​Cryptocurrency regulation in Ukraine. What is important to know about the new law

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On February 17, 2022, the Verkhovna Rada of Ukraine adopted an updated version of the law “On Virtual Assets” in its second reading. The document contains general rules for regulating the market, as well as establishes responsible institutions and liability for violating the law. The new rules will come into force only after the Parliament amends the Tax Code, the exact date of this event is still unknown

It should be noted that in October 2021, Ukraine’s President Volodymyr Zelenskyy vetoed the first version of the law and returned it for revision. The president’s proposal to grant the National Securities and Stock Market Commission and the National Bank of Ukraine the rights to control virtual assets was accepted and taken into account in the current version of the document.

What are virtual assets?

According to the new law, virtual assets must have the following characteristics:

• It is an intangible benefit;
• It is an object of civil rights;
• It has a value;
• an asset can be expressed as a set of data in electronic form.

At the same time, virtual assets are not and will not be a means of payment within the country. Their exchange for goods or services is also prohibited.

One can become an owner of a virtual asset in the following ways:

1. You create a virtual asset yourself (for example, your token).

2. You receive an asset based on an agreement, a transaction (e.g. buying from another participant).

3. You receive an asset under the law or court order.

Ownership of an asset is evidenced by the possession of the key.

Who will regulate the virtual asset market?

Initially, the first versions of the law envisaged four regulators at once, depending on the types of virtual assets. Thanks to Volodymyr Zelenskyy’s proposals, in the current version their number has been reduced to two. The market control powers have been granted to the National Securities and Stock Market Commission (NSSMC) and the National Bank of Ukraine (NBU). The NBU will be responsible for assets secured by currency values, while the NSSMC will be responsible for all other types of virtual assets.

The Commission’s responsibilities will include:

• drafting and approving legislation;
• supervising the activities of service providers;
• issuing warnings and injunctions for violations;
• examining cases of violations, referring them to law enforcement authorities.

Powers of the National Bank:

• regulating the circulation of virtual assets;
• determining the list of currency values and rules for the exchange of virtual assets;
• supervising the activities of service providers related to the circulation of secured virtual assets;
• determining information security requirements;
• taking measures to influence service providers related to the circulation of virtual assets.

Who are the service providers?

The law “On Virtual Assets” defines as service providers organizations that offer:

• custody and administration;
• exchange;
• transfer;
• intermediary services.

The law contains a list of the main requirements for providers, dividing them into two categories:

1. The provider of services related to the circulation of virtual assets may be a legal entity with an impeccable business reputation and a formed authorized capital. The authorized capital for residents ranges from 19 300 EUR (exchange, transfer, and intermediary services) to 38 600 EUR (custody or administration).

2. Only a financial institution can be a provider of services related to the circulation of secured virtual assets secured by currency values

All service providers will be required to obtain permits from the NSSMC, implement KYC and AML standards. At the same time, permits will be issued for one year.

What is known about the taxation of cryptocurrencies?

Individuals. Currently, the concept of “cryptocurrency” is not enshrined in any way in the legal framework of Ukraine. Accordingly, individuals may not reflect this type of assets in a lump-sum voluntary declaration.

In the future, after the amendments are added to the Tax Code, individuals will receive a tax break for 5 years on personal income tax. Thus, profits from transactions with virtual assets will be subject to 5% personal income tax + 1,5% military tax based on the results of a voluntary annual declaration. Virtual asset transactions will be accounted for separately from other transactions. As for mining, it will be taxable only on the sale of the mined assets. The rate will be at the level of 5% personal income tax + 1,5%.

Legal entities. Organizations will have to obtain a special financial license in order to work with virtual assets. Companies will then pay 18% income tax on their net profits.

VASPs (virtual asset service providers), whose operations with virtual assets will be an exclusive type of activity, will be able to pay income tax in the amount of 5% of the profit. The services of such VASPs, as well as those of financial intermediaries, will not be subject to VAT.

Conclusion

The implementation of full-fledged and transparent regulation of the Ukrainian cryptocurrency market will allow the country to attract new projects and develop the industry at the global level. The law establishes a clear definition of virtual assets, company licensing, and the taxation rate. The regulators have also been selected, who will monitor the activities of individuals and companies, ensuring compliance with the law.

We thank Mikhail Chobanyan for being one of the first to sort out the most important details of the new law.