the information system with no recourse to any third party, such as a public notary or any state registration body.

As a general rule, the information system will identify a digital right owner and will create rules for such identification accordingly.

Digital rights are now assets within the meaning of Russian civil legislation and are therefore subject to civil law regulation and protection. This shift is a big step forward in building a civilized market for digital assets and cryptocurrencies in Russia.

How smart contracts are regulated

New amendments to the Civil Code recognize that a transaction executed by electronic or other technical means will be deemed compliant with a mandatory written form, if such electronic or technical means allow the transaction’s terms to be reproduced on a tangible carrier and if the parties to the transaction can be identified and verified.

In addition, the Civil Code now recognizes that contracts generally can be self-executed, i.e., the obligations of the parties under the contracts can be executed automatically through electronic means without any additional actions or intent from the parties.

The above two changes introduced the concept of smart contracts to Russian law. Significantly, smart contracts are recognized not as a special type of contract (e.g., sale purchase agreement, service agreement, etc.) but as a means of performance of contract. This recognition means that smart contracts can be effectively applied in any kind of transaction in Russia.

This post was prepared with the assistance of Anton Vologin in the Moscow office of Latham & Watkins.