The headlines of all Russian analytical reviews heralded 2018 as the year of the digital economy. Clearly, this was largely spurred by the Digital Economy programme adopted by the Russian Federation. Now, in mid-2019, we can try to measure whether the expectations came to fruition and to trace the key digital economy trends.
Hopes for a digital economy breakthrough were prompted not only by greater investment in the relevant sectors as such but also by the pro-active approach taken to making and adapting laws regulating digital asset turnover and digital market players. Russian experts perceived commercially viable laws as a key driver of the digital industry’s development in close contact with international organisations.
Initially, great enthusiasm was invested in bills on digital financial assets and crowdfunding so they made quite a splash, but the discussion waned substantially afterwards, casting doubt on whether any appropriate legislative regulation would be offered at all in the near future. Incidentally, this might not be such a bad thing after all. The bill put forward last spring was actually quite “rough and ready” and extremely general in nature so, if it had been passed as proposed, it would have inevitably driven a need for changes in a vast number of current laws and regulations. In other words, the spring bill carried the risk of triggering more questions than providing answers, thereby aggravating legal uncertainty.
On 12 March this year, a draft federal law (which was dubbed “On Digital Rights”) amending the Civil Code of the Russian Federation was passed at the third reading. These changes paved the way for further digital economy laws.
The new version of the Civil Code envisaged by the bill introduced the actual concept of “digital rights”, understood as special, in personam and other rights with content and conditions determined by the rules covering an information system compliant with law. The possibility of exercising digital rights or restrictions on exercising them may be realised only in an information system without reference to a third party.
When this law comes into effect (the intention is in October 2019), the circulation of digital rights, which was, of course, in place even without Russian legislative regulation, will acquire a legal framework. This should instill a certain confidence in both developers and investors, opening up the digital markets to many potential players. Digital rights will at last gain recognition and basic protection.
Another important planned amendment to the Civil Code includes recognising transactions conducted remotely by SMS or by completing online forms as valid, as well as electronic powers of attorney and ballot papers filled in online as legally significant. Regulation of Smart contracts is also introduced, these being essentially automated performance contracts (whether a sale and purchase agreement, a lease, services contract, etc.) and not recognised as independent transactions. The bill also legalises collection and processing of Big Data.
The State Duma is currently considering two other bills: “On raising investment through investment platforms” (regulating ICO and crowdfunding, as well as investment platform operators’ activities) and “On Digital Financial Assets”. Although they have already been submitted to the State Duma, both bills are really still in the development stages.
The bill “On Digital Financial Assets” passed at the first reading (it has been in the Duma’s hands since March 2018) but the version prepared for the second reading is somewhat different1, in fact somewhat better.
Initially it was a framework bill, offering regulation that was so inadequate that enforcement of the law was extremely doubtful. The draft law defined digital financial assets as property in an electronic format created using means of encryption. Two types of digital financial assets were established: cryptocurrency and tokens. Digital financial assets, including certification of ownership rights to them, were to be recorded in a special ledger of digital transactions (which we will call the Ledger). Yet the bill contained no precise definition of the concept of “cryptocurrency”, which would inevitably cause difficulty in deciding which cryptocurrency the law actually meant. What is more, cryptocurrencies were not recognised as legal tender.
The first draft of the law did, however, define mining, including in creation of cryptocurrency and/or validation of transactions for gaining a consideration in the form of cryptocurrency, as well as the concept of “token”, and did contain very general regulation of their issue. The bill determined that to issue a token is to raise finance and the right to tokens must be entered in the Ledger.
The first draft established that transactions to change tokens into roubles or foreign currency were only possible through a digital financial asset exchange operator that organises trading (on the basis of a licence from a stock exchange or trading system). A major role in circulation of digital financial assets was delegated to the Central Bank of Russia.
This first version of the draft law came in for serious criticism from businesses, experts and the legal community. The bill contained concepts that did not exist in Russian law (such as Ledger and validator); what is more, there was no legislative framework for creating them. Nor was there any official platform for exchanging cryptocurrencies. Under the rules of the bill’s first version, it would be virtually impossible to become a token issuer since a large set of documents was required, though precisely which documents was not fully determined. Most important, the given bill equated cryptocurrency with assets in a digital form, without recognising it as legal tender, making it impossible to use it for making payments and substantially restricting its capacity for circulation.
In the version of the bill prepared for the second reading (which was planned for this spring but has not yet gone through), the legislators tried to take into account the comments made by businesses and modified a number of the main concepts.
Digital financial assets are now defined as any rights recorded using distributed ledger technology (blockchain). The key difference in the new version is that virtually no attempt has been made to define cryptocurrency and the main focus is on tokens as a means for raising investments (though definition of the term “token” is not given either).
Tokens are described as accounting units analogous to securities in the digital space: tokens confirm rights to assets or participation in a company’s capital and play a technical role in digital asset trading. Tokens may also be secured by the property of the issuer or third parties.
Tokens can only be placed on special platforms holding a licence of a professional securities market player and entered on the Central Bank register (this condition also featured in the first version; yet there is no such ledger in place so far or any definition of a digital securities market player, come to that).
Also of interest is how mining is regulated: the bill now considers this not as a means for generating blocks in a blockchain for a fee but rather as an instrument for raising capital. For instance, tokens obtained through mining certify the right to participate in a company or to its assets. Yet the bill as prepared for the second reading gives no definition of mining, any more than it does of cryptocurrency.
Like the first version, the second version contains mainly framework rules, leaving the Central Bank to deal with practical issues (and not yet taking account of the FATF requirements that the concept of cryptocurrency be formalised and the measures specified for combating money laundering in the cryptosphere).
Even so, the second version of the bill is, in general, better balanced when it comes to definitions of the main concepts and digital assets market players, as well as the key operations, on the one hand, and the specific system of control and identification, on the other. Full legalisation of the market for digital assets in Russia is, however, still a long way off, though the first steps have, of course, been taken in this direction.
As for other notable trends, I would pinpoint cyber-security and personal data protection issues. We are currently seeing a steady increase in investment in projects to protect systems, networks and software applications against digital attacks. At the international level, these issues are constantly on the EAEU, OECD and ОSCE agenda, while national discussions focus on the need for certain business segments to switch over to domestic encryption systems.
May 2018 saw enactment of updated personal data processing rules set out by the GDPR. All companies with an international presence felt the need to make their businesses GDRP-compliant.
Moreover, quite a range of legislative initiatives passed in 2018-2019 were also triggered by security issues, the most recent, high-profile ones including the Russian Government’s November 2018 Resolution banning anonymous use of messengers. Messengers are only available to the person in whose name the mobile phone number is registered, while messenger administrators will be required to verify whether the user’s number is actually registered in their name.
Big data and scoring remain a pressing issue. More and more new methods and models are being proposed for collecting and processing available information (so-called Big Data technology) underlying quite a number of analytical systems that build important solutions for certain businesses (scoring technologies).
I would say that the most popular tool at the moment is credit scoring, whereby a client's creditworthiness is assessed automatically and not only with reference to their credit history but also depending on how often they post on the Internet, what they post and their social network behaviour. This helps identify their social standing, training background and qualifications, including from their vocabulary and speech profile in general.
I certainly see opportunities for extensive use of scoring in the marketing business. In the past, the key data used by scoring systems were primarily social and demographic (sex, age and marital status, region and district), whereas now, with all the types of mobile application on the market and with development of other technologies, there is a thick layer of additional information to be analysed (such as geolocation, social media activity, personal preferences, shopping behaviour, etc.). All these data help businesses identify and “process” their “would-be customers” with greater precision.
Another trend consists in on-going digitalisation of government services and roll-out of “smart city” programmes. On the one hand, the government encourages businesses to implement hi-tech processes and, on the other, it is itself an active consumer of new technology and digital R&D products. For instance, a new Rublevo-Arkhangelskoye smart neighbourhood project is being contemplated for construction in the west of Moscow (where a harmonious atmosphere will be created determining how residents interact with one another, with nature and with new technologies); the Tretyakov Gallery will operate a blockchain platform to digitalise its collection as part of a project dubbed “My Tretyakov”; the Novgorod Region has already launched a distributed ledger to monitor subsidised medications, while the Kaliningrad Region has applied this technology to regional social payments. In fact, Sberbank CEO Herman Gref predicts that use of blockchain technology by virtually all Russian industries is just one or two years away.
The digital industry’s on-going globalisation should also be noted. Technologies could be in equal demand all over the world (whatever their country of origin). In turn, this makes them bankable in various jurisdictions. And Russian companies are increasingly fitting into international alliances, building partnerships for the future. I have encountered this in a number of mandates we have handled for clients and such scenarios are on the rise, I am happy to say.
Finally, I would also like to mention an aspect that is likely to shape a trend in this industry over the next couple of years, i.e., digital ethics. Each year, we spend more and more time on social media sites. Users have to spend longer scrolling through their social media feeds, which is definitely a major distraction and frequently causes information overload. In this context, we cannot help but wonder how our use of web resources could be made more targeted and how to set our social media so that they become useful, rather than dumping any unwanted information into our private workspace. I believe we will even see digital ethics integrated into the education process in the coming years but, at this stage already, we should all be thinking about and remembering that we are not just consumers: we are also providers of social media content.
1Draft Federal Law No. 419059-7 “On Digital financial assets and amendment of certain legislative acts of the Russian Federation”.
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