At the start of 2022, Ukraine adopted the Law “On Virtual Assets” (“OVA”), regulating cryptocurrency operations. Alongside the NBU as market regulator, the National Commission on Securities and the Stock Market (NKЦБФР) was appointed.
Despite the war, the country continues to tighten cryptocurrency regulation, preparing a number of legislative initiatives that will bring the market out of the gray zone. ForkLog spoke with a member of the NKЦБФР, Yuri Boyko, about the main forthcoming changes.
ForkLog (FL): Hello, Yuri. The Law “On Virtual Assets” is already a year old, but it has not yet taken effect. What is needed for it to start functioning?
Yuri Boyko (YB): To bring the Law “On Virtual Assets” into effect, changes to the Tax Code were required. In addition, the text of the law was current for the market at the moment of its drafting, a couple of years ago, and the market for virtual assets is very dynamic.
Ukraine has chosen the path of European integration; accordingly, the path to EU membership will require adapting local cryptocurrency regulation to the MiCA regulation.
This document was developed by influential experts of global renown, who gathered the best expertise and practice of the virtual assets market in Europe. There is already an absorption of mistakes and corrections laid out in the EU experts’ paper. We, as a future EU member, are also taking all these aspects into account.
FL: At the moment MiCA has not yet been finally adopted in the EU. Will Ukraine monitor potential changes to this regulation?
YB: The regulation was developed for more than four years with constant consultations, involving major market players, and public discussions. To date, the draft regulation has been approved by the EU Council, and in February it will be put to a vote in the European Parliament.
We are currently conducting consultations with European experts who participated in developing the regulation, and we hope for its adoption within the specified timeline. Yes, indeed, we have information, and Western colleagues emphasise that changes to this draft regulation are being prepared. We are ready for this. I repeat again that the virtual asset market changes rapidly, and such changes are a normal process.
FL: Will the classification of types of virtual assets and services be changed in the Law On Virtual Assets? Now it differs quite a lot from what MiCA prescribes.
YB: Yes, that is correct. MiCA provides a broader definition of terms, but also clearly divides them into three categories. These are Asset-referenced tokens — tokens linked to assets, Electronic money tokens — electronic money tokens, and all other crypto assets, including service tokens. This is the classification that will be embedded in Ukraine’s legislation.
MiCA also clearly defines ten services, among which a trading venue license as a separate type. These services will be reflected in the updated law, namely:
- custody and administration of VAs on behalf of third parties;
- operation of a trading venue for VAs;
- exchange of VAs for money;
- exchange of VAs for other virtual assets;
- execution of orders for VAs on behalf of third parties;
- placement of VAs;
- provision of transfer services of VAs on behalf of third parties;
- receipt and transmission of orders for VAs on behalf of third parties;
- provision of consultations on VAs;
- portfolio management of VAs.
Unfortunately, the Law On Virtual Assets had only four services and described a different approach. Specifically, for a trading venue to operate, a license for two or three services would be required.
FL: MiCA also implies that for a trading venue to operate one must obtain licenses for several services. Is it correct to say that, given market operation, the exchange should be a VA custodian, a trading venue operator and a broker?
YB: I do not wish to go into the business models of each exchange. But this is correct. To provide the full range of services to end users, the exchange must hold several licenses. MiCA sets out requirements for all license types and licensees.
FL: The question readers will want answered is the planned taxation of cryptocurrency operations. How does the NKЦБФР envisage this concept?
YB: Indeed, this is the most difficult issue, on which the local industry as a whole depends. Together with Ernst & Young experts in Ukraine, with support from the USAID Financial Sector Reform project, we developed a concept that analysed the experience of global jurisdictions in regulating the virtual asset market.
Most countries in their concepts have defined the taxation of virtual asset operations as an investment activity, i.e., the approach is similar to the taxation of securities transactions.
Studying international experience, we found that in all countries the taxation concept is quite complex. One cannot simply copy another country’s practice and implement it here. It is important to understand that there are different operations with virtual assets.
However, globally there are only five main taxable operations with taxable virtual assets: mining, selling cryptocurrencies for money, exchanging them for other virtual assets, settling cryptocurrencies for goods and services, and growth of market value — another tax used abroad.
Given this, we drafted a concept that is analogous to the existing taxation mechanism for securities in Ukraine. It will cover all five operations above.
FL: Were consultations held with market participants before formulating the tax bill?
YB: Yes. The NKЦБФР established a Consultation Council on Regulation of Virtual Assets, which engages market participants, the parliamentary body and sectoral authorities.
FL: What about citizens who already own virtual assets? How should they confirm the cost of their holdings in line with the current concept?
YB: This is a difficult question. But I can say this: those who already purchased cryptocurrency, under the concept we proposed for discussion, should provide information confirming the cost basis of the purchase of the virtual asset.
Those holders who cannot confirm it will obviously run into issues. However we will seek other structures that simplify this for users.
FL: Will the introduction of cryptocurrency taxation require additional regulatory acts and amendments to existing law?
YB: The question is which ones exactly. For example, regarding reporting, yes, most likely. After the law is laid out, it will be clear what else needs to be introduced and refined.
FL: Most countries in cryptocurrency regulation have not pursued cross-border legislation, preferring experimental concepts at the national level. Why did Ukraine not choose a similar approach?
YB: We did consider such a conceptual approach, but it would have been very time-consuming for our country. Also we already had groundwork and the Law On Virtual Assets.
Ukraine is a leader in virtual asset turnover, with over 5 million crypto wallets open. Not to put it too strongly, we can become a regulator of trendsetting; given market pressure and rapid development, this gives us a push to act quickly. The industry needs legalization of virtual assets in Ukraine for business development right now.
We chose for ourselves the concept of introducing MiCA into our baseline law. And then we will have the so-called sandboxes, since MiCA does not cover some markets, such as DeFi and NFT.
So far even European regulators do not have robust practice supervising these segments. Accordingly, we cannot be on the sidelines of these directions. I am confident regulators of our baseline law will have sandboxes where such projects will be tested.
FL: Which professional participants of the Bitcoin market do you expect to be among the first to obtain licenses to operate in Ukraine?
YB: We see interest from exchanges seeking to build their operations in Ukraine, given our potential. There are also many who will build business models for their commercial interests. They can be called issuers.
FL: Who exactly is being referred to, for example, issuers of digital assets like Tether? Does such a company need to register in Ukraine?
YB: This will be a new term “offeror” — a natural or legal person who can conduct a public offer of virtual assets.
FL: Most virtual assets were issued long ago and circulate freely in the EU and the USA. How will their circulation be regulated in Ukraine?
YB: The MiCA concept defines such a notion as a public offering.
After legalizing the circulation of virtual assets in Ukraine, offerors must meet the conditions of a public offering. This is a notice to third parties in any form and by any means. It contains sufficient information about the terms of the offer and the proposed virtual assets for potential owners to decide whether to buy them. In other words, an offer to an unspecified group of people.
In general this all boils down to the white paper requirements, where the risk profile for investors, the essence of the technology, and so on, must be described.
Companies that cannot meet the standards will, unfortunately, not have a public offering in Ukraine.
FL: The main goal of legalizing virtual assets is benefits for Ukraine. What exactly does NKЦБФР expect from launching the market on a lawful plane?
YB: As I have said, our country is a leader in this industry. The market exists here and now. We will bring it out of the gray zone.
Firstly, this will help business development. When there are clear rules and an understanding of how to build a business, it becomes attractive to investors. Corruption factors will disappear. Secondly, it introduces taxation.
FL: What volume of budget receipts could legalization of virtual assets bring to Ukraine?
YB: For this there must be a clear justification. There are no precise figures because there is no statistics. There are only analytical data from consultancy firms. We cannot talk money because we have not approved the concept or the rate itself. This will all be decided by our parliament.
FL: Ukraine has restrictions on capital movement. Currently, with the legalization of virtual assets in Ukraine these restrictions are being removed. How will this align with NBU norms?
YB: The National Bank is the main actor in monetary policy and no laws should bypass its established norms. We must also remember that Ukraine is at war, affecting all processes in the state.
Nevertheless, we are conducting consultations with NBU specialists on this rule. What model will be adopted, we cannot yet say. It will be laid out in the bill.
FL: Will restrictions be lifted after legalization of VA in Ukraine? Could the NBU widen restrictions on them?
YB: For now we are not talking about lifting restrictions. We are saying that current currency controls remain in place and this law should not harm them because there is a war.
FL: Will licensed companies be able to attract Ukrainians and allow them to open accounts in other jurisdictions?
YB: If a Ukrainian wants to open a wallet somewhere, that is his right. However we are currently regulating activities in Ukraine, where everything will be licensed and clear. But this does not mean that such legalization provides maximum protection for such activity.
FL: How to prevent cases like FTX?
YB: The FTX case is directly linked to licensing requirements. It showed that there were affiliated parties and capital requirements were not met.
FL: Is it correct to say that passing the tax bill automatically leads to enactment of the Law On Virtual Assets?
YB: These documents are connected and cannot exist without each other.
FL: When will the tax bill and the updated Law On Virtual Assets be presented?
YB: We aimed to have them by the end of January 2023, but obviously we will not make it.
Read more about cryptocurrency regulation adopted in Ukraine in 2022 in ForkLog’s special material.
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