Legal aspects of mining cryptocurrency

Mining cryptocurrency every year less and less becomes a lot of geeks and more and more becomes a popular and high-margin type of business activity. Mining activities in Russia to date, as well as tokensail (ICO / ITO) are not specifically regulated or defined by current Russian legislation. There is no mining in the All-Russian Classifier of Economic Activities (OKVED). However, given that any business activity that is not directly prohibited by law is allowed in Russia, we can safely say that mining is legal in Russia. But at the same time, it is necessary to remember that the mining activity has a number of legal peculiarities, and improper organization of activities can entail administrative and even criminal liability. What awaits miners after the adoption of the law in Russia and how mining is regulated today in other countries was thoroughly disassembled in the new material.

At its core, mining represents the activity of maintaining a distributed platform and creating new blocks in the blockchain chain with the opportunity to receive remuneration in the form of new units and commission fees in various cryptocurrencies. Mining is an important element of kryptonomy, as computing mining equipment is required to protect the network from re-spending the same units (the so-called double-spend), and reward encourages people to spend their computing power and support the operation of networks.

Mining related activities are completely legal and do not require a license. Even if it is not explicitly specified in the Charter of the company and is not covered by the selected OKVED codes. Despite the absence of such an activity in the classifier, in our opinion, it is possible to use the closest code 72.40 “Activities on the creation and use of databases and information resources” to describe mining activities.
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As long as any person mines a cryptocurrency using his electricity, which he pays for himself, he is clean before the law. Anyone can engage in mining in any volume and quantity. Registration of the enterprise or obtaining the status of IP for this is not required. However, a problem arises when miners introduce the products of their activities into the exchange zone or the economy, that is, they become participants in economic relations. This position is shared by the head of the working group of the Central Bank of the Russian Federation on cryptocurrency Elina Sidorenko. It is already rumored that, perhaps, in the new draft law for individuals in Russia mining will be banned, which is a very dubious proposal.

Administrative and criminal aspect

In the case of regular withdrawal of cryptocurrency and their exchange for fiat money, the fact of doing business, that is, an independent activity carried out at your own risk and aimed at systematically making a profit, arises. In this case, it is necessary to register the mining activity as an LLC or an individual entrepreneur, or in any other civil law form prescribed by law. Otherwise, there are risks of criminal liability. The organizers of mining may face criminal liability under art. 177 of the Criminal Code of the Russian Federation (illegal business activity), that is, an activity that is carried out without registration or without a license. Another problem is taxes. If you recognize mining as a way of income, then the miners will be required to declare their income and pay the statutory percentage. In case of non-fulfillment of this condition, the person may be subject to criminal liability under art. 199 of the Criminal Code of the Russian Federation (tax evasion). The corpus delicti will be formed, there is tax evasion on a large scale. Under a large size, criminal law means the amount of taxes, which is more than 5,000,000 rubles for a period of 3 financial years in a row, provided that the share of unpaid taxes exceeds 25% of the tax amounts payable in the aggregate, or exceeds 15,000,000 rubles.

Obviously, mining involves huge energy costs, which cost a decent amount. And of course, the lower the cost of electricity, the more marginal the mining business becomes. Some entrepreneurial subjects find ways to connect to the power grid for free, which in turn leads to both administrative and criminal liability. Article 7.19 of the Code on Administrative Offenses of the Russian Federation provides for liability for the unauthorized connection and use of electrical, thermal energy, oil or gas. Such a violation of the law entails the imposition of an administrative fine on citizens in the amount of from 10,000 to 15,000 rubles, and on legal entities from 100,000 to 200,000 rubles.

Criminal-related electricity theft consists of illegally obtaining resources in order to avoid paying for them. The grounds for criminal prosecution are regulated by Art. 165 of the Criminal Code. Such acts are punishable by imprisonment for up to 2 years with a fine of up to 80,000 rubles. Responsibility for this rule is subject to the following circumstances:

• electricity theft must be fraudulent or abusive;

• the size of the harm should be large, i.e. exceed 250,000 rubles;

At the same time, not only the resource owner (supplier) has the right to appeal to law enforcement agencies, but also the distribution company, which lawfully redistributes energy between consumers.

Frequent cases of use by system administrators of server equipment for mining cryptocurrencies within state and strategic enterprises are of serious concern to the state. And there are reasons for this. For example, on December 15, 2017, it became known that FSB operatives detained a system administrator at Vnukovo airport, who used electricity at the airport’s Air Traffic Control Center to mine cryptocurrency for personal use. The cause of the alarm was the sudden drops in electricity, which could lead to a significant interruption in the power supply of the Center. In September last year, it also became known about the cases of the dismissal of two IT specialists of the office of the Council of Ministers of Crimea for mining in the basement of a government building. Today, in some Ministries and state-owned enterprises, there are already instructions for identifying hidden miners within their own networks.

The growing popularity of mining at state-owned enterprises, apparently, made the State Duma think about this issue more seriously by sending a bill to the government and the Supreme Court providing for the punishment of imprisonment up to six years for theft of electricity from the power grid object.

Nevertheless, mining remains an interesting type of business, including for state-owned corporations, which are currently deploying huge computing power in different regions of the country.

Throughout 2017, statements about this were made by official representatives of the Russian authorities. Presidential Commissioner for Entrepreneurs Boris Titov proposes to create a “cryptodoline” in Crimea, similar to the Crypto Valley in Zug, and the representative of the Russian President from the Far Eastern Federal District, Yury Trutnev, presents his vision of how to use the excess electricity of the Far East for mining.

Customs aspect

Until recently, all the equipment in the country was either openly smuggled, or imported into the country under other commodity codes. Since miners belong to encryption equipment, nobody can import them officially without notifying the FSB according to Russian law.

Notification is the official notification of the FSB, which allows the importation (exportation) into the territory of the countries of the customs union of a product that is subject to a number of restrictions.

When attempting to official import of miners to the countries of the Customs Union, the buyer came under Article 1, Part 16.3 of the Administrative Code of the Russian Federation. The devices themselves were confiscated, and the importer was fined in the amount of 2k to 300k rubles. The import of miners into the country under gray customs schemes partly led to their shortage and overestimated cost several times. However, the situation changed dramatically in the autumn of last year. On October 26, 2017, the FSB registered the first notification of the technical characteristics of the Bitmain encryption miner of the Antminer D3, Antminer L3 +, Antminer S9 mining brand for mining Dash, Bitcoin and Litecoin.
Below is a list of all mining devices that are now allowed to legally import into the country and into the territory of the Customs Union.

• Bitfury B7 , Bitfury B8 models from Bitfury

• Models iBelink DM11G , iBelink DM22G from iBelink

• Model AvalonMiner 741 from the company Canaan Creative

• Model AntMiner S9, AntMiner D3, AntMiner D3 from the company Bitmain

Bitmain registering its devices and receiving notifications from the FSB may indicate that the company will soon make its trademark in the customs register. And this means that from this point on, miners can be entered into Russia only if they have a license agreement for import with Bitmain or an authorized distributor authorized by it.

At the same time, while importing mining equipment into the country, it is important to remember one more important nuance. According to the customs rules, individuals have the right to import goods only for personal use, which cost no more than 1,000 euros per month and weighs no more than 31 kg. On December 13, 2017, by the Decision of the Eurasian Economic Commission, a list of encryption (cryptographic) goods for personal use was determined, which can be imported without notifying the FSB and non-tariff regulation measures. And there is no mining equipment among them. Therefore, citizens who decide to import equipment as physicists are more likely to run into problems at customs. According to the current position of the Federal Customs Service of Russia, if customs officers determine that goods are imported for commercial purposes (and this is how they determine the import of miners from China), they are entitled to refuse to release goods.

Tax aspect

On October 21, 2017, the President of Russia signed the order , appointing Prime Minister Medvedev responsible for drafting legislation to “establish requirements for the organization and implementation of production based on the principles of cryptography in a distributed registry environment (“ mining ”), including the registration of economic entities carrying out such activities, as well as the determination of its taxation ”. The deadline for execution of the order is July 01, 2018. Therefore, in the very near future, mining will most likely come out of the gray zone and will be a regulated type of business activity.

December 28, 2017, the Ministry of Finance and the Central Bank of the Russian Federation at the meeting of the Public Council under the Ministry of Finance presented a working version of the draft law on the regulation of the use of digital technologies in the financial sector. In the presented project there are provisions for mining, which is defined as entrepreneurial activity. Accordingly, either individual entrepreneurs or legal entities can engage in entrepreneurial activities. Since mining in the document is defined as entrepreneurial activity, then, according to Deputy Minister Moiseyev, it does not require separate regulation and will be taxed under the current legislation for entrepreneurs. The minimum threshold for the volume of mining, from which this activity will be taxed, is not supposed to be established. The final decision, in any case, will be made closer to the second half of 2018 by the Prime Minister, taking into account the views of the tax authorities.

Considering that the tax authorities have not yet formed any position on the procedure for taxing cryptoactive assets and transactions on the alienation of cryptocurrencies derived from mining, as well as individuals, companies and individual entrepreneurs engaged in mining, taxes should be calculated independently . At the same time, the economic benefit can be fixed at the exchange rate at the time of the implementation of cryptocurrency.

International experience in the regulation of mining

It is possible that in order to develop the most competent mining regulation strategy, the domestic legislator should pay attention and take into account the practice of foreign countries that already have or are beginning to gain experience working with this institute so as not to repeat the same mistakes and take best practice.

In neighboring Ukraine, she recently organized raids on crypto miners. There is even a judicial act in which a judge of the Svyatoshinsky District Court in Kiev issued a charge against the miner due to illegal activities. According to the judge, the defendant violated several laws of Ukraine at once: “About the National Bank of Ukraine”, “About banks and bankers”, “About payment systems and retelling of money in Ukraine”.

But then suddenly, in October 2017, a bill on the legalization of cryptocurrencies and regulating legal relations in the sphere of circulation, storage, use and operations with cryptocurrencies was introduced to the Verkhovna Rada of Ukraine. The corresponding document is published on the official website of the Verkhovna Rada of Ukraine. The authors of the bill provide definitions for the basic concepts of the cryptocurrency sphere. The term cryptocurrency is defined as a program code that is subject to the right of ownership and the subject of a barter agreement, information about which is entered and stored in the blockchain system. ” From this definition it follows that a cryptocurrency is not legal tender, but only the subject of an exchange agreement.
Particular attention should be paid to Article 5 of this draft law, which reveals the essence of mining. This article also states that the resulting cryptocurrency is the property of the miner, and is subject to taxation, as well as the fact that the miner, at his own discretion, chooses the type of cryptocurrency for mining. He can carry out the specified process with the help of his own equipment or rented. This bill contains some gaps and flaws, but it is one of the first experiments to introduce mining under special regulation.

On January 4, 2018, it also became known that the Government of Venezuela launched an online registry for Bitcoin miners. All miners in the country will have to voluntarily register in it. The registry is only the first step in developing a complete legal framework for taxation and regulation of cryptocurrency mining in the country. According to the authors of the initiative, this will protect the miners of cryptocurrency in the country. For the protection of miners there is every reason. Despite the fact that the extraction of cryptocurrency in Venezuela is not illegal, the local police have been arresting miners since the beginning of 2016, accusing them of committing various crimes - theft of electricity, fraud, cybercrime, and the financing of terrorism. Extortion is also a real problem. Police officers often require miners to pay in exchange for dropping charges. It is known that there were incidents of raids in the city of Lara on December 9, 2017, when the 21 miners seized the police and arrested a 31-year-old man who owned them. He was charged with computer crimes, fraud, terrorist financing, damage to the national electrical system and money laundering.

The experience of Japan in this matter is extremely important. The cryptocurrency received in Japan the status of a means of payment in accordance with the currency regulation law adopted by the country's parliament earlier. In this regard, Japanese banks are planning to develop the blockchain technology and by 2018 create large testing platforms for large and regional institutions, and GMO Internet Group, the Japanese technology conglomerate, officially announced the start of bitcoin mining . By the first half of 2018, the company will launch a large mining center in Japan.

Of particular interest to us is the experience of the brotherly Republic of Belarus, in which on December 22, President Alexander Lukashenko signed Decree No. 8 “on the development of the digital economy”.

According to the mining decree by individuals, the acquisition, alienation without the involvement of other individuals (under labor or civil-law contracts) is not a business activity. Tokens are not subject to declaration, and mining itself is not subject to any taxes.

Mining can be carried out by both individuals and HTP residents (“High-Tech Park”, the site on which the start-ups are based). A very interesting point is that legal entities without HTP resident status are not listed in the Decree as entities that can be engaged in mining. However, it is rather a flaw in the legal technique of the decree than a malicious ban on mining by legal entities. We believe that in the absence of the HTP resident status, such activities may fall under the general taxation system.

So far, we are distinguished from Belarus only by the fact that the position of the Russian authorities is inclined to recognize mining as a type of business activity. And this means: that it will certainly be taxed. In essence, the Government has only to determine what taxes and in what amount to impose miners. Anyway, the mining business today can be organized in a 100% legal field, if you approach the issue legally competently .

I would like to hope that by taking a decision on regulating mining, the Russian authorities will be able to work out the most benign regulation and tax regime for this kind of activity, which will attract entrepreneurs from around the world, including from Asian and European regions, to a country with one of the lowest prices production of electricity, as well as stimulate the construction of its own large mining capacities. Then it will allow Russia to take its rightful place among the crypto-producing countries that meet the needs of the decentralized world community within the created crypto-ecosystem.