Regulator reshuffle and EU-rule misalignment: why Zelensky vetoed the Virtual Assets Law

In early September, the Verkhovna Rada of Ukraine adopted in the second reading and in full the law “On Virtual Assets”. However President Volodymyr Zelensky did not approve the document in its current form.

On 5 October, the head of state returned the law for consideration with his proposals. They mainly concern the regulators of the virtual assets market (VA).

According to the version of the law adopted by the parliament, regulators would be the National Bank (NBU), the National Commission on Securities and the Stock Market (НКЦБФР) and a newly created body. The latter was to be responsible for implementing the state policy formed by the Ministry of Digital Transformation. Before the creation of this body its role was performed by the ministry.

However, in the presidential administration they believed that creating a new body would entail substantial budgetary costs.

Also in the presidential document there is talk of the “world experience” of regulation over VA trading, exchange and custody by financial-market regulators, as they have experience in “protecting investors’ rights, preventing fraud, and countering the use of VA in financial pyramids”.

In the president’s office they think the law, as written, does not meet constitutional requirements of legal certainty and does not provide transparent and understandable conditions for participants in the VA market.

The president proposed anchoring regulators’ roles to the NSSMC and the NBU. The NBU would deal with VA backed by monetary values, and the Commission would handle all other types of VA. The NSSMC confirmed that Min Digital Transformation is planned to be fully excluded from the process.

In a conversation with ForkLog, Maxim Libanov, a member of the NSSMC, noted that previously regulation was anchored to the Ministry of Digital Transformation and the new service planned to be created under the ministry, whereas the NSSMC was to be responsible only for VA backed by financial instruments.

To the NSSMC’s powers, the Zelensky administration proposes adding the management of a special state registry of VA providers, issuing them licences to operate and full oversight of their work. Essentially the Commission becomes the main regulator of the market.

In the NSSMC they stated:

«The Commission has consistently advocated proper regulation of all spheres of financial and commodity markets, including the VA sphere, and therefore supports the president’s proposed changes to the law».

Earlier, the NSSMC called the law passed by the Verkhovna Rada “a good start for the development of the VA segment in Ukraine”, but noted some discrepancies with European and international standards regarding the introduction of VA into Ukrainian law.

The day before, the Ministry of Digital Transformation declined to comment. In response to ForkLog’s follow-up request, ministry representatives did not respond.

The authors of the law will take Zelensky’s proposals into account, said ForkLog, the head of the cross-factional Blockchain4Ukraine group, Aleksey Zhmerenetsky, who is working on the document:

«After another passage through the Rada’s Digital Committee and after incorporating the president’s proposals, the bill will be put to a second reading».

It is expected to take one to two months, said Konstantin Yarmolenko, head of the advisory group of lawmakers Blockchain4Ukraine.

The head of the KUNA exchange’s legal department Anna Voevodina explained to ForkLog that the proposals for changes are related to bringing the law in line with European standards.

In 2020 the EU introduced rules for regulating cryptocurrencies and stablecoins. The draft regulation defines that supervision of the VA market should be carried out by a local government body regulating financial markets, and sets strict requirements for participants and a classification of their activities.

Because Ukraine signed the association agreement with the EU, it must harmonize legislation with European rules, noted Voevodina.

The EU regulation has not yet been approved in the vote, and after it happens, it will come into force two years later.

«The law adopted in Ukraine corresponds to what exists now, but will not correspond to what will exist in the future», — summed up the lawyer.

Voevodina calls the president’s position “the safest and legally most sound”.

In the Blockchain Association of Ukraine (BAU) they regard the proposed changes at this stage as a “good result” for the market in the country.

«This will shorten the time for recasting and amendments. An alternative would have been to adopt it, have the law in force for several months and then need to redo and re-vote it», said ForkLog BAU head Natalia Drik.

Aleksey Chernykh, head of the committee on enforcement issues of the National Association of Lawyers of Ukraine, noted that the EU rules regulate VA precisely as derivative financial instruments with properties and requirements similar to securities.

However Chernykh notes that treating VA only as speculative instruments of the stock market and attributing them entirely to the NSSMC’s remit would be a major mistake.

«In my view, such emphasis sets us back ten years. Leading financial institutions deploy transactional mechanisms and smart contracts, and we still have to invent the alphabet from which to build our regulation», — said the expert.

Voevodina notes that for the industry changing the regulator could lead to tighter requirements and a more cumbersome legal process:

«It will be harder, but in the long run it will give more opportunities to become part of the global market, to obtain banking services in Ukraine and abroad. And we will become a more attractive jurisdiction».

Chernykh suggests that the process of legitimising the cryptocurrency market may drag on indefinitely, especially if it does not happen before the start of the presidential campaign in Ukraine:

«Given the delays in implementing the Law on Payment Services, the postponement of the Law on Financial Services, and the veto of the Law on Virtual Assets, we will not have “clear conditions” for VA before mid-2023. And there are elections…»

The VA law was adopted in the first reading in December last year. Since then the text has been rewritten several times.

On 8 September 2021 the Verkhovna Rada approved the law. It defines VA as an intangible asset, prohibits their use as a means of payment, and introduces a classification of VA providers. Read a detailed analysis of the document in ForkLog’s exclusive.

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