Ukraine joins the comity of crypto-friendly nations with new regulation

Published at: Sept. 24, 2021

The legal status of cryptocurrencies remains a mixed bag of regulatory positions, depending on the jurisdiction being considered. While some countries move toward blanket prohibitions or stringent regulations, others elect to go with a more open approach to crypto.

For Ukraine, the latter path appears to be the case, with the government encouraging legalized crypto operations within the country. Ukraine’s seemingly positive stance on cryptocurrencies also stands in stark contrast with neighboring Russia where officials are enacting regulatory roadblocks against the ownership and use of digital currencies.

While Ukraine enacts laws to recognize and regulate crypto, the country’s central bank is also working on its own national digital currency. Central bank digital currency (CBDC) projects have become quite popular across the globe, often as a response to the proliferation of cryptocurrencies.

Some countries such as China and Nigeria with CBDC plans have been known to pass anti-crypto regulations. Global financial organizations like the Bank for International Settlements have also clamored for nations to use CBDCs to suppress the spread of “private” cryptocurrencies.

Draft law on virtual assets

Earlier in September, Cointelegraph reported that the Ukrainian Parliament adopted the draft law “On Virtual Assets.” The legislative action meant official recognition of cryptocurrency in the country.

According to a release by Ukraine’s Ministry of Digital Transformation on Sept. 8, the draft law passed by the legislature was based on the crypto regulatory standards set by the Financial Action Task Force (FATF). As such, the guidelines contained in the new regulations mandate compliance with Anti-Money Laundering protocols.

Commenting on the passage of the draft bill, Oleksandr Bornyakov, deputy minister of the Ministry of Digital Transformation Ukraine, told Cointelegraph that government regulation was a necessary step in the growth and maturity of any emerging industry, adding:

“Establishing a virtual assets policy in Ukraine will enable the creation of a legal space for Ukrainian and international VASPs to officially register their businesses. This is also relevant in view of the fact that Ukraine’s potential as one of the leading countries in the field of virtual assets is huge. So, there is a clear need for crypto adoption in Ukraine.”

Bornyakov’s ministry will be tasked with implementing the crypto regulatory policies across Ukraine. The Ministry of Digital Transformation will also help to monitor the circulation of cryptocurrencies within the country in collaboration with the central bank.

In a conversation with Cointelegraph, Lucia della Ventura, legal and compliance manager at treasury technology specialist Ledgermatic, commented on the legalization of crypto in Ukraine, stating, “The main purpose of the Ukraine bill is to provide a secure space for the introduction of Bitcoin and other cryptocurrencies in the country, which have a legal definition now, with rules that determine their use.”

According to della Ventura, passing the bill will offer legal certainty for crypto companies in Ukraine, adding:

“With parliament’s green light for this law, individuals and companies are adequately protected as the bill provides more clarifications on financial aspects and officially allows cryptocurrency companies to operate within the country.”

Legalized crypto trading in Ukraine

With the passage of the draft law in only its second reading, lawmakers in Ukraine have effectively kickstarted the legalization of the country’s crypto market, which had previously existed within a regulatory “gray area.” By recognizing cryptocurrencies, exchanges and other virtual asset service providers (VASP) can now establish banking relationships with commercial banks in Ukraine.

Access to banking services could incentivize foreign crypto businesses to set up shop in Ukraine, a situation that Mykhailo Fedorov, vice prime minister of Ukraine and head of the Ministry of Digital Transformation, said could help transform the country into a hub for cryptocurrency and blockchain technology.

“Soon, foreign and Ukrainian services related to the circulation of virtual assets, in particular, crypto exchanges, will be able to officially operate in our jurisdiction,” the Digital Transformation announcement stated.

According to Bornyakov, banks interacting with crypto businesses will open up new opportunities for the Ukrainian people, especially in the digital finance sector. As quoted in the Sept. 8 announcement, the deputy minister of Ukraine’s Ministry of Digital Transformation stated that the legalization of crypto will serve as a “powerful incentive” for further develop the country’s cryptocurrency space.

“We believe that the virtual assets market can jumpstart a digital economy in Ukraine,” Bornyakov told Cointelegraph, adding:

“The Ukrainian virtual asset market is already quite well-developed and large even on a global scale. Developing the virtual assets industry is among the Ukrainian government’s top priorities. Therefore, we strive to create a truly favorable regulatory and tax framework for conducting crypto business in Ukraine.”

Foreign crypto exchanges operating legally in Ukraine could also be a net positive for attracting overseas investment into the country’s digital economy. With stricter regulatory guidelines emerging in several jurisdictions, Ukraine’s recognition of digital assets could drive cryptocurrency businesses to move into the country.

VASPs looking to establish a presence in Ukraine under the new regulatory paradigm will reportedly have to provide information about their ownership structures. Indeed, only owners with an “impeccable business reputation” will be allowed to run crypto-based firms in the country.

In August, the Security Service of Ukraine shut down a network of clandestine crypto exchanges believed to be involved in illegal financial activities since the start of 2021. These platforms were reportedly funneling funds from banned Russian payment processors such as Yandex, WebMoney and Qiwi.

Ukrainian authorities are also keen for these VASPs to create internal financial monitoring protocols as a way of ensuring compliance with Anti-Money Laundering policies. The central bank has also stated its commitment to promoting fair crypto regulations in the country.

In an official statement from the National Bank of Ukraine (NBU), the country’s central bank stated plans to focus on crypto regulations. As part of the document, the NBU recognized the promising opportunities provided by cryptocurrencies especially in the payments market.

With parliament recognizing cryptocurrencies, the NBU said it would monitor the risks associated with the rapid proliferation of digital currencies in the country with a special focus on stablecoins. Indeed, stablecoins have become a subject of significant regulatory scrutiny in many countries, including the United States.

Bitcoin: No middle ground

The attitude shown toward Bitcoin (BTC) and crypto in general by governments seems to be shifting toward absolutes — for or against — with nuanced positions in danger of extinction as far as state actors are concerned. While not in the same category as El Salvador’s Bitcoin Law, Ukraine legalizing cryptocurrencies put the country in a small group of nations passing laws to foster digital currency adoption within its borders.

With Ukraine’s central bank also reportedly planning to issue a CBDC, the move to legalize cryptocurrencies offers a departure from the regulatory route taken by other nations with active sovereign digital currency projects. While China has long enacted strict crypto-control policies, banning trading and token fundraises back in 2017, Beijing seemingly upped the ante on its cryptocurrency crackdown once its digital yuan project began entering public testing phases.

The People’s Bank of China (PBoC) has stated on numerous occasions that its digital currency electronic payment project is a direct response to privately issued cryptocurrencies. Indeed, the PBoC joined the chorus of central bankers who warned against the potential of the Facebook-backed Diem project to upend sovereign monetary policy control protocols.

Middle-ground crypto-related regulations appear to be disappearing rapidly, with nations falling into one of two extreme categories when it comes to dealing with cryptocurrencies. El Salvador’s adoption of Bitcoin as legal tender is already being touted as the inspiration for other countries in Central and South America to pursue a similar course of action.

Earlier in September, Cuba’s crypto regulations enacted by the country’s central bank came into effect. Thus, cryptocurrencies can now be used for investments and commercial transactions in Cuba, with exchanges and other VASPs falling under a new licensing regime.

In Ukraine, the country’s Ministry of Digital Transformation is already looking at possible early use cases for the digital hryvnia CBDC. Fedorov has already put forward the argument for the proposed CBDC to be used in paying staff salaries at the ministry.

Back in August, the country’s vice prime minister stated that using the digital hryvnia to pay wages of government workers would be a suitable pilot scheme for the CBDC. According to Fedorov, such a testing route would provide a controlled use case for the digital currency and a more suitable pilot scheme rather than a public beta rollout. If the move does pull through, Ukraine will join the likes of China in using the payment of government workers as a testing ground for CBDC deployment.

With policymakers in both government and international financial regulatory establishments espousing anti-crypto sentiments, industry groups and allied bodies are also working to foster better dialogs of the important issues. It has become common for blockchain organizations to publish policy toolkits to help lawmakers and regulators better understand the cryptocurrency industry.

Critics of the perceived heavy-handed approach to crypto policing say such measures will stifle digital innovation, forcing companies to move their businesses elsewhere. Countries like Ukraine that are enacting fairer regulatory policies may stand to gain from restrictive crypto laws enacted by the United States and Europe.