Crypto assets legalized in Ukraine

Crypto assets have become widely used in Ukraine over the past few years. To promote and expand their legal use, parliament passed the Virtual Assets Act, following the presidential veto last fall. While crypto assets would need enforcement regulations to become a widespread alternative to fiat currencies in the country, Ukraine has already started using crypto assets to collect donations for the support of the Ukrainian military and for the humanitarian efforts to save Ukrainians from the effects of Russia’s unprovoked and illegal invasion. The new legal framework in Ukraine will allow crypto exchanges to operate in Ukraine, Ukrainian banks will be able to open crypto cards and accounts, and users of virtual assets will have the right to expand the use of these assets and benefit from legal protection for them.

On March 17, 2022, the Law of Ukraine “On Virtual Assets” No. № 2074-IX (the Virtual Assets Law) finally passed, after being vetoed by the president last fall. The Law on Virtual Assets comes into force upon adoption of amendments to the Tax Code of Ukraine. The relevant bill^[1] the amendment to the Tax Code is still under consideration by Parliament and the prospects for its adoption are currently unknown. Once the Virtual Assets Act comes into force, market participants should be able to use banking services, pay income taxes, and enjoy legal protection of their rights to virtual assets. However, even now those who wish to support Ukraine and help overcome the consequences of the Russian invasion can do so by donating in various cryptocurrencies to Aid to Ukraine website created by the Ministry of Digital Transformation of Ukraine.

The average daily turnover of the virtual asset market in Ukraine is estimated at nearly $150-200 million, although this market remains unregulated. The idea behind the passing of the new law was to move business with virtual assets out of the gray area to a regulated area. This means that virtual assets now have a special legal status. The notion of virtual assets (which go beyond just crypto-currencies) is expressly recognized by law as an object of legal relations.

Key Changes and Benefits

Following the passage of the Virtual Assets Act:

• the activities of foreign and Ukrainian crypto exchanges will be legalized;
• banks will be able to open accounts for market participants;
• Ukrainian residents who own virtual assets will be able to transact with them in accordance with the law; and
• Ukraine will ensure judicial protection of all rights to virtual assets.

The main advantage is that the market will get official status and market participants will get legal protection for their rights. In practice, this means that the owners of virtual assets will be able to declare their income on these virtual assets and use the banking services relating to them.

Second, the Virtual Assets Act is an essential step to ensure the fight against money laundering^[2] requirements, especially given the size of the virtual asset market.

Third, legal recognition of virtual assets can help attract virtual asset providers and investors to Ukraine. This will bring economic benefits to Ukraine as a whole and help to overcome the economic consequences caused by the Russian invasion of Ukraine.^[3].

Scope of regulation

It is important to note that the Virtual Assets Law applies to transactions with a “Ukrainian element”, which means that the law does not extend its scope outside of Ukraine.

In particular, the law on virtual assets applies in the following cases:

• the service provider or recipient has a registered office or permanent establishment in Ukraine;
• the parties to the transaction have chosen Ukrainian law as the applicable law;
• both parties to the transaction are residents of Ukraine;
• the acquirer of the virtual asset is a resident of Ukraine.

Are crypto-payments possible?

According to the Virtual Assets Law, a virtual asset is an intangible benefit that has a cost and is expressed as a combination of electronic data. However, virtual assets are not a means of payment and cannot be exchanged for goods (goods) or benefits (services). Although the possibility of paying directly with virtual assets is excluded, in practice there may be cases where virtual assets will be converted into UAH.

Scope and types of virtual assets

Virtual assets (which go beyond just cryptocurrencies) are divided into secure, or asset-backed, and non-secure assets. The main distinction is that secure virtual assets certify property rights, specifically the holder’s right to claim other civil rights objects. This means that secure tokens are digital claims on physical objects and are backed by those objects. The object itself is determined by the transaction in which such a virtual asset is created (it can be gold, crude oil, real estate, agricultural products or basically any other physical asset real).

The types of securities that can guarantee a virtual asset must be determined by the State Commission for Securities and Exchanges of Ukraine (the NSSMC).

At the same time, insecure virtual assets do not certify any of these ownership rights (e.g. Bitcoin and Ethereum).

Regulators

The virtual asset market will be regulated by both the NSSMC and the National Bank of Ukraine (the NBU).

The main missions of the NSSMC are:

• formation and implementation of state policy and adoption of regulations to regulate virtual assets;
• promote the development of the virtual asset market;
• implement state regulation and control over virtual asset turnover;
• protect the rights of market participants;
• ensure and exercise control over AML^[4] conditions;
• financial tracking, etc.

The NBU regulates the turnover of virtual assets issued by Ukrainian residents and guaranteed (backed) by monetary values. In particular, the NBU:

• determines the list of monetary values ​​which can secure the virtual assets, and against which the virtual assets can be exchanged;
• approves the rules for the exchange of virtual assets backed by monetary values ​​and establishes the relevant restrictions;
• supervises the activities of service providers, carries out inspections and applies sanctions;
• determines the cybersecurity requirements related to the turnover of virtual assets secured by monetary values.

Crypto-support for Ukraine

The Ministry of Digital Transformation has created the Aid to Ukraine website to support the Armed Forces of Ukraine. Accepted currencies are: Bitcoin (BTC), Ethereum (ETH), Tether (USDT ERC-20), Tether (USDT TRC-20), Terra (LUNA), Polkadot (DOT), Solana (SOL), Cardano (ADA) , Dogecoin (DOGE), Monero (XMR), ICON (ICX) and Casper (CSPR).

In three weeks of war, the Ministry of Digital Transformation has raised nearly $60 million in cryptocurrency to support Ukraine.

conclusion

Once the Virtual Assets Law comes into force, market participants should be able to use banking services, pay income tax and enjoy legal protection of their rights.

It is crucial to protect investors in virtual assets. However, the Virtual Assets Law is a framework legal act that establishes the general basis for regulation. Its real impact and benefits will only become apparent after the adoption of relevant regulations establishing very precise requirements for the mechanisms and procedures for dealing with virtual assets in the market.

In particular, these regulations should be adopted in a timely manner, i.e. before or simultaneously with the entry into force of the law on virtual assets, in order to avoid a situation where the market will operate in violation of the law. There should also be a transition period so that market participants can bring their activities into line with the law.

To fully and effectively launch the virtual asset market, the Ministry of Finance is also actively working on amendments to the tax and civil codes of Ukraine.

In either case, given the current state of the Ukrainian economy and the uncertain prospects for its recovery, the adoption of the Virtual Assets Law is an important step towards building a liquid regulated market.