Ukraine to Introduce Laws on Blockchain

David Kemp

The Ministry of Digital transformation of Ukraine has published the draft of the law "On Virtual Assets". This law promises to establish ground rules for the cryptocurrency functioning on the territory of Ukraine. The draft is not final and is ready to be edited accordingly to the helpful comments of the crypto community. 

Main outlines

The specified bill defines:

  • the legal status of virtual assets (hereinafter - VA), which allows to regulate the procedure for establishing the rights of individuals to such assets, their use and turnover in the Ukrainian market
  • the range of subjects and market participants whose activities are subject to state registration;
  • VA emission rules; it is possible to implement both public and private offers of VA;
  • the VA market regulator, as well as the scope of its powers and functions, in particular, monitoring and supervising compliance with legislation in THE field of VA circulation;
  • liability for violation of the rules of conduct by certain participants of the VA market.

In particular, for activities that have the characteristics of a qualified service provider related to the turnover of virtual assets, without state registration, a fine of 5,000 to 10,000 tax-free minimum incomes  of an individual (from 85,000 to 170,000 UAH) is imposed.

Excerpts from the author interview

The crypto news portal called Forklog has interviewed the author of the draft, Oleksei Zhmerenetskyi and the head of the advisors group, Konstantin Yarmolenko. 

The document caused a lot of controversy. 

ForkLog: Hello, Oleksei and Konstantin. The document was recently submitted for public discussion, but has already received a portion of criticism in its address. We suggest to go through the most important points today. First of all, explain what dictates the definition of virtual assets (VA) as property?

Blockchain4Ukraine: We classify VA as a property for a number of reasons. First, according to the definition of FATF and the EU Directive 2018/843 VA, it is a "digital representation of value".

Secondly, according to article 139 of the Economic Code of Ukraine, "property in this Code is recognized as a set of things and other values (including intangible assets) that have a value definition…»

Third, the international financial reporting standards (IFRS) in the update for June 2019 classify cryptocurrencies as integral assets. Taking into account these arguments and for a number of other reasons, we refer VA to integral assets and, accordingly, to property for the purposes of economic legislation.

For accounting purposes, we classify VA as integral assets of the group "other integral assets".

ForkLog: You have divided the VA into secured and unsecured tokens (crypto assets). What class does bitcoin belong to?

Blockchain4Ukraine: According to this bill, bitcoin belongs to crypto assets.

ForkLog: The bill specifies registration for companies working with cryptocurrency. Who should register with the Ministry of Finance, and who should not?

Blockchain4Ukraine: Registration is only provided for VA service providers: exchanges, custodians. All other market participants are not required to register, but they can also do so based on their business interests.

ForkLog: How will the activities of cryptocurrency issuers not registered in Ukraine be regulated?

Blockchain4Ukraine: In the current version of the draft law, the activities of VA issuers are regulated in two ways: either the Issuer has a registered location or a permanent representative office here, or the Issuer has submitted its offer for sale to the legislation of Ukraine.

The issue of registration in Ukraine of VA suppliers (VASP) that are incorporated abroad is discussed at the FATF level. In the current version of the FATF recommendations from June 2019, each country decides for itself whether to register a non-resident VASP.

However, according to our information, the relevant FATF committees are forming the view that it is necessary to make changes to the FATF proposals and recommend that all countries conduct licensing/registration of non-resident VASPs.

ForkLog: Does the bill apply to miners as currency issuers? Will they need to register?

Blockchain4Ukraine: The topic of mining of virtual assets has not yet been touched upon in the bill , but this issue is actively discussed. Ministry of energy and environment protection of Ukraine is currently considering possible options for using the surplus of electricity generation in the power system, especially by Energoatom.

Since there are not many options to solve the problem (in particular, putting nuclear power units for repairs, electrifying the railway network, using energy-intensive data centers and mining farms that can balance their energy consumption), we are in an active dialogue with all stakeholders of the initiative to use data centers and mining farms in search of a solution in the legislative sphere.

If there is a need and political will, we will promptly develop and implement changes to regulate this issue.

In our opinion, and we share the opinion of the Better Regulation Delivery Office on this issue, it is important to quickly launch the segment of virtual asset generation to change the classification of this type of economic activity: from KVED 64.19 "Other types of monetary mediation" to KVED 63.11 " Data processing…»

ForkLog: In what cases will it be considered that the VA does not have an Issuer?

Blockchain4Ukraine: This is a difficult question. The most famous case, when the Issuer of the VA is not defined, is bitcoin.

From a legal point of view, the term "VA Issuer undefined" means that the token issuer has not been identified. Bitcoin and all Proof-of-Work VA fall under this definition, since no one has identified the miners or mining pools, and it is not possible to calculate who exactly is behind each of the blocks and, accordingly, for the bitcoins that are paid as a reward. Thus, it is impossible to make claims to the bitcoin miner.

Now we are working with lawyers and experts to find an answer to this question, especially in relation to those VA issued outside of Ukraine and before the entry into force of this law.

ForkLog: What about taxation for exchanges, exchanges and miners? Is it implied in the future?

Blockchain4Ukraine: On November 15, 2019, we registered draft law No. 2461 "On taxation of crypto assets" in the Verkhovna Rada of Ukraine. Prior to the entry into force of this law in Ukraine, standard tax rules apply for participants in the virtual asset market.

ForkLog: The bill stipulates that only people with an unblemished business reputation can own exchanges and exchanges. What does this mean and will it create corruption risks?

Blockchain4Ukraine: The "unblemished business reputation" rule assumes that an individual who is the ultimate beneficiary or head of a virtual asset provider company, by analogy with the ultimate beneficiary or head of a bank, should not have a criminal record under articles of the Criminal code related to crimes in the financial sphere.

ForkLog: It just turned out that way that almost immediately after Ukraine, Russia submitted its own draft laws on regulating the crypto market. And they are much tougher – for bitcoin transactions, the penalty is up to seven years in prison. Why didn't Ukraine choose the path of prohibition?

Blockchain4Ukraine: We have studied the current version of the Russian draft law "On digital currency and amendments to certain legislative acts of the Russian Federation". It contains two key points: 1) a ban on the issue and turnover of cryptocurrencies and 2) a ban on the dissemination of information about the issue and turnover of cryptocurrencies.

Both clauses introduce criminal liability for their violation. If the bill is adopted in the current version, it will lead to the death of the virtual asset market in Russia.

Ukraine did not follow the Russian path of banning virtual assets, because this market is a growth point for Ukraine's GDP and an opportunity to become one of the world's technological leaders. In addition, there is no point in prohibiting something that is technically impossible to control, as we have already seen in the case of blocking Telegram in Russia

The discussion of the draft law" on virtual assets " continues. It is expected that the document will be submitted to the Verkhovna Rada of Ukraine for consideration by May 29.

Recall that the law On countering money laundering and terrorist financing came into force in Ukraine on April 28, but the provisions on financial monitoring of cryptocurrency operations prescribed in it will not be applied yet.