Utility digital rights: whose obligation you are buying and how to get out of it

A utility digital right (UDR) is not equity, not debt and not a token in the everyday sense: it is a claim, recorded in the information system of an investment platform, against a specific issuer for the transfer of a thing, the transfer of an exclusive right or of a right to use the result of intellectual activity, the performance of work or the provision of services. A UDR cannot certify a monetary claim, and this difference determines everything else: the instrument has no coupon, no dividend, no face value to be redeemed and no market price in the usual sense. For an analyst it is a prepaid deliverable forward on a good or a service, issued without collateral, without a central counterparty and without variation margin.

The legal structure: where UDRs came from

The structure entered Russian law with the act on raising investment through investment platforms, which came into force in 2019. It described both the instrument itself and the infrastructure: the operator of an investment platform is entered in the Bank of Russia register, runs the information system and records investors' rights in it. The law explicitly narrowed the range of possible claims: a UDR cannot certify a claim for the transfer of property where the rights to it, or transactions with it, are subject to state registration or notarisation. That is why a flat or a stake in a limited liability company cannot be packaged as a UDR; what remains is a good, a service, a piece of work, a licence.

A separate element of the structure is the digital certificate: a depository may take a UDR onto its books and certify the rights to it, after which the wrapper security can circulate in the standard depository infrastructure. Without this, the life of the right is locked inside one information system and its rules.

What a UDR is not

The confusion usually runs along several lines, and each of them is worth separating out explicitly.

It is not a share. The holder of a UDR has no stake in the capital, does not vote and has no claim on distributed profit. A comparison with the instruments in the Russian equities section does not work here, either in terms of rights or in terms of how the price is formed.

It is not a bond. A bond is a monetary claim with a known schedule and a known duration; that mechanism is covered in the section on the debt market. A UDR does not promise money at all, so yield to maturity is simply not defined for it as a quantity.

It is not a digital financial asset. Digital financial assets are governed by a separate law, adopted in 2020, and they are precisely the instruments that may include monetary claims, rights to participate in the capital of a non-public joint-stock company and rights under securities. The operators of information systems for digital financial assets are kept by the Bank of Russia in a separate register. UDRs and digital financial assets are neighbouring but different regimes, and they must not be mixed together in analysis.

It is not the right-of-use asset found in financial statements. The term "right-of-use asset" belongs to the lessee's accounting for leases — see right-of-use asset. The overlap in the words "right of use" is a coincidence.

How to value it when there is no cash flow

Discounted cash flow analysis cannot be applied to a UDR directly: there is no flow, there is an expected delivery. The working framework is avoided cost: how much it would cost to buy the same thing or service on the open market at the moment of delivery, adjusted for several factors.

• Time to performance. The further away it is, the more you are in effect lending to the issuer interest-free.
• Risk of non-performance. This is the issuer's credit risk, but without covenants, without a rating and, as a rule, without collateral. It helps to look at the issuer the way you would look at a borrower: sources of revenue, debt burden, dependence on one project — for public issuers a starting point can be found in the financial reports section.
• No secondary market. The right can be assigned under the platform's rules and often only through the operator; the illiquidity discount here is not theoretical, it is the main component.
• No indexation. If a service has been promised, its market value can move in either direction, and all of that risk is yours.

Risks that the offer description does not show

The main one is concentration: you take on the risk of a specific issuer in full, without the diversification that is built into, for example, exchange-traded funds. The second is infrastructure risk: the rights are recorded by the platform operator, and the procedure that applies if the operator ceases its activity should be read in the rules before the deal, not after it. The third is how the claim behaves in the issuer's bankruptcy: in the proceedings a non-monetary claim is converted into a monetary one and joins the general queue of unsecured creditors.

{{callout:warning}}For non-qualified investors the law sets an annual limit on investments made through investment platforms, and the tax outcome depends on how exactly the right was realised — by receiving the thing, by having the service provided or by assignment. The source material for this article contains no specific figures for the limit and no applicable tax rules, and I am not going to invent them: check the current version of the law and the platform operator's guidance.{{/callout}}

What to check before the deal

Step 1: find the platform operator in the Bank of Russia register. Step 2: read the platform's rules — how the right is recorded, how it is assigned, what happens if the operator ceases its activity. Step 3: find in the investment offer the exact wording of the obligation — what is transferred, in what volume, by what date, and what counts as proper performance. Step 4: find out whether a digital certificate has been issued and at which depository it is held. Step 5: set the size of the position as an amount whose complete loss does not change your plan.

The practical conclusion for a portfolio: UDRs are not a substitute for equities, for debt or for funds. They are closer to a venture-style advance against a future delivery, and they belong in the part of the portfolio where a full write-off of the position is acceptable. Related concepts are explained in the site's glossary.