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Partner, Dentons Kyiv / Barcelona
Law of Ukraine On Payment Services: a Brief Overview of the New Concepts
Taking into account the considerable migration of Ukrainians, many of whom have gone abroad or are internally displaced persons, digitization in the field of financial services and, above all, payment services, has become an urgent need. Updating the legal basis for the functioning of the payment market of Ukraine must provide additional opportunities for the development of new products and services and for the entry of new players into the market.
In 2021 the Ukrainian Parliament passed the Law of Ukraine On Payment Services. Its Implementation could be of great importance in addressing various needs related to the development of digital payment solutions.
In general, the Law is designed to adapt Ukrainian laws to the legal framework of the European Union (mainly to the requirements of PSD2 (Directive (EU) 2015/2366) and EMD (Directive (EU) 2009/110/EU)). It establishes a fresh regulatory framework for the money remittances market in Ukraine and brings it in line with EU regulations and modernizes requirements for payment transactions in Ukraine. Among other things, the Law sets out an exhaustive list of payment services that could be provided in Ukraine and determines the market players and the conditions for authorizing their activities. It also defines the general principles for the functioning of payment systems in Ukraine as well as the general principles for the issuance and use of electronic money and digital currency of the National Bank of Ukraine (NBU).
In this Article, we provide a brief overview of the new concepts the Law brings. At the same time, it is important to note that in pursuance of the Law, the NBU has already developed a significant number of legislative acts and will continue to develop detailed rules for a number of provisions outlined in the Law.
Electronic Money – Updated Concept
The concept of “electronic money” has been changed and brought closer to the definition of “electronic money” as set forth in PSD2.
The Law sets out that not just banks can be issuers of electronic money in Ukraine (as before), but other payment market players, in particular branches of foreign payment institutions and electronic money institutions can also offer this service. In Ukraine, electronic money can only be issued in Ukrainian hryvnia (UAH) and may only be used in permitted cases.
The Law also establishes which products are not considered to be “electronic money” and enables the NBU to establish other exceptions to the concept of electronic money.
Last but not least, the Law enlarges the scope of transactions where electronic money may be used (e.g. tax payments, charity donations, other settlements for purchased goods with various merchants).
Digital Currency – the Basis for the Introduction of a CBDC
For the first time in Ukraine, the concept of “digital currency” appears at the regulatory level and is defined as an electronic form of the monetary unit of Ukraine, the issuer of which is the National Bank of Ukraine. The launch of the “e-hryvnia” project supports the trend of other central banks as to the possibility of implementation of a Central Bank Digital Currency (CBDC). In general, e-hryvnia is essentially a fiat currency in electronic form. The e-hryvnia can be used on distributed ledger technology (DLT, blockchain) as a platform to issue and circulate it. As a result, in the future, the e-hryvnia may become an alternative to existing means of payment.
Payment Service Providers – the List of Payment Service Providers has been Expanded
In addition to banks, which can provide payment services under banking licenses, payment services may also be provided—after obtaining the necessary license and/or registration—by other entities, including payment institutions, branches of foreign payment institutions and financial institutions that have the right to provide payment services.
All payment market players (except for banks) and the list of services provided by them must be entered in the Register maintained by the NBU.
The minimum charter capital requirement for non-banking payment service providers is set in absolute values in hryvnias. Considering hryvnia devaluation, however, that may be a rather insignificant requirement.
A hot topic concerns the possibility of international players to enter the Ukrainian payment services market. Branches of foreign payment institutions must first obtain a license for accreditation purposes. This process includes the need to provide a written commitment to the NBU, issued by the foreign payment institution, stating that it will unconditionally perform its obligations arising in connection with the activities of its branch on the territory of Ukraine.
A simplified licensing procedure is provided for setting up small payment institutions. Their activity is limited (i) by the volume of payment transactions and (ii) to only payments on the territory of Ukraine (no cross-border payments). The NBU may introduce additional limitations and restrictions down the road.
Taking into consideration the wide range of players and business models on the payments market, the Law provides for the possibility of engaging agents in the provision of payment services. Information on such agents must be entered in the Payment Infrastructure Register.
The requirements for agents’ activities, the list of their functions, as well as restrictions on their engagement will be set by the National Bank of Ukraine. In addition to agents, the engagement of third parties to perform certain operational services related to payment services is also regulated.
The payment service provider that has engaged an agent or third party remains responsible to the client for the provision of the payment service.
Remarkably, the Law provides a regulatory framework for launching mobile payments market in Ukraine, allowing for mobile operators to effect certain limited payments, using the mobile phone accounts of their clients.
Types of Payment Services and Procedure for the Provision of Services
The Law defines and provides a list of financial and non-financial payment services, as well as ancillary services and limited payment services. No license is required to provide non-financial services as well as limited payment services; only registration in the relevant NBU register is necessary. Furthermore, the Law entitles the NBU to classify services not provided for by the Law as separate types of payment services. This should give an opportunity for the regulator to address the market developments in a prompt manner.
In addition to opening bank accounts with banks, the Law allows residents of Ukraine to open payment accounts with non-bank payment service providers. It is important to note that only banks may open accounts for nonresident legal entities.
Payment accounts opened with a non-bank payment service may be used exclusively for payment transactions. Funds can be held in a payment account only for the period of time required to complete the payment transaction. It is prohibited to use such payment accounts to attract deposits or for other financial services.
The Law imposes a number of restrictions on payment services providers engaging in other activities or combining various payment services. It also defines the types of payment instruments and the procedures for providing payment services, establishes the requirements for protecting information when carrying out payment transactions and authentication as well as the requirements for operational and security risk management.
Security, Reliability and Consumers Rights Protection
Funds held in payment accounts opened with non-bank payment service providers are not protected under the Law of Ukraine On the Household Deposit Guarantee System. At the same time, there are requirements for non-bank payment service providers to take measures aimed at securing their liability towards their clients.
Non-bank payment service providers are not subject to the legal requirements concerning bank secrecy; that said, the Law introduces the concept of “payment service provider secrecy.”
Fintech Sandbox Regime. Open Banking
The Law also sets out the principles for the NBU to create and operate a regulatory platform for testing innovative services, technologies and tools on the payment market (Sandbox regime). This can enable fintech companies to test new products and services that have regulatory uncertainty. According to the Law, such Sandbox regime may not exceed two years. Upon expiry of the testing period, the Sandbox participant may continue providing the tested services, subject to completion of an authorization procedure and complying with the requirements of the Law. On the other hand, if requested by the NBU, the Sandbox participant must cease providing/using the services, technologies and tools that were tested. Thus, there is some risk/uncertainty about Sandbox regime testing for participants.
One important innovation provided by the Law is the introduction of conditions for the launching of open banking in Ukraine. The relevant provisions of the Law will enter into force 36 months after the date of entry into force of the Law.
Provided that effective implementation and supervision are ensured, the Law should generally have a positive impact on the further development payment services market in Ukraine.