Brian Zimbler is a lawyer and senior partner at international law firm Morgan Lewis in Moscow. He advises on cross-border investment and financial matters, primarily in emerging markets. Zimbler was assisted in the writing of this article by Dmitry Dmitriev and Andrey Ignatenko, associates at Morgan Lewis.

In this opinion piece, the authors examine the seeming thaw in attitudes towards blockchain and bitcoin in Russia.

Blockchain technologies are attracting increased interest from Russian financial institutions and IT companies, and may be poised to overcome skepticism from Russian regulators. This is perhaps not surprising, given Russia’s prominence in the technology sector, with over 120,000 local programmers and continuing growth in e-commerce and online activities.

However, certain legal obstacles may still pose challenges for promoters and developers of cryptocurrencies and other blockchain applications.

Initial resistance to bitcoin

The Russian authorities have given attention to potential uses of cryptocurrencies for several years, but until recently the focus was on anti-corruption and anti-money laundering measures, legal compliance and risk management. The Russian central bank and Ministry of Finance have played leading roles in consideration of these issues.

Russian law currently states that the ruble is the national currency, and that the issuance of other currencies or “currency surrogates” on Russian territory is prohibited. Some Russian officials have argued that cryptocurrencies should be treated as surrogates, but this point remains controversial.

In 2014, the central bank issued a formal letter noting that the trading of goods or services for “virtual currencies,” as well as the conversion of such currencies to rubles or foreign currencies, could be used for money laundering and terrorist financing. While this warning did not have the force of law, it served to put Russian banks and companies on notice that transactions with cryptocurrencies are likely to be subject to special scrutiny.

Softening stance

In early 2016, the Russian authorities appeared ready to go further in moving against cryptocurrencies. Reportedly, the Ministry of Finance prepared draft amendments to existing laws that would impose administrative fines and criminal penalties for the issuance, purchase or sale of bitcoins. These would include fines of up to 2.5 million rubles (about $39,000 at current exchange rates) for financial organizations, and imprisonment of up to seven years for senior managers.

Certain other Russian governmental bodies expressed support for these proposals, including the Ministry of Economic Development and the Investigative Committee, a federal agency with authority over criminal investigations.

However, it appears that the Russian government has decided not to pursue these amendments, for several reasons. First, it was reported that certain key players such as the Ministry of Justice and the federal Prosecutor’s Office did not support the proposed imposition of criminal liability. Some observers argued that existing Russian laws would be sufficient to deal with criminal activity, without establishing a separate rule based solely on use of cryptocurrencies.

Second, Russia is now exploring the potential advantages of the relevant technologies behind bitcoin and other cryptocurrencies. Accordingly, some Russian authorities are working on new legal reforms to provide a legitimate basis for the use and development of cryptocurrencies.

Proponents include Herman Gref, chairman of Russian banking giant Sberbank and a former Minister of Economics and Trade. Gref has argued that if Russia bans cryptocurrencies, it will risk falling behind in innovations related to blockchain and similar technologies. Other Russian officials have also expressed interest in blockchain, and further progress is expected on this front in 2017.

Testing blockchain

A concrete example of Russian interest in blockchain technologies is Masterchain. Commencing in fall 2015, the central bank established a working group to study blockchain technologies and explore potential practical applications, with emphasis on financial markets. This led to efforts to establish a prototype distributed database for financial messaging.

In 2016, a consortium including Russian payments company Qiwi, Accenture and four Russian financial organizations began testing blockchain technologies in cooperation with the central bank. The work of the consortium resulted in Masterchain, an ethereum-based blockchain prototype for the validation and exchange of client data and transactional information.

In contrast to ethereum, Masterchain is a permissioned (private) database of chained blocks of data that sees the central bank act simultaneously as an ordinary user in payment processing and a trusted administrator.

The next step may be to develop further prototypes. Central bank officials are currently examining two other…

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