Cryptocurrency is about to be Regulated in Ukraine. How will it be?
Two months ago, in mid-April, the European Parliament approved the first legislation in the European Union on tracking payments in cryptocurrencies, supervision in this area and combating money laundering. The MEPs also adopted common rules for the supervision and protection of consumer rights (MiCA, or Markets in Crypto assets) with safeguards against market manipulation and financial crimes.
A month later, in mid-May, EU finance ministers approved the MiCA regulation — the world's first comprehensive set of rules for regulating crypto-assets. The regulation will enter into force in the European Union on June 29, 2023 and will be fully effective from December 30, 2024.
On June 14, the National Commission for Securities and the Stock Market of Ukraine (NCSCFR) presented the draft Law "On Amendments to the Tax Code of Ukraine and other legislative acts of Ukraine regarding the regulation of the turnover of virtual assets in Ukraine." The project was based on the mentioned MiCA regulation, which should be implemented in Ukrainian legislation.
In a comment to Novosti.LIVE, Yuriy Boyko, a member of the NCCPFR , said that work on the document began in the fall of 2022 with the support of the USAID Project "Financial Sector Reform", which involved Ernst&Young as consultants.
In general, the document outlines the mechanism of legal regulation, the scope of legal obligations for market participants, which must be observed, the concept of taxation, as well as the issue of protecting the rights of investors against fraud and other illegal actions in the market.
According to the official, Ukraine may become the first country in Europe to introduce the MiCA regulation into the legal field, as no jurisdiction has yet done so.
How cryptocurrency is currently regulated in Ukraine
According to Andrii Tyshchenko, a senior lawyer at the Asters law firm , the situation with the regulation of the crypto-asset market in Ukraine is quite ambiguous and in some ways contradictory.
On the one hand, Ukraine is considered one of the most crypto-friendly countries in the world, because:
- is one of the first to start developing a consolidated special law, which acts as a regulatory framework for the free and legal circulation of virtual assets in Ukraine;
- is one of the first to start developing its national NBU digital currency (CBDC E-hryvnia);
- a high percentage of the population owns, uses and disposes of virtual assets;
- there are numerous crypto-communities, which at the same time are among the largest, at least in Eastern Europe;
- a significant number of crypto startups are being created in Ukraine and by Ukrainians, which are developing successfully even at the international level. It is worth mentioning, in particular, one of the most popular blockchain ecosystems in the world — Near and Solana, with a combined capitalization of more than 10 billion dollars, whose founders include people from Ukraine.
On the other hand, although at the beginning of 2022 the Verkhovna Rada adopted a specialized law on virtual assets, as of today it has not yet come into force. This can largely be a problem for crypto-companies and non-residents who wish to obtain a license to operate in Ukraine and officially conduct their activities in a clearly defined legal field.
However, although the field of use and implementation of activities related to the circulation of virtual assets has not yet received its specialized legal framework, the use of virtual assets is not officially prohibited by law, reminds the lawyer. Moreover, the circulation of these assets may be subject to the general rules of civil law regarding the use and protection of property rights related to such assets. It also applies to any other legal requirements, such as anti-money laundering, financial monitoring, taxation, etc. requirements.
Rather, the problems may be related to restrictions on the part of the National Bank of Ukraine.
Thus, at the beginning of March, the NBU published Resolution No. 14 on amendments to the authorization procedure for financial payment service operators. According to the clarifications of the NBU, the new rules are aimed at solving problems related to manipulation of payments and miscoding (fraud with changing the destination of payments) in the field of gambling.
"However, the introduction of new procedures and restrictions actually affected the crypto-industry as well, because the banks now consider the operations of exchanging fiat funds for cryptocurrency, as well as withdrawing cryptocurrency into traditional money, as high-risk. Accordingly, they now do not pass the framework of financial monitoring, as a result of which banks are forced to block such operations in order not to have additional problems with the regulator ," explains the interlocutor of Novosti.LIVE.
And although there is no direct mention of cryptocurrencies and crypto-exchanges in the explanation of the new rules, they significantly affected both payment market operators and Ukrainian owners of exchange crypto-wallets. After all, this means the loss of the ability to freely withdraw funds from them, withdrawing fiat currency to Ukrainian bank cards, or to enter funds into wallets from bank accounts for further exchange for virtual assets.
In addition, the large-scale war in Ukraine additionally made adjustments to the process of legalization of cryptocurrencies. Thus, with the aim of stabilizing the banking and financial system, the exchange rate of the national currency, as well as preventing the withdrawal of currency values abroad (including through cryptocurrencies), the NBU introduced strict limits on the withdrawal of funds to foreign bank accounts. That is, now the possibilities of transferring significant amounts to foreign bank cards for the purpose of their subsequent transfer to a crypto-wallet are significantly limited.
"Although it is now possible to make money on a crypto-wallet and withdraw cryptocurrency to fiat by means of fund transfer operations between the accounts of individuals, in which users exchange fiat and digital assets with each other (rather than buying them on exchange platforms), the NBU did not stop and introduced additional mechanisms of supervision and reporting, which also indirectly affect payment services ," says Andriy Tyshchenko.
In a comment to Novosti.LIVE, the NBU reported that the analysis of such information will make it possible to identify the facts of the use of banks' services to serve the shadow market (in particular, the service of illegal gambling business activities), and will also allow to identify cases of activities carried out by banks and non-bank financial institutions that may contain signs of violation of the legislation of Ukraine in the field of combating the legalization of proceeds obtained through crime.
"And although these changes do not directly affect the circulation of virtual assets, however, once again, with their uncertain status and with the possible introduction of any restrictions on the use of p2p transfers, this will definitely affect the already mentioned method of depositing funds in the crypto-wallet of users " , Andriy Tyshchenko comments.
Why are crypto assets still not regulated in Ukraine?
The reasons for the lack of regulation of the crypto-asset market in Ukraine are complex, say lawyers.
First, the specialized law "On Virtual Assets" comes into force from the date of adoption of amendments to the Tax Code of Ukraine in the area of taxation of operations with cryptocurrencies.
Currently, there is draft law No. 7150 "On Amendments to the Tax Code of Ukraine regarding the peculiarities of taxation of operations with virtual assets". However, it has not yet been considered. Accordingly, we actually have a situation in which the law is formally adopted, but its provisions cannot be applied.
Secondly, in the conditions of the rapid development of the crypto-industry and rapid technological changes, the development of the Ukrainian law took too long, so it has already lost its relevance in some aspects. Accordingly, the law, which has not yet entered into force, already needs to be revised, say the interviewed lawyers of Novini.LIVE.
Thirdly, in view of Ukraine receiving the status of a candidate for EU membership on June 23, 2022, the norms of Ukrainian legislation regarding the cryptocurrency industry must be adapted to European standards (including the regulation of the circulation of virtual assets).
And in the EU, such a specialized legislative act regarding the functioning of the crypto-assets market is the MiCA regulation, the development of which began quite a long time ago (since the end of 2020). However, its final draft appeared much later than a similar law was adopted in Ukraine.
"Accordingly, during the development and adoption of the Law of Ukraine "On Virtual Assets", no one took into account and could not take into account the approach of the European Union to the regulation of this industry ," states Andriy Tyshchenko.
Now, when we have an official document adopted in the EU, in addition to the already expected changes to the Tax Code, Ukraine must also change the adopted law "On Virtual Assets" taking into account the provisions of MiCA.
How the regulation of the crypto market will change in Ukraine
Considering the presence of significant differences in the approaches to regulating the circulation of virtual assets in Europe and Ukraine and the need to unify Ukrainian legislation with the provisions of the European MiCA regulation, the situation on the crypto market of Ukraine may change quite radically, according to Asters lawyers.
The key points of Ukrainian legislation regarding the crypto-assets market will definitely be unified.
Classification of tokens
If according to Ukrainian law, virtual assets are divided into two types (secured and unsecured), then MiСА already has three such categories:
- asset-referenced tokens, which support a stable value by linking to several currencies / goods / cryptoassets;
- CBDC tokens are crypto-assets with a stable value, based on a single fiat currency and will function like electronic money, replacing fiat currency in payments;
- Utility tokens — provide access to applications, services or resources.
List of types of licensed activities
If, according to Ukrainian law, we have only five types of services: those related to the turnover of virtual assets; those related to their storage or administration; exchange services; transfer services; intermediary services (performed in the interests of third parties), the MiCA regulation details and expands this list of activities as follows:
- storage and administration of virtual assets on behalf of third parties;
- functioning of the trading platform for virtual assets;
- exchange of virtual assets for cash;
- exchange of virtual assets for other virtual assets;
- placement of virtual assets;
- provision of virtual asset transfer services on behalf of third parties;
- receiving and transferring orders for virtual assets on behalf of third parties;
- providing advice on virtual assets;
- activities for managing a portfolio of virtual assets.
Requirements for service providers
In order to provide the mentioned services, in addition to obtaining the appropriate license, providers must: have a registered office in the EU; meet a high level of organizational requirements; have insurance coverage; comply with the procedure for processing and storing personal data of customers.
In addition, cryptoasset service providers will be required to comply with requirements aimed at protecting consumers, in particular: prosecution in case of loss of investors' funds; the obligation to publish a "white paper" and sanctions for the use of misleading information. By the way, essentially similar requirements are provided for by Ukrainian law when conducting a public offering of tokens.
For consumers, it will be necessary to provide a warning about the risks of incurring losses, as well as the introduction of marketing communications rules.
When unifying the legislation, there is no need to strictly and fully transfer the content of the European regulation to the Ukrainian law, because the task is to ensure that Ukrainian and European legislation do not contradict each other.
Instead, given the existing shortcomings of MiCA, in particular the presence of unregulated aspects regarding the type of legal status of NFTs, the possibility of tokenization of assets, certain aspects of the operation of decentralized platforms, as well as the inflexibility of the regulation in matters of decentralization and anonymity, Ukraine has the opportunity to gain significant advantages over the EU by regulating what MiCA does not cover, while relaxing the regulation where possible.