The President of the Russian Federation signed a law on the use of digital financial assets (DFAs) in international settlements on March 11. Together with GORUS experts, we examined the advantages of such a financial scheme and the difficulties that may arise during its implementation.
What the law changes
The new law establishes the possibility of conducting international transactions using DFAs as a means of payment. The need for measures arose because the use of digital rights in such settlements currently does not fall under currency regulation and control or regulation of foreign trade activities.
These changes could be revolutionary in the financial system, as they will allow legal international settlements without the involvement of the banking system, noted Maxim Kolomytsev, founder of the DFA.su portal. Central bank digital currencies enable the organization of international settlements without the involvement of commercial banks, and foreign companies within their own country can easily convert digital currency into regular currency, so all operations will be beyond the visibility of US authorities, explained Nikolai Zhuravlev, head of the “DFA.RF” project.
According to him, traditional international settlements involve banks, each of which can be disconnected from the dollar financial system. Thus, it risks losing a significant portion, if not all, of its business. Due to sanctions, banks are afraid to work directly with Russia, and the new scheme will allow them to avoid this. After all, there are no banks involved in it at all.
“We believe that this law was adopted for some specific transactions of state-owned companies to solve problems with currency regulation, revenue return, and the like,” believes Nikolai Zhuravlev.
Last week, the head of the Ministry of Finance of the Russian Federation, Anton Siluanov, proposed to create a BRICS settlement system based on blockchain. According to this scheme, it is assumed that the digital currencies of friendly countries will be linked to each other through cryptocurrency exchanges.
The Features of DFAs
DFAs are digital analogs of existing financial instruments: loans, bonds, stocks, and other assets. These analogs are certificates (tokens) or digital rights with an established value. They are stored in a special information system and operate on the basis of blockchain or another decentralized network.
Digital assets and cryptocurrencies have differences, despite both operating on blockchain technology. Cryptocurrencies are not considered a type of digital rights, so the issuer has no obligations to investors, unlike DFAs, explained investment advisor and founder of the University of Investments, Yulia Kuznetsova.
The first legislative norms on DFAs appeared in 2020, and the issuance of such assets began in 2022. Today, both legal entities and individuals can invest in assets, with qualified investors having access to a wider range of assets.
There are ten platforms for issuing digital assets in the Bank of Russia’s register: three banks (Alfa-Bank, Sberbank, and Eurofinance Mosnarbank), the National Settlement Depository, the SPB Exchange, companies “Distributed Ledger Systems” (Masterchain), “Tokens” (Tokion), “Atomize,” “Lighthouse,” and “Blockchain Hub” (part of the MTS ecosystem). There is currently only one operator for exchanging and creating the secondary market for DFAs – the Moscow Exchange.
As of the end of 2023, the total number of DFA issuances is about 350, and the market volume in monetary terms is estimated at 60 billion rubles – such figures are cited in the latest study by the rating agency ACRA. However, the DFA secondary market has not started because Russian and foreign companies are skeptical about purchasing them, noted Associate Professor of the Department of Corporate Finance and Corporate Governance of the Financial University under the Government of the Russian Federation, Olga Borisova.
The volume of the DFA market in monetary terms is estimated at 60 billion rubles / Photo: ichip.ru
Advantages and Disadvantages of Using DFAs in International Settlements
The use of DFAs for servicing international operations will help Russian exporters and importers to work more actively with friendly countries. This will partly reduce the problem of sanction pressure on Russia. This alternative to the Russian Financial Messaging System and the international SWIFT system is particularly relevant due to the refusal of foreign banks, even from friendly countries, to conduct payments with Russia due to the risk of secondary sanctions, noted investment advisor Yulia Kuznetsova.
“We will soon witness an important economic experiment when a new, fast, and confidential mechanism for international settlements is implemented, where the possibility of intervention by financial authorities of unfriendly states will be impossible,” said the expert.
However, the complexity of applying the new scheme in practice lies in the fact that the assets issued in Russia will need to be recognized in the international market. To achieve this, legislation will need to be changed not only in our country but also in other countries with which settlements will be made. Of course, the adoption of such laws depends on the will of individual states.
“Counterparties from other countries will need to be explained what DFAs or digital rights are, why settlements can bypass the bank, and how to incorporate such schemes into the legal field beyond Russia,” explained Maxim Kolomytsev.
After the signing of the law on the use of DFAs in international payments, the interest of companies in such assets may increase
Development Forecasts
The DFA market in Russia may grow to 500 billion rubles within three years, which is 10 times its current volume. ACRA provides such an estimate in a moderately optimistic scenario for DFA development in its analytical commentary, as reported by RBC.
Analysts presented several development scenarios for the digital asset market in the report. In the conservative scenario, the scope of DFA application will be relatively narrow, despite the rapid development of digital products. In the most optimistic scenario, assets may take over part of the issuers, investors, and bank borrowers of certain categories if DFAs are used as an alternative to short-term bank lending.
GORUS experts surveyed unanimously agreed that it is too early to evaluate the results of DFA implementation, but the new law may push further development of the system.
By Daria Kolesnikova