The EU has become one of the first jurisdictions to introduce comprehensive regulations on crypto-assets. Ukraine has announced its ambition to become a “pioneer” in implementing the European version of the Markets in Crypto-Assets Regulation, MiCA. As the third country in the world in terms of cryptocurrency usage, Ukraine has been working on the regulation of crypto-assets for years, but in practice there are still no clear rules for the functioning of the industry in the country. At the same time, dialogue with EU lawmakers has helped to take on board the views of both the industry and civil society and, as a result, has had an impact on the regulation of crypto-assets in Ukraine. This approach of working with regulators in the EU and other international platforms should become a systemic practice for scaling up the global use of Bitcoin in various spheres.
In June 2023, the Markets in Crypto-Assets Regulation (MiCA) and the related Transfer of Funds Regulation (TFR) came into force. These regulations require crypto-asset transfer service providers to accompany crypto-asset transfers with information about their senders and receivers , . These two new European regulations lay the foundation for a new regulatory framework for crypto-assets not only within the EU but also beyond. For example, Ukrainian authorities have stated their desire to be the first to implement “the most important MiCA regulations” as part of the standardisation of legislation in line with EU requirements.
1. Heading towards MiCA standards: the regulatory framework in Ukraine
Ukraine has been working on the regulation of crypto-assets for several years, but in practice there are no clear rules for the functioning of the industry in the country. This policy has led to a shortfall of at least UAH 3 billion (about USD 81 million) in taxes to the Ukrainian state budget from local cryptocurrency exchanges, according to estimates by the Economic Security Bureau. To understand why this has happened, it is necessary to outline the reasons why the law “On Virtual Assets” adopted by the Verkhovna Rada at the beginning of 2022 has failed to work:
1. The law will come into force when amendments to the Tax Code of Ukraine regarding the taxation of transactions using cryptocurrencies are adopted.
Now there is draft law No. 7150 dated 13 March 2022 “On Amendments to the Tax Code of Ukraine Concerning the Specifics of Taxation of Transactions with Virtual Assets”, which is registered in the Verkhovna Rada.
So far, the Verkhovna Rada of Ukraine has not considered it and is unlikely to consider it as the main one, because now the National Securities and Stock Market Commission (NSSMC) has prepared an alternative draft law on amendments to the Tax Code. Accordingly, we have a situation in which the law has been formally adopted but not actually enacted, as it is not fully developed in terms of taxation. On 20 July 2023, the NSSMC announced the completion of the stage of public consultations on the draft Law of Ukraine “On Amendments to the Tax Code of Ukraine and Other Legislative Acts of Ukraine Regarding Regulation of the Turnover of Virtual Assets in Ukraine”, as well as sending the text to the relevant authorities for approval before submission to the Verkhovna Rada of Ukraine.
2. Given Ukraine’s status as a candidate for EU membership, as granted on 23 June 2022, Ukrainian legislation on the cryptocurrency industry should in any case be adapted to European standards, in particular on the regulation of the circulation of virtual assets.
In the EU, the specialised legislation on the functioning of the crypto-asset market is MiCA and TFR, adopted in June 2023, i.e. more than a year after the adoption of a similar law in Ukraine. Accordingly, when drafting and adopting the Law of Ukraine “On Virtual Assets”, no one took into account – nor could have – the approach of the European Union to the regulation of this industry.
The amendments to the law, which meet MiCA requirements, are also being developed by the National Securities and Stock Market Commission of Ukraine (NSSMC) together with the Advisory Council under the NSSMC, which includes representatives of relevant government agencies, representatives of crypto businesses, relevant non-profit organisations and experts in the industry – in particular, representatives of the Asters law firm.
3. The law has not entered into force, and yet it already requires updating due to the rapid development of the crypto-industry and technological changes in this sphere. This situation may cause certain difficulties for crypto-companies and non-residents wishing to obtain a licence to operate in Ukraine and officially carry out their activities in a clearly defined legal field.
Although the use and implementation of virtual assets have not yet been given a specialised regulatory framework, the use of virtual assets in Ukraine is not officially prohibited by law. Moreover, their circulation may be subject to the general rules of civil law regarding the use and protection of property rights associated with such assets, as well as any other legal requirements (e.g. anti-money laundering, financial monitoring, taxation, etc.).
2. Regulatory paralysis of the Ukrainian cryptocurrency market
Despite Ukraine ranking third in the world in cryptocurrency usage for 2022 and raising over USD 225 million in cryptodonations to combat the unprovoked Russian military invasion of Ukraine, the lack of regulatory clarity has, in effect, paralysed the development of the industry in the country.
Currently, the main concern for Ukrainian Bitcoin and stablecoin users is the highly controversial disconnection of crypto-asset service providers from the banking sector. The situation escalated in March 2023 due to a problem with transfers from cryptocurrency exchanges to bank accounts due to various restrictions from the National Bank of Ukraine (NBU). There is no direct ban on transferring or withdrawing funds from cryptocurrency exchange accounts by the NBU. However, such restrictions were a by-product of various regulations that had been introduced mainly for a different purpose:
- On 24 February 2022, with the beginning of the full-scale unprovoked military invasion by Russia, the NBU adopted Resolution No. 18 “On the operation of the banking system during martial law”, which introduced bans and restrictions related especially to the replenishment of electronic wallets with electronic money and the implementation of currency payments.
Subsequently, the Resolution was systematically supplemented and amended in one way or another – in particular, by Resolution No. 18 of 20 April 2022, the NBU obliged banks to stop (return) incoming and outgoing transfers resulting from the purchase and sale of one foreign currency for another foreign currency to gain profit from exchange rate changes, as well as transfers in e-currency. The NBU explained as follows: “payment cards are also used to pay for ‘quasi cash’ transactions, which are predominantly carried out to circumvent the current restrictions of the National Bank, in particular for investing abroad, which is prohibited under martial law. Consequently, the respective transactions should be interpreted as leading to unproductive withdrawal of capital from the country. As a consequence, the National Bank has partially restricted the possibility to carry out such operations.”
At that time, numerous schemes of “washing out” foreign currency from the country did emerge, in particular by means of exchange transactions related to cryptocurrencies due to the differences in exchange rates between Ukrainian exchangers and cryptocurrency exchanges). Therefore, in a certain sense, it was a necessary step to balance the foreign exchange market and maintain the stability of the economy under war conditions.
- On 21 July 2022, the NBU introduced new restrictions on the transfer of funds abroad or to citizens’ personal accounts (p2p) – in particular: (1) it reduced the monthly limit on p2p transfers of citizens abroad from UAH payment cards of Ukrainian banks from UAH 100,000 (equivalent) to UAH 30,000 (equivalent); (2) it set a monthly limit on payments abroad from UAH payment cards of UAH 100,000 (equivalent) from all bank accounts of a customer opened in UAH.
Such measures were also aimed at preventing the outflow of money from Ukraine; however, it indirectly caused negative consequences for the crypto industry, as well as negatively affecting the activities of individual volunteers who raised funds using Bitcoin and bought humanitarian aid and protective equipment for the Ukrainian military in Europe (bulletproof vests, tourniquets, drones, night vision goggles, etc.).
- On 1 March 2023, another NBU Resolution (No. 4), on amendments to the procedure for authorisation of financial payment service operators and comments to this document was published. According to the NBU’s explanation, the new rules were aimed at solving problems related to manipulation of payments and miscoding of payments in the sphere of gambling (note: a type of fraud in the banking network, which consists of replacing the purpose of payment).
The introduction of new procedures and restrictions also affected the crypto industry, as banks began to regard transactions involving the exchange of fiat money for cryptocurrency, as well as the withdrawal of cryptocurrency into traditional money, as high-risk. Accordingly, banks began to block such operations to avoid having additional problems with the regulator.
Although there is no direct mention of cryptocurrencies or crypto exchanges in the NBU’s explanation of the new rules, they have had a significant impact on both payment market operators and Ukrainian cryptocurrency exchange wallet owners, as they mean losing the ability either to freely withdraw funds from the wallets by withdrawing fiat currency to Ukrainian bank cards, or to deposit funds into them from bank accounts for further exchange for virtual assets.
Currently, the ability to deposit money into crypto wallets and withdraw cryptocurrency into fiat is predominantly through p2p transactions, where users exchange fiat and digital assets among themselves (rather than buying them on exchange platforms).
- On 1 June 2023, in letter No. 25-0005/38228, the NBU obliged acquiring banks to report on the volumes of non-cash payments by customers, economic entities and payment service providers with whom the bank has contracts (additional oversight and reporting mechanisms that also indirectly affect payment services).
Thus, banks must report on: transfers of funds between individuals’ accounts (P2P transfers); payments over the Internet (Internet acquiring services); transfers of funds from a card to a company’s current account or payments to customers’ cards from a company’s account (C2A and/or A2C services). At the same time, since the letter does not specify the threshold from which a transaction should be tracked, the report will likely include transactions for any amount.
According to the NBU, analysis of such information will allow the identification of problems of using bank services to cater for the shadow market (in particular, servicing the activities of illegal gambling business)and the identification of cases of banks and non-banking financial institutions carrying out activities that may contain signs of Ukrainian anti-money laundering legislation being violated.
And, although these changes do not directly affect the circulation of virtual assets, again, with the uncertainty of their status and the possible introduction of any restrictions in the use of p2p transfers, it may also affect the aforementioned method of depositing funds into users’ crypto wallets.
3. How dialogue with European regulators can help the Ukrainian crypto industry
The draft law being developed by the NCSSM is based on the regulation of the European Parliament and the Council of the EU on Markets in Crypto-Assets Regulation, MiCA. Therefore, the draft law takes into account most of the provisions that are necessary to bring Ukrainian legislation closer to European legislation (in particular, the regulatory approach is similar to the European approach in terms of interpretation and typology of cryptocurrencies, mechanisms for authorisation of projects and legalisation of legal entities engaged in economic activities related to the turnover of virtual assets, and it defines the rules for the activities of providers of relevant services).
Certain provisions of the draft law have been adapted to the current legislation – in particular: the Law of Ukraine “On Capital Markets and Organised Commodity Markets” to harmonise the conceptual framework, and the Law of Ukraine “On Payment Services” to harmonise the provisions on e-money tokens and the like.
Accordingly, based on the results of the adoption of the draft law by the Verkhovna Rada of Ukraine, the Ukrainian model should fully comply with the pan-European model.
However, the following should be taken into account:
Firstly, in its content, the MICA is a more general regulatory act on the basis of which other aspects of crypto-asset circulation will be developed. Therefore, to finalise the process of introducing virtual assets and the technologies on which they are based into the economy and, in particular, the banking sector, it is necessary to adapt the banking, financial and civil legislation of Ukraine.
Second, in June 2023, along with the entry into force of MiCA, the EU’s “Transfer of Funds Regulation” (TFR) was adopted, which provides for the tracking of crypto-asset transfers on a par with traditional money transfers. The actual implementation of the law will rely on the “travel rule”, which stipulates that any information about the source of the asset and its beneficiary must “travel” with the transaction and be held by both parties to the transaction. The new rules will cover transactions over EUR 1,000 when wallets operated by crypto-asset service providers are involved. However, it is worth noting that the rules will not apply to p2p transfers that take place without a service provider.
It is important to note that the EU legislative package on anti-money laundering and countering the financing of terrorism (AML/CFT) has not yet been finalised — in April 2023, the European Parliament adopted a report on a proposal for a “regulation of the European Parliament and of the Council on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing” (AMLR). The AML/CFT includes measures requiring organisations to prevent and disclose money laundering and terrorist financing, mitigate and manage the risks of non-compliance and evasion of targeted financial sanctions, and promote transparency of beneficial ownership of legal persons and arrangements. The AMLR is currently undergoing the legislative trilogue procedure, which is an informal inter-institutional negotiation involving representatives of the European Parliament, the Council of the European Union and the European Commission.
Even at the EU drafting stage, representatives of industry and civil society have been in consultation with European regulators.
Through numerous meetings with Members of the European Parliament (MEPs) and various policy groups of the European Parliament, the European Commission and the European Council since September 2022, as well as the submission of written recommendations, Bitcoiners and activists of the Building True Change Coalition (BTC Coalition), led by the Open Dialogue Foundation, achieved the inclusion of amendments, in part or in full, in the final draft of the AML/CFT Regulation, which was tabled in the European Parliament on 14 April 2023, including:
- include in the regulation the protection mechanisms against the abuse of AML/CFT laws by authoritarian regimes for political persecution;
- recognise crypto-assets like Bitcoin as a means of payment and fundraising – in particular, for humanitarian aid (especially at the time of Russia’s unprovoked full-scale invasion of Ukraine), the protection of human rights in authoritarian countries, and the role of Bitcoin mining as a purchaser of renewable energy;
- guarantee the rights of access to financial services and possession/use of bank accounts for non-governmental and humanitarian organisations, activists, refugees, asylum seekers and persons associated with them;
- strengthen controls over third-country financial systems that help Russia circumvent the sanctions regime. In particular, BTC Coalition representatives provided evidence of the use of banking systems in Kazakhstan, Kyrgyzstan and Turkey to help circumvent Russia’s international sanctions , , , , , .
Similarly, in June 2023, after a series of meetings with the BTC Coalition, the Parliamentary Assembly of the Council of Europe (PACE) in France adopted a resolution on transnational repression. PACE identified as one of the criteria for defining transnational repression “the persecution of activists and political opponents by authoritarian regimes outside their borders through the abuse of Interpol red notices, extradition procedures and other forms of inter-state legal assistance, such as measures to combat money laundering and terrorist financing.” The PACE report examines as examples some cases of transnational repression committed by authoritarian regimes on the territory of 46 Council of Europe countries, including Ukraine. The recommendations apply to all countries interacting with the countries within the Council of Europe.
The PACE resolution emphasises that “the abuse, on politically motivated grounds, of mechanisms of inter-state legal cooperation, such as measures to combat money laundering and the financing of terror, can lead to violations of the right to a fair trial […] and the right to property, […]. This […] can lead to the financial exclusion of politically persecuted individuals and non-governmental organisations, and effectively prevent them from carrying out their human rights work and participating in economic and social life.” The next step is to develop a system to counter transnational repression, including countering financial exclusion, drawing on the experience of activists using Bitcoin in authoritarian countries to defend human rights.
In July 2023, the OSCE Parliamentary Assembly, following testimony from BTC Coalition members, also included an amendment recommending that parliaments in 57 countries, including Ukraine, the United States and Canada, develop mechanisms to curb AML/CFT abuses by authoritarian regimes and reflect in relevant regulations the use of crypto-assets such as Bitcoin and stablecoins to protect human rights and provide humanitarian assistance:
161. Urges OSCE participating States to ensure that Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) mechanisms are not used as tools of transnational repression to stifle dissent or target human rights defenders, anti-corruption campaigners, exiled dissidents and diaspora communities, taking into account the potential unintended consequences of prevention-focused AML/CFT regulations and their side effects, including the potential for increased financial exclusion and further malicious exploitation of strict AML/CFT and related provisions, and further urges them to reflect in relevant regulations the use of crypto-assets, such as Bitcoin and stablecoins, to defend human rights and to provide humanitarian aid;
Such resolutions and meetings, and discussions as coalitions of end-consumers and Bitcoiners with regulators, form the basis for a more open discussion with traditional financial regulators and contribute to more friendly regulation not only in the EU but also beyond.
Ukrainian Bitcoin and crypto services users should actively participate in providing feedback to the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA). From July 2023, the consultation covers the authorisation, governance, conflict of interest and complaints processes for MiCA application. The measures are subject to approval by the European Commission, the European Parliament and the European Council. Igal Nevo, member of the OECD’s Blockchain Expert Policy Advisory Board, spoke about this during the Crypto | Verse Conference on 31 May 2023. Igal Nevo urged Ukrainian crypto-business representatives to actively participate in the discussions on the upcoming regulation for the mutual benefit of each party.
In addition, the FAFT announced a public consultation until 18 August 2023 on the problem of excessive application of AML/CFT preventive measures against the NGO sector in some countries, recognising the negative impact this may have on the legitimate activities of the NGO sector. An example of such abuse is the case of a politically motivated request in 2020 by Russia and Belarus to the cryptocurrency exchange KUNA.IO, which sought to obtain personal information about their opponents, accusing them of financing extremism and money laundering. In the case of Belarus, the fund in question is BYSOL. This is a fund that provides financial assistance to those who were fired for protesting or were victims of repression by the Belarusian authorities.
This pro-active approach by Bitcoin and stablecoin end-users helps to comprehensively build a dialogue with regulators from the EU, as well as regulators from countries like Ukraine that are seeking to pioneer the implementation of EU rules. Clear rules that take into account the interests of all market participants will help both the industry and the volunteer movement that uses Bitcoin to raise funds and buy humanitarian aid for the army and victims of Russian military aggression. This approach should become a systemic practice for scaling up the global use of Bitcoin in different spheres.
- Defend PoW: Submission to ESMA (December 15, 2023)
- Submission to FATF: Tools to prevent abuse of AML/CFT laws (December 14, 2023)
- Can the EU’s anti-money laundering reform help dictators? (March 7, 2023)
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