Experts comment on the amendments regarding the confiscation of cryptocurrencies in Russia.
On July 7, Russian Prosecutor General Igor Krasnov announced that Russia would develop amendments to its legislation regarding the confiscation of digital assets that have become sources of criminal proceeds. According to Krasnov, cryptocurrencies have become increasingly used for bribery and laundering stolen budget funds, according to RBC Crypto.
The Federal Law on Digital Financial Assets already recognizes cryptocurrency as property for the purposes of enforcement proceedings in a separate article. Digital financial assets are already considered property under civil law and can be subject to foreclosure during enforcement proceedings, explained Dmitry Kirillov, senior associate in the tax practice at Bryan Cave Leighton Paisner (Russia) LLP.
The collection of fines and confiscation of property as criminal penalties are also provided for in the law on enforcement proceedings. However, it only details procedures for the collection of traditional types of property—for example, cash from bank accounts, securities from financial institutions, and the seizure of any other property directly from the debtor. Moreover, the collection of debtor's property from financial institutions is secured by administrative or criminal liability of officials of these institutions for failure to comply with court orders or writs of execution.
At the same time, the enforcement procedure for digital currency and digital financial assets is absent from the law on enforcement proceedings, and this aspect requires revision, Kirillov explained. He stated that it would be appropriate to recognize these assets as property for the purposes of criminal law and criminal proceedings. This would also simplify, for example, the initiation and investigation of criminal cases involving the theft of crypto assets.
The very concept of confiscation applies to digital assets even under the current criminal law. Currently, the list of items that can be confiscated is open-ended. Certain cases don't even require determining the owner, for example, if the cryptocurrency was the subject of a crime such as bribery, commercial bribery, etc., added Alexander Guskov, partner at Guskov & Associates.
He noted that the actual enforcement of the relevant court order and the confiscation mechanism remain unclear. In 2018, in a bankruptcy case (A40-124668/2017), the Ninth Arbitration Court of Appeal upheld the financial manager's arguments that the cryptocurrency should be included in the individual's estate. The debtor was then ordered to hand over access to the crypto wallet (password) to the manager. However, based on information in open sources, the order was never enforced.
“The main signal of this news is that law enforcement agencies have outlined their active vector of movement in relation to the search and seizure of crypto assets associated with crimes,” Guskov emphasized.
The law's introduction could harm bona fide individuals who store digital currencies on exchanges or regulated depositories—their digital currencies could theoretically be seized through these regulated entities, warned a partner at Guskov & Associates. He believes that criminal activity will most likely occur without regulated intermediaries, for example, using hardware wallets.
When it comes to directly foreclosing crypto assets, not only legal gaps but also the technical specifics of such assets can pose obstacles. If the debtor's cryptocurrency is stored in a crypto exchange wallet, it's possible that Russian law enforcement could somehow (for example, through legal assistance agreements) compel the exchange to transfer the coins. However, if the cryptocurrency is stored in the debtor's own wallet, due to the decentralization of its blockchain, there will be no one to compel except the debtor (for example, by charging them an enforcement fee), Kirillov explained.
Access to hardware storage is impossible without a password and recovery phrase. The confiscation mechanism in this case is unclear: cryptocurrencies have no single issuer, nor are there any registrars to whom one can appeal, recalled a partner at Guskov & Associates.
He proposed that the authorities avoid confiscation and instead, as a first step, create a transparent legal environment for cryptocurrencies. For example, unlike cash, the transaction history for every bitcoin is publicly available. Thus, a special state registry could be introduced that would identify “coins” that have become sources of criminal proceeds. All regulated market participants would refuse to accept payments with such a marker. Such databases already exist and are used by crypto exchanges.
