Ukraine will legalize Bitcoin: what will the bill on virtual assets change for cryptocurrency owners

Bitcoin as an unsecured token, mandatory registration of exchanges and exchangers, fines for ICO without notificationregulator - Ukraine presented a draft law «On Virtual Assets», which will introduce the cryptocurrency market into the legal field.

The document caused a lot of controversy. To understand how the established rules will affect market participants, ForkLog talked with the author of the bill, the head of the Blockchain4Ukraine inter-factional association (MFI) Alexei Zhmerenetsky and the head of the Blockchain4Ukraine advisory group Konstantin Yarmolenko.

ForkLog: Hello, Alexey and Konstantin. The document was recently submitted for public comment, but has already received a portion of criticism in its address. We suggest today to walk on the most important points. First, explain what the definition of virtual assets (VA) as property is dictated by.

Blockchain4Ukraine:We classify VA as property for a number of reasons. Firstly, as defined by FATF and EU Directive 2018/843 BA, it is a “digital expressioncost"(Digital representation of value).

Secondly, according to Article 139 of the Economic Code of Ukraine, “property in this Code is recognized as a set of things and other valuables (including intangible assets) that havecostdefinition…"

Third, international financial standardsreporting (IFRS) in the update for June 2019 classify cryptocurrencies as intangible assets. Given these arguments and for a number of other reasons, we classify IA for the purposes of economic legislation as intangible assets and, accordingly, property.

For accounting purposes, we classify IA as intangible assets of the “other intangible assets” group.

ForkLog: You divided VA into secured and unsecured tokens (crypto assets). What class is Bitcoin assigned to?

Blockchain4Ukraine:According to this bill, Bitcoin is classified as a crypto asset.

ForkLog: The bill spells out registration for companies working with cryptocurrency. Who should register with the Ministry of Digital Affairs and who should not?

Blockchain4Ukraine:Registration is for suppliers onlyVA services: exchanges, exchangers and custodians. All other market participants are not required to register, but can also do so based on their business interests.

ForkLog: How will the regulation of cryptocurrency issuers not registered in Ukraine be regulated?

Blockchain4Ukraine:In the current version of the bill, activitiesVA issuers are regulated in two ways - either the issuer has a registered location here or has a permanent representative office, or the issuer has subjected its offer to sell to Ukrainian legislation.

Question of registration in Ukraine of suppliers of VA(VASP), which are incorporated abroad, is discussed at the FATF level. In the current version of the FATF recommendations of June 2019, each country decides whether registration of VASP non-residents is necessary.

However, according to our information, in specializedFATF committees form the point of view that it is necessary to amend FATF proposals and recommend that all countries conduct licensing / registration of non-resident VASPs.

ForkLog: Does the bill apply to miners as currency issuers? Will they need registration?

Blockchain4Ukraine:The topic of mining (generation) of virtual assets inThe bill has not yet been addressed, but this issue is being actively discussed. The Ministry of Economy and Energy is currently considering possible options for using the surplus of electricity generation in the energy system, especially by Energoatom.

Since the solutions to the problem are not soa lot (in particular, the removal of atomic units for repairs, the electrification of the railway network, the use of energy-intensive data centers and mining farms that can balance their energy consumption), we are in an active dialogue with all stakeholders on the initiative of using data centers and mining farms in search of a solution in the legislative plane.

If there is a need and political will, we will promptly develop and implement changes to regulate this issue.

In our opinion, and we share this issuethe opinion of the Effective Regulation Office (BRDO), to quickly launch the virtual asset generation segment, it is important to change the classification of this type of economic activity: from KVED with 64.19 «Other types of monetary intermediation» on KVED 63.11 «Data processing…»

ForkLog: In what cases will it be considered that a VA does not have an issuer?

Blockchain4Ukraine:It's a difficult question. The most famous case where the issuer of the VA is not determined is Bitcoin.

From a legal point of view, the term “VA issuer does notdefined ”means that the token issuer has not been identified. Bitcoin and all Proof-of-Work VAs fall under this definition, since no one has carried out identification of miners or mining pools and it does not seem to identify who exactly stands behind each of the blocks and, accordingly, for the bitcoins paid as a reward possible. Thus, it is impossible to make a complaint to the Bitcoin miner.

Now we are trying with lawyers and experts to find the answer to this question, especially with respect to those VAs, the issue of which was conducted outside Ukraine and before the entry into force of this law.

ForkLog: What about taxation for exchanges, exchangers and miners? Does it mean further?

Blockchain4Ukraine:On November 15, 2019 we registered in the SupremeRada bill No. 2461 “On taxation of crypto-assets”. Until this law comes into force in Ukraine, standard taxation rules apply to virtual asset market participants.

ForkLog: The bill stipulates that only people with a clean business reputation can own exchanges and exchangers. What does this mean and will it not create corruption risks?

Blockchain4Ukraine:The norm about “untarnished business reputation”suggests that an individual who is the ultimate beneficiary or director of a virtual asset provider company, similar to the ultimate beneficiary or director of a bank, should not have a criminal record under articles of the Criminal Code related to crimes in the financial sector.

ForkLog: Why is the authorized capital for crypto exchanges set at 20 thousand euros, and for custodians of VA - 10 thousand euros? Is this consistent with global practice?

Blockchain4Ukraine:We determined the level of authorized capital for VA suppliers based on an analysis of global practice, but we are ready to discuss this issue with market participants.

Forklog: The document spells out various fines for VA service providers. Is there a risk that exchanges will pay fines from user funds? Does this potentially jeopardize the site’s liquidity?

Blockchain4Ukraine:We believe the bigger risk now issecurity issues of exchanges and the protection of their clients. The procedure for registering VA service providers is precisely intended to clear the market, and the authorized capital is to create a “stabilization fund”, which will be used for risks in the event of illiquidity of the exchange or the imposition of fines.

Forklog: To regulate legal relations between participants of the crypto market, it is proposed to consider that virtual assets are located in Ukraine. Will this norm not create legal conflicts, for example, in the case of litigation with clients of foreign exchanges? How appropriate is such a territorial binding of cryptocurrency?

Blockchain4Ukraine:Since the nature of virtual assets is suchWhile their actual location is difficult to establish, the rule of Article 8 largely prepares the ground for approaches to determining the competent court to consider a dispute by determining the location of the property to which the dispute concerns. This mainly applies to those disputes when the proceedings are regarding property, and not regarding a person.

Of course, judicial protection of the rights to virtual assets should be given close attention in the future.

At the same time, they must say that such a link is not Ukrainian know-how, in other jurisdictions it is also practiced.

ForkLog: In what cases can the circulation of a secured token be prohibited?

Blockchain4Ukraine:The current edition does not contain instructionsregarding VA blacklisting, although this possibility has been discussed. At the moment, there are general rules that follow from existing legislation: a) if the property behind the secured token has withdrawn from civil circulation, for example, if it is destroyed or prohibited for circulation in Ukraine (drugs, weapons, etc.); b) if such property is the subject of a pledge or there is another burden on it that interferes with civil circulation, then the disposal of the secured token is prohibited.

Forklog: The ownership of the virtual asset, according to the document, is confirmed by the presence of a private key. Does it follow that if a seed phrase is lost, the user will not be able to prove ownership of the assets?

Blockchain4Ukraine:One of the objectives of the law is to introduce VA into circulation inUkraine, despite the fact that users already have them. Therefore, it is assumed that the key confirms the right regarding the VA that the user has. In this case, of course, if the court confirms the theft or another basis for the claim, the presence of the key does not mean anything.

If we are talking about anonymous VAs and their owner did not go through the identification procedure, then with the loss of the seed-phrase, he will lose this virtual asset.

If an individual or legal entity is identified as the owner of a certain virtual asset, then he will be able to prove his ownership, even if he loses the seed-phrase.

ForkLog: Will the bill affect ordinary cryptocurrency owners in any way?

Blockchain4Ukraine:This bill, like the one that entered intointo force on April 28, 2020, Law No. 361-IX (2179) on financial monitoring, including virtual assets, will mainly affect market participants, namely virtual asset providers. Ordinary owners of virtual assets will be able to continue to use them, with the exception of money laundering and other criminal purposes.

ForkLog: What other bills regarding the regulation of the cryptocurrency market are supposed to be developed?

Blockchain4Ukraine:For now, we are focused on passing the law “On Virtual Assets” and by-laws.

ForkLog: Why do cryptocurrencies need legal regulation?

Blockchain4Ukraine:Firstly, there are three international institutions,which, since the summer of 2019, have taken active measures to regulate the virtual asset market are the FATF, the European Central Bank and, in fact, the European Union. This was necessary to cut off the criminal segments of the market, and on the other hand, to integrate the virtual asset market into the existing financial and banking system.

Ukraine in the framework of the Association Agreement with the EUshould gradually implement EU directives. Ukraine is also a member of MONEYVAL (the regional committee of the FATF under the Council of Europe) and is undergoing intensive monitoring by MONEYVAL based on the results of the 5th round of mutual evaluations.

Secondly, regulation is necessary to protect investors who, over the past few years, have lost their savings from investing in different pyramids and in dubious schemes.

Third, before launching a regulated marketof virtual assets, we plan to conduct a one-time action on the legalization of virtual assets as part of the capital amnesty plan, which is currently being prepared in the Verkhovna Rada.

Forklog: It so happened that almost immediately after Ukraine, Russia submitted its bills to regulate the crypto market. And they are much tougher - for a bitcoin transaction, punishment is provided up to seven years in prison. Why Ukraine did not choose the path of the ban?

Blockchain4Ukraine:We have studied the current version of the Russianthe bill “On digital currency and on amendments to certain legislative acts of the Russian Federation.” It contains two key points: 1) a ban on the issue and circulation of cryptocurrencies and 2) a ban on the dissemination of information about the issue and circulation of cryptocurrencies.

At the same time, both paragraphs criminalize their violation. If the bill is adopted in the current version, this will entail the death of the virtual asset market in Russia.

Ukraine did not follow the Russian ban pathvirtual assets, because this market is a growth point for Ukraine’s GDP and an opportunity to become one of the world technological leaders. In addition, it makes no sense to prohibit what is technically impossible to control, as we have already seen in the case of the Telegram blocking in Russia.

Discussion of the bill on virtual assetsgoes on. Your suggestions and comments on the document can be sent until May 24 to the mail blockchainforukraine (@) gmail.com or dubetskyi (@) thedigital.gov.ua. It is expected that before May 29 the document will be submitted for consideration to the Verkhovna Rada.

Recall, from April 28 in Ukraine entered into forcethe law on combating money laundering and the financing of terrorism, however, the provisions on financial monitoring of cryptocurrency transactions specified therein will not be applied so far.

Interviewed by Lena Jess