Clever Geek Handbook

Legal cryptocurrency exchange project





The task is to create a legal cryptocurrency exchange through which you can get crypto from an individual and pay it in rubles to a card / account in a Russian bank. At the same time, it is mandatory to have legal grounds for this, to provide supporting documents and not to withhold personal income tax.



Potentially, the project may be of interest to operators of exchangers from the gray zone, projects for settlements with freelancers, international companies for implementing salary projects in Russia, financial consultants (including premium banking managers), traders - to any individuals and teams, who there is a need to partially or fully legalize cryptocurrency income.



To technically implement the project is real right now, the scheme is working despite possible gaps and risks. In fact, nothing will change with the adoption of the law on the regulation of digital assets , which may be adopted in the near future. In the draft law currently available, the cryptocurrency market remains virtually unregulated, all exchange requirements apply only to tokens with one issuer. And therefore, in the light of the adoption of this law, we are probably waiting for changes in the tax, administrative and criminal codes, as well as some other laws and by-laws, which will be designed to limit cryptocurrency operations as much as possible. However, this is not a tangible prospect.



Disclaimer . A project should not be seen as a business plan or guide to action. This is a study in which authors are interested in a possible legal scheme for the interaction of participants.



Working cases



Exchanger as an advertising tool



The fact of the exchanger launching in itself is an excellent info guide. The main advantage of working through a legal exchanger is that the end customer may not have accounts in payment systems and exchanges, not go into the nuances of currency legislation and not fight with banking services, he always has supporting documents and can legalize income from the sale of cryptocurrency.



The exchanger can work as a channel for attracting an audience and conversion to other sites. Under certain conditions, it becomes possible to legally advertise the service on Facebook and Google.



Exchanger as a private club



An exchanger initiated by a single investor or a group of investors in order to meet the needs of a limited circle of persons will make it possible to partially or fully legalize income - i.e. to receive the necessary supporting documents, submit a 3-personal income tax return and pay tax.



This may be your own scheme with full control over companies, assets, accounts and chains of operations. The risks associated with the human factor can be worked out and kept to a reasonable minimum.



Thanks to a foreign company, the purchase and sale of cryptocurrencies is carried out at competitive rates directly on connected exchanges, where corporate accounts with extended transaction limits are opened.



Participants of the scheme and their activity





1. The client initiates a transaction and sends a crypt to the Operator





2. The operator issues a loan agreement to the Client with an obligation on its part to pay off the debt upon request and the right to transfer the debt.



3. The client sells the loan to the Partner





4. The Partner pays the Client money in rubles to a card or account in a Russian bank.



5. The Partner issues confirming documents to the Client , sends documents on the transaction electronically, instructions for the bank in case of any questions, recommendations on filling out a tax return - all that is necessary for legalizing income and submitting 3-personal income tax for the year.



6. A partner presents a loan to the Operator for repayment - sends a loan agreement, assignment agreement and Client data with a request to pay off the debt.



7. The operator pays the Partner money to the currency account in a Russian bank.



End customer



An individual, a seller of cryptocurrency, a resident of the Russian Federation.



Foreign company (Operator)



Legal entity in cryptofriendly jurisdiction (Estonia, Malta, etc.). He has several accounts in banks and payment systems for settlements with partners and corporate accounts on exchanges for the purchase and sale of cryptocurrencies. According to the laws of its jurisdiction, it is free to buy and sell cryptocurrencies and reflect all operations in accounting. In order to carry out crypto-fiat exchange operations and provide services to individuals, it has a corresponding license or accreditation (for example, Providing services of exchanging a virtual currency against a fiat currency - for Estonia). The company buys cryptocurrency from end customers, and subsequently sells it on the exchange at the most favorable rate.



The Operator’s website has a client’s personal account in which end customers register, upload documents for KYC, see the current exchange rate, create exchange requests and download the necessary documents. The exchange rate is formed manually or automatically, taking into account expenses (exchange rates, commissions for transactions in the blockchain, bank commissions, exchange differences) and pledged margin.



After creating the application, the client transfers the cryptocurrency to the company's wallet and receives a loan agreement. The operating company is ready to repay the loan agreement at any time immediately after confirming the transaction on the blockchain. Payment can be made both in a foreign office, and through a partner in Russia. It is possible to implement the terms of the scheme and loan agreement in such a way that payment is made only after passing through the entire chain of transactions and receiving money by a Russian company.



Russian company (Partner)



One or more legal entities in the Russian Federation, ordinary LLCs without any special licenses, permits or accreditations. The main activity is the provision of information and advisory services on financial intermediation. He has several accounts with banks and payment systems for settlements with the operating company and payments to individuals. The partner buys loans from end customers at a discount and repays them at a foreign company at full cost.



Payment of funds to the end customer occurs by bank transfer to the account / card of an individual in a Russian bank or payment system. Cash payments require separate consideration due to legislative risks, risks of blocking bank accounts in the framework of AML / CFT procedures, add. security and collection costs.



A partner company does not have to have a website or even a public office. If a meeting with a client is a necessity, in order to identify the client, as well as in order to exchange documents, it can be carried out by a visiting specialist by agreement.



A partner can provide consulting services and help with the preparation of a 3-NDFL tax return and, for example, help restore documents for the purchase of cryptocurrency so that you do not have to pay 13% tax on the entire sale amount, but only on the difference between the sale price and the purchase price.



Legal description of the scheme



When an individual (citizen of the Russian Federation) sells cryptocurrency to a foreign company, he receives a loan agreement under which this company becomes his debtor for cryptocurrencies (crypto assets) transferred to the loan subject to repayment of the debt at any time in fiat money.



A bill or bond will not work, because according to Russian law, a bill of exchange can only be expressed in documentary, that is, in paper form, and to issue bonds it is necessary to obtain a license.



Further, an individual assigns his rights of claim under a loan agreement to a Russian company on the basis of an assignment agreement (optional assignment of future rights of claim under Article 388.1 of the Civil Code of the Russian Federation), receiving for this amount in rubles at the exchange rate, for example, the Central Bank of the Russian Federation at the time of payment.



In order to finance its own activities, a Russian legal entity presents a loan agreement for reimbursement of a foreign company, and the foreign company repays such a loan.



At the same time, no cryptocurrency operations take place in the Russian Federation. The parties determine the applicable law and place of transaction in a foreign jurisdiction, as the borrower (acquirer) is a foreign legal entity.



Formally, the Russian company pays to the individual the cost of the assignment of rights, without risking running into misunderstanding from banks and tax, despite the fact that the subject of the loan was cryptocurrency, the loan is repaid in understandable fiat foreign currency. Even the re-qualification of a loan agreement to the contract of sale of digital assets (in the terminology of the draft new law) will not make the Russian legal entity the ultimate beneficiary of the transaction, since the cryptocurrency wallet of the Russian company does not belong.



The provisions of 115- “On counteracting the legalization (laundering) of proceeds of crime and the financing of terrorism” are not applicable to this scheme, since the Russian legal entity is not an organization engaged in operations with cash or other property in accordance with Art. 5 of the specified law. In addition, an individual who is a recipient of funds under the assignment agreement is identified by all parties and must independently pay taxes.



The question may arise whether in such a scheme a Russian company is a tax agent. No, because according to Art. 226 of the Tax Code of the Russian Federation, tax agents are required to withhold tax only on income, and since an individual under a loan agreement bears expenses that the amount received for the assignment of the right to claim does not pay off, then there is nothing to calculate the tax with.



Requirements for foreign and Russian companies:





Choosing a crypto-friendly jurisdiction for a foreign company



We examined several jurisdictions, in particular Estonia, Malta, Cyprus, Gibraltar, as well as Belarus, Switzerland, Poland, Finland and Slovenia. In fact, if you need the most comfortable way to create and manage a legal entity with a limited budget, Estonia is ideal. With the exception of certain difficulties with local banks, this is a country with a developed digital economy and clear legislation. Malta and Gibraltar are also good, with significant “buts” in the form of license costs and a general perception of jurisdictions as offshore. In the framework of the article, we will not touch on the specifics of the choice of jurisdiction, this can be done if there is a subject interest.



Main risks



Sanctions against Russian legal entities



The status of cryptocurrency in the Russian Federation is not defined, which leads to sanctions imposed by the courts on the proposal of the prosecutor's office without any substantive proceedings.



Currently, courts and tax authorities consider crypto as property, and this is an attempt to bring cryptocurrency savings to some existing basis and introduce into the field of the tax code, but not an accurate description of the legal nature of the phenomenon. The Central Bank, Rosfinmonitoring, the prosecutor's office and the security forces consider the crypto as money surrogates according to Art. 27 of Law No. 86- “On the Central Bank of the Russian Federation”, recognize the use of cryptocurrencies as a means of laundering criminal proceeds and try to violate laws No. 115- “On counteracting money laundering ...” and No. 395-1 “On banks and banking activities” ". No responsibility has been established for the circulation of cryptocurrencies, and although attempts to introduce it do not stop, so far no laws have been prescribed for any persons carrying out operations with cryptocurrency. Sites that openly offer exchange services are blocked by court order; it’s almost impossible to advertise in large grids on the subject of cryptocurrencies.



In the scheme under consideration, the main risks fall on the Russian legal entity, but the five risks are not related to criminal prosecution. With a company abroad, with proper execution of its activities, there will be no complaints. Sooner there will be no complaints against end customers, provided that they submit reports and correctly calculate the tax base.



Russian jur. the person will also not be involved in the management of cryptocurrency, will not give appropriate advertising, which means that the risk of checks, blocking the site and accounts, although it exists is quite tangible, but is still significantly reduced compared to other schemes existing at the moment. As an example, we can recall the case of Lavka Lavka (as well as their joint action with UAZ) selling products for bitcoins, when the prosecutor asked for an explanation, warned that settlements in the Russian Federation are possible only in rubles, but did not find any violations. Although, in fact, an even less obvious scheme was used there, when the buyer transferred bitcoins to the cooperative's account, and the employees paid money directly to the cashier for it.



Pretense and invalidity of transactions



Obviously, transactions under such a scheme can be considered feigned. But to invalidate the transaction, this still needs to be proved. In connection with the pretense, only the transaction can be recognized as invalid, which is aimed at achieving other legal consequences and covers the other will of all participants in the transaction. The intention of one participant to make a sham transaction for the application of legislative norms is not enough. In our case, there is a counter-provision that was actually received by the parties and which cannot be disputed, that is, neither the subject matter, nor the price of the transaction (and therefore the tax base), nor its subjective composition are changed.



The prosecutor's office may require invalidating transactions made with a purpose that is obviously contrary to the foundations of law and order and violating the requirements of legislative acts. However, at present, the transactions described do not fit any of these criteria.



Problems with banks regardless of jurisdiction



Banks are black boxes and the weakest link in the scheme. In pursuance of the recommendations of the Central Bank of the Russian Federation, Russian banks are likely to request additional documents for each incoming currency transaction, which will force compliance not from time to time, but as a process. Denial of service is likely, which will require having multiple accounts and constantly looking for adequate banks.



With foreign banks, the situation is similar, but to a greater extent for reasons of Russian citizenship, the ultimate beneficiaries of the company and participants in the transaction.



Key benefits for the end customer



Legal protection for the transaction



Unlike the “gray” schemes based on classic exchangers and p2p sites, in a legal exchanger the end client will have some kind of legal protection, and therefore can take fewer risks and incur less security costs.



The best proof of source of income



In a legal transaction with a Russian legal entity, the client will receive supporting documents on hand, and therefore it will be easier and cheaper to legalize all or part of the funds from the sale of cryptocurrency - submit a 3-personal income tax return, pay taxes and have a better confirmation of the source of income.



Competitive commissions and high limits



Crypto exchange through exchanges and payment systems that support the input and output of Qiwi, Yandex.Money and bank cards (for example, Exmo, Cex, Advcash) is fraught with high commissions and low limits. Naturally, together with the 'tax component' the exchange cost will be significantly higher than on the black market. However, on average exchange volumes, the commission component will be comparable. Commissions of a foreign company will be optimized through exchange at favorable exchange rates and bank transfers in EUR by SEPA. The commissions of the Russian company on foreign exchange control are optimized by choosing banks dedicated to foreign trade activities, and to develop co-branded banking products to pay physicists.



If you want to play by your own rules -



the proposed scheme allows exchanges according to any own rules and have full control of all companies, assets in accounts and chains of operations.



No need to delve into the nuances of currency legislation



Until 2020, Russian currency legislation generally does not allow individuals to fully work with foreign accounts. Starting in 2020, this will be possible, but only for 42 countries. Data as of September 2019 is provided on Google Spreadsheet . This does not exclude the need to file a notice on opening a foreign account and monitor all legislative changes. Receiving funds into an account with a Russian bank according to our scheme will allow us not to deal with this issue in principle.



The risks of holding funds and blocking an account are minimal



When working with large exchanges (for example, Bitfinex and Bitstamp) and depositing and withdrawing physical persons through bank accounts in both Russian and foreign banks, there are risks of holding funds. Banks comply with anti-money laundering legislation: Russian ones are interested in operations with cryptocurrencies, foreign ones are interested in operations of non-resident beneficiaries. When exchanging cryptocurrency through a legal exchanger, the end customer (individual) may not have accounts at foreign banks, payment systems and exchanges at all, not go into the nuances of currency legislation and not struggle with currency control, security and AML / CFT banks. Payment under an assignment agreement from an account of a Russian organization to an account of a Russian individual significantly reduces the risk of a bank requesting documents. But even in case of a request, the client has a full set of documents in Russian, certified by a Russian organization, and without mentioning the keyword 'cryptocurrency'.



The original article is posted on lite.legal


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