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RUSSIA: An Introduction to Russia

TECHNOLOGY: AN INHERENT PART OF RUSSIAN FINANCE

I. Russian fintech landscape in the spotlight 

Russia is a technology-driven country that maintains the strong trend for fintech unabated. This should be attributed to several factors: firstly, an extensive interest in technology-enabled solutions to the financial sphere steadily derives from both public institutions and business community; secondly, Russia is rightfully considered to be one of the leading global suppliers of IT specialists and has an opportunity to use prominent resources for scientific and applied research at the interface of finance and technologies.

Starting from the government initiatives, the Central Bank of Russia has taken significant steps not only as a regulator of the financial sphere, but also as an enthusiast for several fintech projects. The Central Bank continues with consistent implementation of the previously approved strategy and roadmap for financial technologies development for the period of 2018-2020. The main objectives set by the Central Bank with respect to the fintech support activities reflect the official view on the needs of the industry:

• Development of competition in the financial market;

• Increase of the availability, quality and range of financial services;

• Reduction of risks and costs in the financial sector;

• Increase of the competitiveness of Russian technologies.

Indeed, over the past several years technical innovations have caused tangible progress in the Russian financial sector. An illustrative example is a Central Bank-backed landmark of 2019: a System for Fast Payments (SFP). SFP is a backbone infrastructural project for establishment of an “all national banks-inclusive” money remittance system allowing individuals to make 24/7 instant, convenient (the sender can specify the recipient by only the recipient’s phone number) and cheap money transfers, regardless of which particular banks maintain sender and recipient accounts. Apart from payment services, the Russian regulator has made efforts in establishing regulatory sandbox for innovative companies, produced a financial marketplace and a single biometric identification system.

Pursuant to the work done in public-private cooperation, by late 2019 Russia, according to the Head of the Central Bank, is one of the most advanced countries in the world in terms of level of penetration of financial technologies. This view is supported by the Ernst & Young study Global FinTech Adoption Index 2019: the research recognizes Russia as a country in the top third in the world by the level of fintech adoption with a relevant index of 82%, against a global average of 64%.

Development of the Russian digital economy has obviously brought the attention of big international business into Russian fintech. One of the major announcements of 2019 is the establishment of a fintech joint venture by Alipay and leading local investors. According to the published statement, the endeavour will focus on providing digital payment services for Russian users.

We should also note that traditional banks remain one of the main drivers of fintech development in Russia by building technology advanced ecosystems and actively introducing new financial services and solutions. Examples may include Alfa Bank with its recent development of “Potok” - a platform allowing the public to provide funding to small businesses (a part of the startup was recently sold to a Fintech Capital Fund); or the state-controlled Sberbank, providing corporate clients with access to the bank’s financial infrastructure via Sberbank’s Fintech API, besides which the bank aims to launch its own crowd-lending platform “SberCredo” as well.

A trend for innovation in the financial sector has created fertile ground for the development of smaller-size private companies that introduce and implement fintech not only in banking and payments, but in other areas as well. A recently formed Russian catalogue of fintech startups reveals that the total number of early-stage industry participants exceeds 200 companies operating in various emerging fields of financial technologies. As witnessed during the active involvement of O2 Consulting, the key trend verticals are: online lending, blockchain-based solutions, payments / settlements, artificial intelligence and neural networks for finance, robotics for brokerage and asset management, crowdfunding / crowdinvesting platforms, insure-tech, and solutions for clients’ authentication/identification.

Expertise and the impressive developments of Russian innovators in the financial sector attract the attention of the financial communities in Europe, the Middle East, Asia, Latin America and the USA. Notably, IDC FinTech Rankings 2019 has ranked several Russian fintechs among the top 100 world’s largest suppliers of financial technologies and services.

Thus, at the turn of the decade the Russian fintech sector continues to expand by demonstrating sustainable development, along with claiming international recognition and leadership. Another reason for that might be Russian fintech regulation. It is not overly cumbersome and attempts to reflect the emerging challenges adequately. One can see below examples of the spheres that are likely to continue being the directions for fintech expansion in Russia in 2020.

II. Overview of regulatory environment 

Crowdinvesting. Crowdinvesting is commonly understood as the provision of funds by multiple private investors to a business project involving, as opposed to crowdfunding, future financial (property) return for the investors in an amount dependent on the success of the project. Until quite recently, such models of social relations remained unregulated in Russia, but currently it falls within a regulatory framework established by a Federal Law “On Raising Investments via Investment Platform” entering into force on 1 January 2020 (Investment Platforms Law).

The Investment Platforms Law provides that only those Russian registered companies that are duly authorized by the Central Bank in a special capacity - as investment platform operators (Operators) – are allowed to organize and operate investment platforms, i.e. online facilities that could be used for investment arrangement purposes.

The concept of investment platform functioning is quite straightforward: Operator (i) concludes an investment attraction services agreement with the person raising capital for its project, and (ii) allows this person to use the investment platform in order to conclude investment agreements with private investors. All the contracting goes online, via the platform; investments could be made only by cashless funds.

The following ways of investing through online platforms are within the scope of the Investment Platforms Law: provision of money loans; acquisition of issued securities placed using an investment platform; acquisition of ‘utilitarian digital rights’ (UDR). UDR provide the right to claim transfer items of property, intellectual property, or provision of services.

According to the law, the amount of funds that a single person attracting investments can raise within a year through investment platforms is limited to RUB1 billion, while the amount of funds that one individual can invest within a year through investment platforms is limited to RUB600 000 (this limitation does not apply for qualified investors).

Cryptoassets. Over the last two years the sphere of blockchain-based cryptoassets has been - and, perhaps, remains to be - among the hottest topics for Russian legislators, government authorities and the advanced business community. Despite an abundance of discussions and initiatives, the area remains so far insufficiently regulated in several core aspects, although recent developments cannot go unmentioned.

Specifically, besides the previously addressed Investment Platforms Law, which inter alia has employed the idea of utilitarian digital rights (thus making it possible to conclude that ICOs have a certain regulation now in Russia), the legislative year of 2019 has been firstly marked by enactment of the Federal Law N 34-FZ (the Law on Digital Rights) amending the Civil Code of the Russian Federation.

The Law on Digital Rights has introduced a concept of digital rights to the Civil Code by equating digital rights to property. In fact, digital rights are currently listed as a type of asset among objects of civil rights, side by side with non-documentary (i.e., book-entry) securities and non-cash money.

The legislator’s approach for determining digital right is reference-based: in order to be considered as digital, the right should be named as digital by a special-purpose law. Thus, the Law on Digital Rights does not answer to such practical issues as whether, for instance, cryptocurrency represents a digital right (i.e., whether it represents an object of civil rights in terms of the Russian Civil Code). Formally, cryptocurrencies, such as Bitcoin or Ethereum, are not currently regulated by any special law, and thus remain legally unsettled.

As of the end of 2019, the said special law concerning cryptoassets - named the Law on Digital Financial Assets - remains in a status of draft legislation. The draft Law on Digital Financial Assets distinguishes between cryptocurrency and digital tokens, recognizes both of them as property, but does not recognize them as legal tender in the Russian Federation.

Thus, while the already enacted Investment Platform Law brings the concept (or, more accurately – an analogue) of certain digital tokens into the legal field, cryptocurrencies do not have any clear regulation at the moment. This situation brings difficulties for businesspeople, government authorities and courts in addressing issues or disputes associated with the practical use of cryptocurrencies, but still does not force them to exclude cryptocurrency from actual economic turnover.

For example, in one insolvency case the court assessed the legal nature of cryptocurrency and resolved that it should be treated as property for bankruptcy purposes, despite the fact that the Civil Code does not explicitly identify it as such. Consequently, the court has held that Bitcoins should be included into the insolvency estate. There are certain criminal cases where the crypto-related crime have been accepted for investigation and further prosecution in Russia. Another remarkable example is that in late 2019 the Russian Federal Tax Service registered a legal entity with a contribution of cryptocurrency to its nominal capital. Although this does not legally mean any formal acknowledgement or create legal precedent, the spread and variety of socio-economic relations connected with usage of cryptocurrency have de facto formed an official approach that cannot be characterized as prohibitive.

Online lending. As a general rule, it is permitted to raise funds from the public and carry out lending activity on a regular basis only after obtaining a banking licence from the Central Bank, since such activity is traditionally considered to fall under the regulation of banking operations.

At the same time, what could be of interest for lending-focused fintech companies is that legislation provides for a special regime which can be characterized by reduced regulatory burden and lighter treatment from the Central Bank: subject to certain restrictions it is possible to operate a lending business under the legal framework of microfinancing organizations (MFOs).

All MFOs are divided into two categories: microcredit companies (MCCs) and microfinancing companies (MFCs). All MFOs (i.e., both MCCs and MFCs) are allowed to lend limited sums of money to individuals and businesses; all MFOs are required to have a membership in a self-regulatory organization (SRO); all MFOs must comply with the Central Bank’s basic standards and provide the Central Bank with financial reports on their activity. At the same time, there is a difference between MCCs and MFCs:

• MCCs are small MFOs that, as a rule, are not subject to the Central Bank’s direct supervision. The main requirement for an MCC is to form and maintain certain financial reserves; monitoring of compliance with the said requirement falls within the competence of SRO. MCCs are allowed to attract funds only from their shareholders and third-party legal entities, raising of funds from third-party individuals is prohibited; the maximum size of a microloan that MCC can lend to an individual is RUB500 000.

• MFCs can be considered as larger MFOs. MFCs are required to have their own capital not amounting to less than RUB70 million; their activity is subject to audit requirements and the direct supervision of the Central Bank. MFCs are allowed to attract funds from their shareholders, third-party legal entities and individuals (in the latter case the amount of investment should not be less than RUB1.5 million); the maximum size of a microloan that an MFC can lend to an individual is RUB1 million.

Furthermore, fintech companies might be particularly interested in the recent innovation of the legal regime for MFOs: from now on, both MCCs and MFCs are allowed to carry out identification of their borrowers remotely (i.e., without the borrower’s physical presence). Previously remote identification was available to MFCs only, but the overall trend for digitalization has made online lending accessible for smaller MCCs as well.

Payment services. The Federal Law “On National Payments System” (the Law on NPS) sets out a rather detailed legislative framework with respect to payment services. Supervision over the sphere of payments and issuance of specific subordinate regulations is within the competence of the Central Bank.

In accordance with the Law on NPS, national payment system participants are: payment systems operators; payment infrastructure operators (divided among processing, clearing and settlement centres); electronic money operators (these should be credit organizations, including non-bank credit organizations which are entitled to perform transfer of funds without opening bank accounts and related banking operations); and money transfer operators (these are the Central Bank, credit organizations and VEB.RF – a state corporation).

Revealing the existing regulation concisely, cashless payments could be carried out by banks and - what could be of interest for fintechs innovating in the payments arena - by non-bank credit organizations that can perform cashless payments without bank accounts opening in the form of transfer of electronic money, i.e. using e-wallets. Under the Law on NPS, the right to perform (process) transfers of electronic money is subject to the obtaining of the status of electronic money operator.

New legislative developments in the sphere of payments were introduced in mid-2019. Particularly, the Law on NPS was supplemented with a specific regulation and requirements for the activity of foreign payment systems operators. Pursuant to the amendments, the Central Bank has established a register of foreign payment systems operators; the registry application should be submitted through a Russian subdivision of the foreign payment system operator. Another legislative change provides that within the Russian Federation territory receipt of electronic means of payments issued by a foreign payments service provider is possible only subject to the establishment of contractual relationships between the said foreign payments service provider and Russian money transfer operators. Besides that, the Law on NPS now provides for certain rules with respect to operations of payment aggregators (acquirers), as well as provision of payment services through special mobile software (such as Apple Pay, Google Pay, Samsung Pay, etc.), which is covered by the newly added legal definition of “payment application”.

III. A few more things to consider 

Technological advances have, on the one hand, challenged the Russian jurisdiction to adopt a legislative approach favourable to innovations of the financial sphere, but on the other to effectively secure individual rights and interests from emerging dangers.

Generally, we could say that Russian law is moving towards finding a proper balance between public and private interests on the cutting edge of fintech, and certain issues have been already solved. At the same time, other important decisions – inter alia, on the legislative treatment of cryptocurrencies - are still expected to come.

Furthermore, this review does not claim to address all of the regulatory requirements that may be applicable or relate to a fintech business in Russia - e.g. anti-money laundering and counter-terrorism financing legislation, consumer protection, regulation of advertising and private data protection, etc.

Considering the overall dynamics of the fintech industry, entrepreneurs might find themselves interested in a practical oriented and informed adviser. O2 Consulting, a recognized leading supplier of legal services for the Russian digital economy, is well placed to deliver best results and solutions for local and international clients.