On February 17, the Verkhovna Rada of Ukraine adopted an updated law “On Virtual Assets” (VA), which regulates the circulation of cryptocurrencies in the country. Together with the experts who took part in its creation, and third-party specialized specialists, Cryplogger figured out what awaits the owners of cryptocurrencies in Ukraine.
What does the law regulate?
The law introduces the circulation of virtual assets into the legal plane. They are divided into:
- unsecured VA (classic cryptocurrencies like Bitcoin and Ethereum);
- secured VA (security tokens that give the right to profit and/or company assets);
- financial VA backed by financial instruments (tokenized stocks) and currency values (stablecoins and CBDC).
Secured VA, unlike cryptocurrencies, certify property rights, in particular, the right to claim other objects of civil rights.
“Cryptocurrencies, according to the classification of the law, are classified as unsecured virtual assets. They are characterized by the lack of security of property or non-property rights. This means that no one promises anything for any cryptocurrency, it is an independent unit of the market,” explained Artem Afyan, member of the Virtual Assets of Ukraine (VAU) public union and managing partner of the law firm Juscutum.
The law does not directly affect the DeFi and NFT segment, however, a broad interpretation of the terminology allows them to be regulated.
“Recommendations FATF on the topic of DeFi and NFT were published only in October 2021, and we have not yet had time to implement them in the rules of this law. However, the term “virtual asset” is formulated rather abstractly to cover all types of VA,” said Oleksiy Zhmerenetsky, head of the VA Supervisory Board and Blockchain4Ukraine Interfactional Association of People’s Deputies of Ukraine.
The only inconsistency he pointed out is that if the DeFi administrator cannot be determined, it is not clear who should comply with the law.
“One of the challenges for the legislator is to determine the ownership of the NFT for its holder. On the blockchain, the token holder is defined as its unique owner, but this is not fixed in any way in the legal system. At the moment, we have developed and registered draft amendments to the Civil Code of Ukrainewhich should partially solve this problem,” added Zhmerenetsky.
The General Director of the VAU, the head of the group of advisers of the inter-factional association of people’s deputies of Ukraine Blockchain4Ukraine Konstantin Yarmolenko specified that the law applies exclusively to legal entities that provide services in the field of VA:
“If you, as an individual, send crypto to another individual or simply hold crypto as an investor, the rules of this law do not apply to you and you can sleep peacefully.”
Suppliers may store/manage VA, exchange and transfer such assets, and provide intermediary services related to them.
If a foreign company falls under the criteria of a VA supplier and provides services to residents of Ukraine, it is required to register its activities in the country.
“If a resident of Ukraine simply conducts transactions with some foreign VA, this foreign issuer is not required to register as an VA supplier in the country,” Yarmolenko specified.
Sanctions stipulated by law will be applied to violators only after three months from the date of implementation of the state register of providers of VA-related services.
“Given that it takes time to develop and launch a registry, VA users and potential VA providers will have the necessary time to adapt. It is impossible to apply sanctions within the framework of this law until these sanctions come into force,” Konstantin Yarmolenko explained.
New market regulators
Control over the market is distributed between the NBU and the National Commission for Securities and Stock Market (NKTSBFR). The National Bank is responsible for VA secured by currency values. The regulation of the circulation of cryptocurrencies and VA, secured by securities or a derivative financial instrument, is assigned by the law to the National Securities and Stock Market, explained Juscutum lawyers Vladislav Kislitsky and Andrey Chaban.
At the same time, the provision on the need to create a new regulatory body and the mention of the Ministry of Digital Development, which was supposed to temporarily replace it, disappeared from the new version of the document. Cryplogger previously discussed this change with representatives of the department.
“I believe that both one and the second approach had their pros and cons,” says Artem Afyan. – During the dialogue, thanks to the Mintsifra, the position of the Commission and the NBU, there was an understanding that the selected regulators would be effective. As experience shows, most often do not like the creation of a new body.
At the same time, Juscutum lawyers Kislitsky and Chaban pointed out that the expertise and experience of the NBU and the NSMSC may not be enough to regulate absolutely all aspects that an VA market participant may encounter:
“It is important to remember that given the different types and types of tokens, there may be more regulators for them. For example, if electricity is tokenized, this is one regulator, and if land is another. There cannot be a single regulator.”
Banks in the game
Thanks to the law, banks will become one of the full participants in the cryptocurrency market. This, according to the authors, is dictated by global trends and is especially relevant in light of the creation by central banks of their own digital currencies.
“The CBDC payment system will be available only to financial institutions holding funds in central bank accounts and professional market participants. In developed countries, retail payment and settlement systems are already quite efficient, operate almost in real time and are always available. It is banking services that will allow citizens to work with CBDC,” Artem Afyan explained.
Technically, banks are the most ready players in the IA market, since they have a wide customer base, conduct KYC and act as primary financial monitoring entities, Konstantin Yarmolenko believes.
According to him, the introduction of the e-hryvnia, which is being developed by the NBU, will deprive commercial banks of part of the income from transactions for payment for goods and services, as well as fiat payments, therefore, “it would be reasonable for them to pay attention to the VA market.”
“How fast and flexible banks will be enough to compete with, for example, top exchangers or crypto exchanges, time will tell. If banks adapt, they will survive and even earn money, and if not, they will die out like dinosaurs,” Yarmolenko added.
Compliance with FATF recommendations
According to the authors of the document, one of the main goals in creating the bill was to implement the recommendations of the FATF. Oleksiy Zhmerenetsky pointed out that the law was supposed to prevent Ukraine from being blacklisted due to possible money laundering with the help of VA.
“An important aspect is that we coordinate all our developments with colleagues from the State Financial Monitoring Service of Ukraine, because they are at the forefront of negotiations with the FATF and only they have all the information on this issue,” he said.
Taking into account the new extended recommendations of the FATF and the regulatory approach of world jurisdictions to its implementation, the authors are ready, if necessary, to amend the law “On VA”.
In the current version, the legislators did not set themselves the task of clearly defining the mechanisms for regulating the crypto market, but focused only on setting the basic rules.
“While the law was being written, ICOs sank into oblivion, service stations appeared and disappeared, then there were IEOs, NFTs appeared, now DAO is starting, and so on. It is very difficult for the legislator to keep up with this, this is already the task of the regulator,” Artem Afyan explained.
One of the provisions of the law gives cryptocurrency owners the right to independently determine the price of VA. However, according to Afyan, such a rule cannot create a risk of money laundering due to several levels of control.
Regulators have an obligation to monitor service providers and, in the event of violations, prevent and sanction such activities. The service providers themselves must collect all the necessary data about the client for the transaction, including information about the sender (initiator) of the transaction (identification data of an individual or company data) and similar data about the recipient of the VA.
“The provider may refuse to process a transaction if there is a suspicion that the VA or funds are associated with criminal activity. At the same time, the purchase and sale of any VA occurs at the market price displayed by the exchange or broker. Regardless of the independent determination of the price for VA, the market itself, in any case, will influence the formation of the price of VA in accordance with global financial algorithms,” the lawyer explained.
Market reaction
Representatives of business and specialized associations generally positively assessed the adoption of the law.
Binance called this a huge step for the entire industry and emphasized that the law provides protection for Ukrainian users from fraud and crime in the field of digital currencies.
“Thanks to the law, cryptocurrency owners in Ukraine will be able to legally exchange assets, contribute them to tax returns, open blockchain businesses and use cryptocurrencies in their daily lives,” Kirill Khomyakov, general manager of Binance in Ukraine, told Cryplogger.
Vladimir Nosov, CEO of the WhiteBIT exchange, noted that the adoption of the law will attract companies already operating in foreign jurisdictions to the country and create opportunities for collaborations of these projects with both Ukrainian business and government services:
“In this format, one can also think about the international expansion of Ukrainian projects.”
The Blockchain Association of Ukraine also stated that they are pleased with the adoption of the bill:
“This shows that the policy of the state is “crypto-friendly” not only in words, but also in deeds.”
Head of Legal of the Kuna exchange Anna Voevodina noted that the law will legalize the cryptocurrency market, provide additional budget revenues and create new jobs. She pointed out that regulators have yet to develop a number of by-laws to fully launch the market:
“Ahead lies the most powerful struggle – the struggle for taxes.”
The Law on Virtual Assets will not enter into force without the adoption of amendments to the Tax Code. According to Oleksiy Zhmerenetsky, a bill on taxation of cryptocurrency transactions will be submitted to parliament within two weeks.
Recall that in September 2021, the Verkhovna Rada of Ukraine adopted the law “On VA” in the second reading. However, then President Volodymyr Zelensky returned the document for revision, proposing to make only the NBU and the NSMSC the main market regulators.
Other provisions have not changed, and on February 17, 2022, the law was finally approved. Cryplogger previously parsed the document in detail:
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