A look at the ‘On Virtual Assets’ law: what the authors put into it and how experts evaluated it

On 17 February, the Verkhovna Rada of Ukraine adopted the updated Law on Virtual Assets (VA), regulating cryptocurrency activity on the country’s territory. Working with the experts who contributed to its drafting and other specialists, ForkLog has looked into what awaits cryptocurrency holders in Ukraine.

What the law regulates

The law brings the circulation of virtual assets onto a legal footing. They are divided into:

• unsecured VAs (classic cryptocurrencies such as Bitcoin and Ethereum);
• secured VAs (security tokens that confer a right to profits and/or company assets);
• financial VAs backed by financial instruments (tokenized shares) and monetary values (stablecoins and CBDCs).

Secured VAs, unlike cryptocurrencies, certify property rights, in particular, rights to demand other civil-law objects.

“Cryptocurrencies, by classification under the law, are regarded as unsecured virtual assets. They are characterised by the absence of secured property or non-property rights. This means that for any cryptocurrency, no one promises anything; it is a standalone market unit,” explained Artem Afian, a member of the public association “Virtual Assets of Ukraine” (VAU) and managing partner of Juscutum law firm.

The DeFi and NFT segment is not directly touched by the law, though its broad terminology allows regulation of them.

“Recommendations FATF on DeFi and NFT were published only in October 2021, and we have not yet had time to implement them in this law’s provisions. However, the term “virtual asset” is formulated abstractly enough to cover all VA types,” said Aleksey Zhmerenetsky, head of the VAU Supervisory Council and the inter-faction association of MPs Blockchain4Ukraine.

The only inconsistency he pointed to is that if a DeFi administrator cannot be defined, it is unclear who should enforce the law’s provisions.

“One challenge for the legislator is determining property rights to NFTs for their holder. On the blockchain the token holder is defined as its unique owner, while the legal system does not enshrine this. At present we have developed and registered a draft amendment to the Civil Code of Ukraine, which should partially solve this problem,” added Zhmerenetsky.

The CEO of VAU, head of the advisers’ group to the inter-faction MPs Blockchain4Ukraine, Konstantin Yarmolenko, clarified that the law concerns exclusively legal entities providing VA services:

“If you as a individual send crypto to another individual or simply hold crypto as an investor, the provisions of this law do not apply to you and you can sleep easy.”

Providers may safekeep/manage VAs, conduct exchange and transfer operations of such assets, and provide intermediary services related to them.

If a foreign company falls under the VA provider criteria and renders services to residents of Ukraine, it must register its activities in the country.

“If a Ukrainian resident simply conducts operations with some foreign VA, that foreign issuer is not obliged to register as a VA provider in the country,” clarified Yarmolenko.

The sanctions provided by the law will apply to violators only after three months have elapsed from the date the state register of VA-related service providers is introduced.

“Given that time is needed to develop and launch the register, VA users and potential VA providers will have the necessary time to adapt. It is impossible to apply sanctions under the law before these sanctions come into effect,” explained Konstantin Yarmolenko.

New market regulators

Control over the market is shared between the National Bank of Ukraine (NBU) and the National Commission on Securities and the Stock Market (NKЦБФР). The NBU is responsible for VAs backed by monetary values. Regulation of the circulation of cryptocurrencies and VAs backed by securities or derivative financial instruments is assigned to the NKЦБФР, explained Juscutum lawyers Vladyslav Kislytsky and Andrey Chaban.

At the same time, the new version of the document dropped a provision about creating a new regulator and the mention of the Ministry of Digital Transformation, which was to temporarily replace it. ForkLog previously discussed this change with officials.

“I believe both approaches have their advantages and disadvantages,” says Artem Afyan. “During the dialogue, thanks to the Ministry of Digital Transformation, the positions of the Commission and the NBU converged on the understanding that the chosen regulators will be effective. As experience shows, most people tend to dislike creating a new body.”

Meanwhile, Juscutum lawyers Kislytsky and Chaban noted that regulating all aspects a VA market participant may face may require more expertise and experience than the NBU and NKЦБФР can provide:

“Remember that given the different types and kinds of tokens, there may be more regulators for them. For example, if you tokenize electricity — that’s one regulator, but if land — another. There cannot exist a single regulator.”

Banks in the game

Thanks to the law, banks will become full participants in the cryptocurrency market. This, the authors say, is driven by global trends and particularly relevant in light of central banks creating their own digital currencies.

“The CBDC payments system will be available only to financial institutions holding funds on central-bank accounts and to professional market participants. In developed countries retail payment and settlement systems are already efficient, operate in near real-time, and are always accessible. It is banking services that will allow citizens to use CBDCs,” explained Artem Afyan.

Technically, banks are the most ready players in the VA market, given their large client base, KYC processes, and role as primary financial-monitoring subjects, says Konstantin Yarmolenko.

In his words, the introduction of the NBU’s e-hryvnia will deprive commercial banks of part of their income from processing payments for goods and services, as well as fiat payments, so from their side “it would be prudent to turn to the VA market.”

“How fast and flexible banks will be and whether they can compete with, for example, top exchangers or crypto exchanges – time will tell. If banks adapt, they will survive and even thrive; if not, they will go extinct like the dinosaurs,” added Yarmolenko.

Compliance with FATF recommendations

According to the authors, one of the main aims of drafting the bill was to comply with FATF recommendations. Aleksey Zhmerenetsky noted that the law should prevent Ukraine from ending up on FATF’s blacklist due to potential money laundering through VAs.

“An important aspect is that all our developments are coordinated with colleagues from the State Financial Monitoring Service of Ukraine, as they are at the forefront of negotiations with FATF and only they possess the full information on this issue,” he said.

With FATF’s expanded recommendations and the global regulatory approach to implementing them, the authors are ready to amend the “On VA” law if needed.

In the current version, lawmakers did not intend to set out mechanisms for regulation of the crypto market in detail, but rather to establish the core rules.

“While drafting the law, ICOs fell by the wayside, STOs came and went, IEOs appeared, NFTs emerged, and now DAOs are beginning and so on. It is very hard for the legislator to keep up; that is a regulator’s job,” explained Artem Afyan.

One provision of the law gives holders of cryptocurrencies the right to set the VA price themselves. However, according to Afyan, this cannot create a risk of money laundering due to several levels of control.

Regulators must monitor service providers and, in case of violations, prevent and sanction illicit activity. Service providers conducting a transaction must collect all the necessary information about the client, including the sender’s data (identification data of the individual or the company) and similar data about the VA recipient.

“A provider may refuse to process a transaction if there is suspicion that the VA or funds are linked to criminal activity. At the same time, the purchase and sale of any VA occurs at a market price displayed by an exchange or broker. Regardless of the price set by the market, the price formation will be influenced by the market in line with global financial algorithms,” explained the lawyer.

Market reaction

Business representatives and industry associations broadly welcomed the law’s adoption.

Binance called it a huge step for the entire industry and stressed that the law protects Ukrainian users from scams and crimes in the field of digital currencies.

“Thanks to the law, cryptocurrency holders in Ukraine will be able to legally exchange assets, declare them in their tax returns, launch blockchain businesses, and use cryptocurrencies in daily life,” said ForkLog’s Binance Ukraine General Manager Kirill Khomyakov.

WhiteBIT exchange CEO Vladimir Nosov noted that the law’s passage will attract to the country companies already operating in overseas jurisdictions and create opportunities for collaborations of these projects with Ukrainian businesses as well as with government services.

“In this format, one can also think about international expansion for Ukrainian projects.”

The Blockchain Association of Ukraine also said they are glad the bill was adopted:

“This shows that the state’s “crypto-friendly” policy is not only about words but about action.”

Head of Legal at Kuna Exchange Anna Voievodina noted that the law will legalize the crypto market, bring additional revenue to the budget, and create new jobs.

She said that during the law’s drafting there were talks with the Ministry of Finance and agreements on preferential personal income tax rates, exemption from VAT for crypto operations, and tax breaks for providers.

The law does not affect mining, as FATF recommendations state it is not subject to licensing.

“When a miner starts selling cryptocurrency not for personal reasons but as a service provider, such activity falls under regulation by this law,” explained Voievodina.

She called the Ministry of Digital Transformation’s exclusion a logical decision, in line with FATF and the European Commission’s requirements; all of them favour financial regulators as the overseer of the crypto market.

The law applies new approaches to classifying entities, dividing them into residents and non-residents. The latter face heightened capital and levy requirements.

“Exchanges will be able to create a legal entity that will enter the register. For Kuna, as an exchange, there are at least three activities – VA custodian, exchange operator, and transfer operator. Under the law, we must register, form a statutory capital, develop AML rules in line with Ukrainian law, spell out all internal-control policies and risk assessments,” said Anna Voievodina.

Every provider becomes registered as a primary financial-monitoring entity. The regulator will separately develop the specific mechanism for this procedure.

Voievodina stressed that without additional by-laws a full market launch is impossible:

“Ahead lies the most intense fight — the tax fight.”

The Law on Virtual Assets will not take effect without changes to the Tax Code. According to Aleksey Zhmerenetsky, a bill on crypto-transaction taxation will be submitted to parliament within two weeks.

As a reminder, in September 2021 the Verkhovna Rada adopted the Law on VA in its second reading. However, President Volodymyr Zelensky returned the document for revision, proposing to make the sole regulators of the market the NBU and NKЦБФР.

Other provisions did not change, and on 17 February 2022 the law was finally adopted. ForkLog has previously examined the document in detail:

Read ForkLog’s Bitcoin news in our Telegram — cryptocurrency news, prices and analysis.