In recent years, the virtual asset field has continuously evolved and now includes a range of new products and services, business models, and activities and interactions, including virtual-to-virtual asset transactions. Jurisdictions have been trying to keep up with the fast pace of development and adequately respond to the emergence of such services and products on the market.
Regulation of virtual assets in Ukraine as well as in most of the jurisdictions has been uncertain. In order to clarify and regulate the legal status of ‘Virtual Assets’ and protect their owners, the Ukrainian Parliament adopted Draft Law No. 3637 on Virtual Assets (the Law) almost unanimously on 8 September 2021, which is submitted for signature to the President of Ukraine. The Law will enter into force simultaneously with the relevant amendments to the Tax Code of Ukraine addressing the taxation of transactions with virtual assets. Interestingly, the Law does not mention “Cryptocurrency” but defines “Virtual Assets” as a set of data in electronic form that has value and that exists in the system of circulation of virtual assets (the Virtual Assets). This definition includes Cryptocurrency as well as other types of Virtual Assets.
It has been a disclosed aim to develop Ukraine’s digital economy and create “legal innovative market for virtual assets” as a selling point for foreign direct investment in the country. Adoption of the new Law is a major step and a platform for more reforms towards this aim since it legalizes Virtual Assets for circulation in civil relations and sets groundwork regulations in this field. While the practical impact of the Law is yet to be seen and detailed regulations are yet to be introduced, it is undoubtable that this makes Ukraine one of the first countries to have dedicated legislation regulating the market of Virtual Assets. The proposed Ukrainian legal framework may be of particular interest for the Georgian market as well, where this field is not yet specifically regulated.
While the Virtual Assets were not illegal in Ukraine, state authorities often took a combative stance towards owners and service providers of the Virtual Assets. The National Bank of Ukraine stated that it considered Bitcoin a “high risk factor” and “a money substitute that has no real value, and cannot be used by individuals and legal entities in Ukraine as a mean of payment”. It has also been reported by the Ukrainian media that authorities often labelled crypto trading companies as a “scam” and raided business in this field, “often confiscating expensive equipment without any grounds.” Furthermore, the Ukrainian population could not defend their rights related to cryptocurrency in court in the event of a scam or a fraud.
The Law is designed to legalize and regulate the Virtual Assets in Ukraine and address uncertainty with regards to their concept and legal status.
Scope of the Law
The Law applies to various services and transactions, including:
• services related to the circulation of the Virtual Assets, if the subjects of such legal relations have a registered location or permanent representation on the territory of Ukraine;
• Virtual Asset transactions if the parties have determined the Law of Ukraine to be applied to the deal;
• Virtual Asset transactions if both parties are residents of Ukraine or if the Virtual Asset holder is a resident of Ukraine.
Legal Status of Virtual Assets
According to the Law, the Virtual Assets are not treated as means of payment and cannot be exchanged for property (goods) or works (services), but as a form of intangible property. Goods and services can only be purchased with Ukrainian Hryvnia, the national currency of Ukraine. Therefore, the new legislation in Ukraine does not regard cryptocurrency as a legal tender, but merely legalizes it for circulation in civil relations.
One of the main achievements of the Law is that it gives clarity to some of the important terms that have never been explained or codified, such as the ‘virtual asset wallet’ and the ‘virtual asset key’. This is an important guideline for policies and comprehensive regulations are expected to be adopted on this matter.
Types of Virtual Assets
The Law differentiates between two types of Virtual Assets: secured and unsecured Virtual Assets.
Secured Virtual Asset is an asset that certifies property rights, in particular, the right to claim other objects of civil rights. A Virtual Asset can be secured by fiat currency, securities or any type of offline asset. One example of secured Virtual Assets is a stable coin like USDT coin which holds a stable value of 1 USD and is secured by different means such as cash, cash equivalents and other assets and receivables.
In contrast, unsecured Virtual Assets do not certify any property or non-property rights. Examples of unsecured Virtual Assets are Bitcoin and Non-Fungible Tokens (NFTs).
Secured Virtual Assets are subject to additional regulations:
• The circulation of a secured Virtual Asset is subject to the same restrictions that apply to the underlying civil rights object by which the Virtual Asset is secured; and
• The alienation of a secured Virtual Asset from civil rights object it is secured by is not allowed if the object is under private or public encumbrance or is withdrawn from civil circulation.
Ownership of Virtual Assets
The Law defines that the holder of the virtual asset key (the VA Key) is the owner of such virtual asset. The VA Key is defined as a set of technical means implemented in the system of ensuring the circulation of virtual assets that allow controlling a virtual asset. Therefore, possession of a set of technical means is definitive in establishing the ownership of Virtual Assets.
There are three exceptions to this rule. The holder of the VA Key is not considered to be an owner of the Virtual Asset if:
• the VA Key or the Virtual Asset is stored by a third party in accordance with the terms of the agreement between the custodian and the owner of this Virtual Asset;
• the Virtual Asset has been transferred for storage to any person in accordance with the Law or a court decision that has entered into force; or
• the VA Key was acquired by the person illegally.
The Virtual Asset market participants have rights to freely implement transaction, receive full information from providers of Virtual Asset-related services, have their personal data protected, protect their rights relating to the Virtual Assets, independently determine and set the value of Virtual Assets, they can be relied upon for opening bank accounts, etc. The Virtual Asset market participants also have obligations to act in good faith, comply with the requirements of the Law and the laws of Ukraine and provide necessary information to relevant state bodies.
Therefore, the Law will allow courts to protect individuals and businesses in disputes related to Virtual Assets, which has not been the case before.
Services Related to the Circulation of Virtual Assets
The Law permits providing services related to the circulation of Virtual Assets. However, the providers can only be legal entities. The state shall issue permits to such service providers.
There are 4 types of services that can be provided:
• Storing or administering Virtual Assets or the VA Keys;
• exchange of Virtual Assets;
• transfer of Virtual Assets; and
• providing intermediary services related to Virtual Assets.
Detailed requirements for obtaining permits are yet to be defined. However, the Law prescribes basic requirements mainly related to reputation of owners and executives of the service providers in accordance with the legislation on prevention of money laundering, terrorism financing and financing of proliferation of weapons of mass destruction. Other requirements include disclosure of relevant information to state authorities and setting up appropriate internal procedures of monitoring and other activities.
Permits shall be issued by the central executive body of Ukraine that implements the state policy in the field of virtual assets circulation (the Central Executive Body). Information on the issuance, reissue, revocation of the permit for the provision of services related to the circulation of Virtual Assets is entered by the Central Executive Body to the State Register of Service Providers (the Register). Service providers are obliged to notify these bodies about any changes in relevant information.
Both the Register and the Central Executive Body shall be created within 6 months from the date of publication of the Law. The Law also prescribes financial sanctions for the Central Executive Body to impose on service providers in case of finding a violation.