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Crypto regulation genesis in Ukraine. Nestor Dubnevich

Нестор Дубневич портретIn the spring of 2017, the world’s first legislative act determining the legal status of virtual assets was adopted. Japan was the pioneer country in crypto regulation. During this year, five more countries of this kind appeared on the world map: Gibraltar, Malta, Belarus, and Kazakhstan were added. Liechtenstein, South Korea and… Ukraine are at the ready, steady, go stage.

There was a forecast for 2018 to become a year of cryptocurrency regulation. There were several reasons for this:

– blockchain startups have raised more than $20 billion in cryptocurrency, and this figure has become difficult to ignore for the regulator (especially in matters of protection of investors’ rights);

– working groups of financial and exchange commissions have finished collecting feedback from the market and announced  first legislative developments;

– the major investors have expressed their interest in highly liquid virtual assets and “lobby” regulatory adulting of crypto industry to inject it with large amounts of money.

Ukraine, being in the top 10 countries in the world by the number of cryptocurrency users, also could not stay away. The first regulatory clarifications on bitcoin appeared back in 2014, and the community acquainted with first legislative initiatives three years after the introduction of bitcoin in view of the financial regulator of the country. But in order to understand the domestic “conception” of crypto regulation, it makes sense to present a brief overview of the world’s main approaches to the regulation of virtual assets, and then to analyze which of them is most applicable to the Ukrainian realities. Traditionally, every legal discussion in the crypto-sphere starts with a question: what is the legal status of bitcoin? Such properties of cryptocurrency as the absence of a centralized issuer, it is limited number and the possibility of using it as a means of payment, have combined the features of gold, money, and exchange (speculative) tool in this asset. In the USA only three different public authorities in their explanations determined the nature of bitcoin in different ways: The IRS (Internal Revenue Service) as property, FinCen (Financial Crimes Enforcement Network under the Ministry of Finance) as money, CFTC (Commodity Futures Trading Commission) as a virtual exchange commodity.

As for other countries, their approaches also vary. For example, in Germany cryptocurrency is private money, in Israel, it is a commodity, in Japan and Australia it is a financial tool, in Great Britain it is an intangible (virtual) asset. But there are issues of cryptocurrency turnover, to which regulators have already developed common approaches. This is financial monitoring of operations with cryptocurrency (each platform, which acts as a “keeper” of virtual assets of third parties, has to carry out their verification) and tax obligations of cryptocurrency holders (cryptocurrency profits are taxed at the time of their conversion into fiduciary money).

On July 20, 2018, a meeting of the Financial Stability Board was held, at which the National Securities and Stock Market Commission expressed its readiness to act as a regulator of the virtual asset market, and also confirmed the adoption of the European direction in the regulation of this industry as a basis.

How are things going in Ukraine today?

Until 2017, there was a regulatory dead calm in the country in this area. There was only one letter from the National Bank, where bitcoin was defined as “quasi-cash”, and a distorted judicial practice, according to which cryptocurrency is a “virtual object”, which has no material expression, and in this regard, its ownership right cannot be recognized by the court.

Now, it gets interesting. As we know, in 2017 bitcoin showed a record for all history of its existence, the growth by 2000%. In supermarkets, restaurants and even taxis people talked about investments in cryptocurrency. It is not surprising that such events also attracted the attention of law enforcement agencies. The rapid growth of the rate “tempted” representatives of law enforcement agencies to conduct a number of searches (many of them were really unreasonable ones) and the removal of a large number of equipment for cryptocurrency mining. As a result of such actions, social tension had grown so much that the crypto community with its claims and petitions in the early autumn attained an explanatory statement of the NBU, the Ministry of Finance and Financial Monitoring about the legality of cryptocurrency mining. And at the beginning of 2018 two more significant events happened: The National Bank canceled its letter about “quasi” nature of cryptocurrencies, and Russia’s Ministry of Economic Development and Trade included in the Classifier of Business Activity a Classification of Business Activities for mining.

Around the same time, the first legislative initiatives aimed at regulating turnover of cryptocurrencies in Ukraine began to appear. The first draft law “On cryptocurrency turnover in Ukraine” (No.7183) was registered in the Verkhovna Rada of Ukraine on October 6, 2017 and defined cryptocurrency as a program code, and operations with it as barter ones. The NBU, according to the draft law, received the powers of the cryptocurrency regulator, and among the key rights of market participants were provided: the right of miners to choose cryptocurrency for mining, the obligation to collect and store data on transactions for five years, as well as to be personally responsible for the safety of their “crypto-cart” (as the creators of the draft law called the crypto-wallet). Just four days later, on October 10, the second draft law “On stimulating the cryptocurrencies market and their derivatives in Ukraine” (No.7183-1) came to life, which outlined the diametrically opposite approach. Cryptocurrency was defined in it as a financial asset, the law introduced derivatives for cryptocurrency (even earlier than on the Chicago exchange), and the creation of a crypto-exchange required a financial license. There was another, third draft law “On the development of the digital economy” (No.7485), registered on January 15, 2018, which was ridiculed by the community as a very bad translation of progressive Belarusian decree “On the development of the digital economy”.

According to the results of such a “legislative volley” the community realized that only consolidated efforts and active joint work of market experts, representatives of crypto business, regulators and lawyers can develop a qualitative approach to the regulation of cryptocurrencies in Ukraine. As a result, in early spring of this year, a working group was established under the management of People’s Deputy Alexey Mushak, which was attended by representatives of crypto business, government agencies and the legal field. This group drew up two draft laws – the principal law “On state economic policy in the field of virtual assets”, which established general rules for operations with cryptocurrency, and the tax law “On amendments to the Tax Code of Ukraine on taxation of transactions with virtual assets”, which defined the rules for taxation of cryptocurrency transactions. At the time of working group establishment, two issues were raised: what are the goals of the adoption of a unified law and what exactly is planned to be regulated in the crypto-sphere. Responding the first question, the participants reached consensus on two points: a unified law is needed to ensure regular operations of crypto business with banks (due to the anonymity of cryptocurrencies and the lack of financial monitoring, banks refuse to work with exchangers and exchanges), as well as to clearly define the legal status of cryptocurrencies and, thus, minimize the risks of manipulation of the “legal vacuum” by law enforcement agencies (qualification of crypto business in view of law enforcement authorities begins from the issue of unregistered electronic money and ends with the financing of terrorism). As for the second issue, namely, which direction of cryptocurrency business most needs to be regulated, then, as you know, the range of such directions is very extensive. These crypto exchangers, crypto exchanges, mining, crypto funds, cryptocurrency storage (custodian), ICO (initial coin offering), STO (security token offering), etc. In this regard, there was a lot of discussion about what it is necessary to focus on in order not to “drown” in the legislative work for several years, losing the competitive advantage of the country, and to solve the most urgent issues of the industry. Taking into account the answers to the above questions, the working group under the management of Alexey Mushak decided to focus on the definition of rules for converting cryptocurrencies into fiat funds, as well as on issues of taxation and financial monitoring of cryptocurrency transactions.

Key provisions of the BRDO regulatory initiative

Simultaneously with the activity of the Mushak’s initiative group, the Better Regulation Delivery Office (BRDO) has been actively working in the field of cryptocurrency regulation. In this year spring, representatives of this institution released a Green Book “Cryptocurrency market regulation”, where they revealed in detail possible approaches to the legal status of virtual assets, as well as justified the position of their definition as an “intangible asset”. In addition, BRDO received clarifications from the State Statistics Service about kinds of Classifications of Business Activities, which should be used for activities related to cryptocurrency, as well as explanations from the State Communications Service that cryptocurrency mining does not require additional licenses. In mid-summer, experts were invited to the BRDO office to discuss the “Concept of state policy in virtual currencies field”, which was planned to be proposed for discussion in the Cabinet of Ministers. This document defines the key challenges that currently exist in the cryptocurrency market (the inability to protect the rights to cryptocurrency, the complexity of these business operations with the banking system, absence of rules for taxation of cryptocurrency operations), and proposes a roadmap for solving these problems. The document has already been sent to the Cabinet of Ministers and is now at the stage of discussion and clarification of additional issues.

Thus, presently there are two parallel processes in the market (drawing up of a unified draft law by Alexey Mushak’s working group, which will be submitted to the Verkhovna Rada, as well as the development of State Policy Concept, which will be considered by the Cabinet of Ministers), aimed at solving the most urgent market challenges, and therefore complement each other well.

State’s position

On July 20, 2018, a meeting of the Financial Stability Council was held, at which the head of the National Securities Commission presented the Concept of state regulation of cryptocurrency operations. Today, there are more and more countries in the world that define the securities market regulatory body as the main regulator of the virtual asset market. There are many reasons for this approach: it includes both speculation with virtual assets and the need to qualify various token types (which are often qualified as securities) and the protection of investors’ rights. Ukraine also adheres to this direction, so it is not surprising that the market saw the first position of state bodies in the direction of cryptocurrency industry regulation on the part of the State Commission for Securities and Stock Market.

Key provisions of the legislative initiative of Alexey Mushak’s working group:


  • Legal relations in the use of cryptocurrencies are defined as the market of virtual assets, which corresponds to the international practice of this industry regulation (this approach is used by Malta, Great Britain, Hong Kong and a number of other countries);
  • Virtual assets are divided into two categories: cryptocurrency and tokens, which legal status is defined as intangible assets;
  • Only crypto-exchangers and crypto-exchanges that work with fiat money are subject to licensing (conversion of some virtual assets into others does not require licensing);
  • The regulator of the virtual asset market, which powers include the development of licensing rules for crypto-exchangers and crypto-exchanges, is the State Commission for Securities and Stock Market;
  • Mining is defined as an economic activity that does not require additional permissions/licenses related to encryption.


  • The ability to “clean up” their virtual assets, paying taxes on them, and be able to use them for buying real estate, cars, as well as for investing;
  • Tax liabilities, according to the draft law, occur only when converting cryptocurrency into fiat money (exchange transactions of one cryptocurrency into another are not taxable);
  • A rate of 5% for cryptocurrency transactions is introduced, which can be used under two rules:

1) those  cryptocurrency holders who can verify cryptocurrency origins (to receive a certified report from the exchanger/exchange about how much fiat funds were transferred to the exchange, how much cryptocurrency was bought by them, what operations were conducted with cryptocurrency), pay 5% of the difference, which was obtained through trading/growth in cryptocurrency value;

2) those cryptocurrency holders who cannot verify cryptocurrency origin have to pay 5% of full cryptocurrency value at the time of its conversion into fiat funds.

The position of the State Commission for Securities and Stock Market is almost fully in line with the global trends in the regulation of the virtual assets market, it proposes to introduce the following directions into the regulatory field:

1) issue of tokens that have characteristic features of financial tools;

2) ICO holding (in other words, the issue of tokens in order to attract investment);

3) conducting crypto exchange activities using traditional (fiat) funds.

Most of these positions are reflected both in the legislative initiative of Alexey Mushak’s working group and in the BRDO Concept that is a good sign and indicates that the position of the market, government agencies and experts largely coincide.

Why is crypto regulation important for Ukraine?

According to the KANTAR TNS study, today in Ukraine 72% of the country’s residents know/have heard about the cryptocurrency, and 13% of them own virtual assets and conduct transactions with them. According to a joint study by Deloitte and UVCA, in 2017 19 projects with Ukrainian teams successfully conducted ICO, and as a result collected a total of more than $160 million in cryptocurrency. About five international cryptocurrency exchanges have offices in Ukraine but do not conduct their activities here due to the absence of transparent rules of the game and risks from law enforcement agencies. It should be noted that Japan, due to considered regulation of the crypto industry in 2017, was able to increase its GDP by 0.2%. Malta, which Prime Minister earlier this year publicly invited the largest crypto-exchanges to his jurisdiction and guaranteed the opportunity to work with banks, has presently concentrated 80% of the world’s crypto-trading. As for Ukraine, in 2014 about 10% of the world’s mining was carried out in the country. But due to the lack of regulation and the actions of law enforcement agencies, the country has lost this competitive advantage. Transparent rules of the game the market experts are now actively working on and which are planned to be submitted to the Parliament this fall will allow the domestic crypto industry to enter a new stage of its development.

Nestor Dubnevich, the head of Blockchain Practice at the JUSCUTUM Attorneys Association.