February 2022 – The crypto business has grown exponentially in recent years. Ukraine is no exception to this global trend, as local businesses are also at the forefront of crypto products and innovations (DeFi, NFTs, the metaverse and Web 3.0). However, legal uncertainty in Ukraine has created risks for the sustainable development of the local crypto industry and the investments of conventional business in digital assets.
This legal uncertainty has been addressed by the recently adopted legislation, which sets out a regulatory framework to minimise the risk and exposure of digital businesses in Ukraine. Although some provisions are framework in nature and secondary legislation is required, we believe that this new legislation will be a positive driver on the local market.
Adoption of the Law
On 17 February 2022 the Ukrainian Parliament adopted the Law of Ukraine “On Virtual Assets” (the “Law”). The Law was updated with the President’s proposals, after it had been initially adopted by the Parliament and subsequently vetoed by the President in autumn 2021. The Law shall come into effect upon adoption of amendments to the Tax Code of Ukraine governing the taxation of transactions with virtual assets. The Law also establishes a transition period for amending the relevant secondary legislation. Below we summarise the changes introduced by the Law.
The legal nature of virtual assets
The Law defines a virtual asset as an intangible benefit, which has a cost and is built using a combination of electronic data. A virtual asset is not a payment instrument (a medium of exchange) and may not be exchanged for assets (goods), works or services.
Virtual assets are divided between secured and unsecured assets. The main difference between them is that secured virtual assets certify proprietary rights (not a security interest), in particular the right to claim other objects of civil rights), whereas unsecured virtual assets do not represent any such rights or assets.
The Law also introduces the concept of “financial virtual assets”, which are secured virtual assets issued by Ukrainian entities or individuals, i.e.:
The types of securities that may back a virtual asset is to be determined by the National Securities and Stock Market Commission of Ukraine (the “NSSMC”). Secured virtual assets are not security instruments.
Regulatory perimeter and supervision
The Law vests state regulation of the virtual assets market in the NSSMC, with the exception of virtual assets secured by currency valuables. The National Bank of Ukraine will be responsible for state regulation over financial virtual assets secured by currency valuables. These regulators can mutually share information and databases to ensure crypto business oversight.
A legal entity (both Ukrainian and non-Ukrainian residents) that intends to exercise activity on the virtual assets market must obtain a special permit to carry out the following services:
Specific requirements have not yet been released. Nevertheless, the Law sets forth that an entity wishing to obtain a permit must meet with the below minimal requirements:
The NSSMC will be responsible for authorising entities that intend to carry out any of the above business activities. Such permit will be valid for one year and must be renewed.
Apart from the NSSMC permit, the Law sets out additional licensing requirements for transactions or business activity with financial virtual assets:
Only financial institutions will be able to provide services related to circulation of virtual assets secured by currency valuables. Non-banking financial institutions would additionally require a license for transactions with currency valuables, whereas banks would be able to perform transactions based on their banking license.
In some cases professional capital market participants will be able to deal with virtual assets without the permit contemplated by the Law.
The Law also incorporates new requirements for the financial monitoring of transactions with virtual assets.
As soon as the Law comes into effect, any entity engaging in the transfer of virtual assets will have to act as a reporting entity under Ukrainian AML legislation. Entities performing the transfer/exchange of virtual assets will be required to provide specific information to initiate a transaction.
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