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Managing Partner, Juscutum law firm
The History of Virtual Assets in Ukraine, or What’s up With Crypto
Ukraine rarely gets a chance to be better in something than others. We are usually among the outsiders in ratings, but with enviable consistency we lead the anti-ratings for inflation and corruption. Fortunately, the situation is a bit different with virtual assets coming forward now.
The paradox is that in the niche of virtual assets Ukraine has, without any support from the government, taken a very noticeable position. The circumstances developed as follows.
At the beginning of 2016, a significant number of Bitcoin mining capacities were concentrated in Ukraine. By December 2016 we had hosted one of the first crypto conferences on the European continent — BlockchainUA. Dedicated to the latest inventions in the field of financial technology, it gathered more than 1,000 people in the city of Dnipro. Thus, a community of blockchain developers gradually began to form in Ukraine, which is now a proactive and influential community. Then, our government agencies decided to join in the consolidation of Ukraine’s success in the crypto world.
There is no denying that any influence of the government on business is not very pleasing to its representatives, nor is the interaction with government agencies, for that matter. And all because the state is slow and almost always fiscal-minded. Nevertheless, we all understand that big capital of the emerging market is rarely kept in the country without state regulations. And though cryptocurrency is something about freedom, the capital goes where there are special licenses, and stays where there are transparent rules of the game and more or less acceptable tax rates. Ukraine started its way in this race 3 years ago.
In 2018, the first bill aimed at state regulation of virtual assets was written: the draft law on amendments to the Tax Code of Ukraine regarding the taxation of transactions with virtual assets in Ukraine. It was created under the supervision of MP Oleksii Mushak. The bill amended the Tax Code of Ukraine by giving the definitions of virtual assets and cryptocurrency. The Ministry of Digital Transformation of Ukraine has now taken over the legislative initiative in this area and proposes to bring the regulation of virtual assets into a separate law. The bill has passed its first reading. All indications are that in 2021 we may have a law on virtual assets adopted and in force in Ukraine.
So what should we expect from the law on virtual assets? It doesn’t really have a lot of innovation and a very strong regulatory policy. But it does have four goals.
The first goal is to define the term cryptocurrency, virtual assets, and other related concepts and definitions. Virtual assets are becoming a separate object of regulation, which takes its special place between intellectual property items and information. That is, virtual assets are a type of intangible asset, which makes it easy to extrapolate all sorts of accounting rules to them and, therefore, removes all questions in this area. This solves one of the main problems for businesses related to cryptocurrencies at the present time, that of accounting on the balance sheet. It is currently impossible to do this because there is simply no way to define and classify cryptocurrency.
Therefore, the law defines a number of characteristics and criteria of what can be attributed to virtual assets. Among these is that a virtual asset must necessarily exist in some system of circulation of virtual assets. For example, Bitcoin exists in the Bitcoin blockchain system. Some tanks or ships exist in a computer game. It means that a virtual asset does not exist without its interaction in a system of similar assets.
Secondly, the law will also provide a number of definitions relating to the basic concepts of a virtual asset transaction. This includes storage services, administration, exchange and transfer of virtual assets, as well as services related to a public offering and/or sale of virtual assets (ICO).
Thirdly, unlike Switzerland, where the attempt to categorize virtual assets ended in failure, in Ukraine one managed to divide virtual assets into two large groups. Virtual assets are usually divided into asset tokens and payment tokens. In Ukraine, because of the rapid development of technology, the system is more flexible. For example, at the time when the law was being written, there was no NFT (Non-fungible token), there was no Initial Exchange Offering, which has become irrelevant today. So, it was decided that grouping tokens by meaning and their essence makes absolutely no sense. Moreover, the biggest problem arises when the token has a mixed nature. That is, it can be used to pay, to vote, or to implement any other activity. Here, Ukrainian law seems inherently simpler. But this simplicity is more reasonable because it provides flexibility.
Thus, the division of virtual assets in the Ukrainian system of reference provides for secured and unsecured assets. Unsecured virtual assets are assets that are not tied to the material world. In other words, there is no promise in them: you have taken them and you cannot claim anything else. For example, Bitcoin and Dogecoin are unsecured virtual assets.
Secured virtual assets are assets that are in some way tied to tangible assets. By owning a secured virtual asset, you can assert claims against the third party. Consequently, the law defines the basic rules for tying them to the rights of claim on other objects of civil rights. For example, a Brocard certificate can be a token on the basis of which you are entitled to receive goods for an amount that is covered by that token.
Then, the law has requirements for professional participants of this market. These are exchanges, funds, where a new type of license is created and the regulatory boundary between the Ministry of Digital Transformation of Ukraine, the National Bank of Ukraine, and the U.S. Securities and Exchange Commission is defined.
It is also worth noting that if an asset is subject to any special legislation, special rule and restrictions, it must be displayed and fully applied to tokens.
Fourthly, the last aspect refers to taxes. Virtual assets and their turnover are not subject to VAT, which makes it possible to calculate expenses. The tax rate is 5% on the difference between the purchase and sale of the virtual asset. On the one hand, these rules are quite simple but, on the other hand, they meet the requirements of FATF. The latter, along with the developed banking system of our state, make Ukraine one of the most attractive jurisdictions in the crypto world, at least for the near future.
The text of the Draft Law On Virtual Assets is ready and well developed. Another sign of its quality is the fact that a number of major international exchanges have already supported the law and gave a clear signal that as soon as the law is passed, they will enter Ukraine immediately.
The law has just passed the Verkhovna Rada committees stage and is being prepared for its second reading.
The Ministry of Digital Transformation of Ukraine will become the main regulator of virtual assets. This is somewhat unusual practice, because in other jurisdictions the function of cryptocurrency regulation is performed by financial authorities: the U.S. Securities and Exchange Commission (SEC), the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC), the Financial Conduct Authority in the United Kingdom (FCA). However, the bill does strike a balance between the SEC and the National Bank of Ukraine. The Commission will deal with all projects that are securities, whilst the National Bank will deal with Stablecoin (a digital currency that is linked to an underlying asset like a currency or precious metal).
It is also worth mentioning that the project on the crypto hryvnia is being actively developed in Ukraine, though it hasn’t yet been included in this law.
However, it is quite possible that very soon we will have the CBDC (Central Bank Digital Currency) in Ukraine. As of today, China is closest to implementing this project. We expect Ukraine will also succeed in this area.
As far as I know, working groups have been already created and a draft law with amendments to the Tax Code is currently being developed. The amendments describe the procedure and rates of taxation of virtual assets. In addition, internal orders, regulations and other by-laws that will regulate the virtual assets field are being developed.
Taking this into consideration, as well as the fact that the Law On Virtual Assets will take effect three months after its adoption by the Verkhovna Rada, we can expect the launch of the legal crypto market and the entire area of virtual assets in Ukraine by the end of 2021.
This is the state of things on the Ukrainian virtual assets market. Everything points to the largest crypto exchanges being situated in our country.