Since Bitcoin’s arrival in 2009, cryptocurrencies have been on the rise. This is especially true in Ukraine, as the nation is now listed third on the list of countries with the highest number of crypto holders according to the Chainalysis 2022 Global Cryptocurrency Adoption Index. It is believed that 6.5 million Ukrainians (15.72%) own digital assets. Ukraine was also the first in the world to form a legitimate legal framework for cryptocurrencies. Furthermore, they played an important role in the Russian Invasion of Ukraine, as many donations were made in crypto to aid the war effort.
Before the new reform, what was the status of the crypto market? With the introduction of the first digital asset in the 2010s, many Ukrainians began using cryptocurrencies as a source of income or as a payment method. However, the law wasn’t suitable to regulate such usage. Article 177 of the Civil Code of Ukraine included ‘money and securities’ as objects that could be subject to property rights, but the Law on Payment Systems excluded the use of cryptocurrencies as a legitimate form of payment. This caused uncertainty among users and businesses, leading to many debates about the legality of digital assets.
In 2014, the National Bank of Ukraine (NBU) released a statement saying that the issuance of Bitcoin “has no support or legality” and is not monitored or controlled by any government authorities in any country (NBU Letter). The NBU also declared Bitcoin to be a monetary substitute with no real value and that buying or selling it in exchange for foreign currency was similar to “pyramid schemes”. This could imply possible involvement in suspicious activities falling under the anti-money laundering legislation.
A great number of issues related to the legalization of crypto use were brought to court, and at times, the court decisions were contradictory. For example, in 2016, the Darnytskyi District Court denied the claim of a service provider who requested payment in cryptocurrency. Although the contract was valid in its entirety, the court declared that the remedy of payment in digital assets was not possible.
However, in 2020, the Kyiv Court of Appeal upheld a lawsuit filed by a crypto investor against his bank for illegally blocking the transfer of crypto from his wallet to his bank account. The court considered buying and selling cryptocurrencies to be legitimate and supported the legalization of transactions on cryptocurrency exchange sites. The court ordered the bank to unblock the transaction.
At the same time, the Odessa Administrative Court ruled that a letter from the Ukrainian Cyber Police Department, which stated that a cryptocurrency exchange should lock the account of one of its customers due to alleged theft of cryptocurrency by users, was legal and valid.
To reduce uncertainty, people began drafting contracts which utilized crypto as an exchange contract. This prevented their classification as (non-executable) payment methods. This approach allowed cryptocurrency to be labeled as goods, instead of currency. This practice quickly spread and helped to develop the discipline. In 2017, Ukraine became the first country to complete a real estate transaction using blockchain and cryptocurrency. An apartment was sold by a developer in Kyiv to the co-founder of a tech news website in exchange for digital assets. The exchange smart contract was used to formalize the transaction. The blockchain technology behind cryptocurrency has allowed for transactions to be quick, transparent, and cost-effective.
To learn more about smart contracts, please read Gernot Fritz and Lukas Treichl.
How does the new law regulate cryptocurrency? With the legalization of crypto usage being a pressing issue, the Ukrainian government has taken several steps to increase its virtual asset portfolio in recent years. This included forming a special working group on virtual assets and initiating parliamentary debates about the issue. This all led up to the enactment of the Virtual Assets Law on February 17, 2022, which regulates several important aspects.
The law allows both foreign and Ukrainian crypto investors to legally operate and acknowledge their legal status. It defines virtual assets as intangible goods that are subjected to civil rights and have value. These virtual assets can be expressed in the form of a series of data in electronic format. There are two types of virtual assets: secure and unsecure. However, the secure virtual assets must be able to prove property rights and be backed up by national currencies or securities. The law also regulates the licensing of virtual asset key managers and service providers for exchanging virtual assets with another virtual asset or currency. Financial monitoring is also introduced for the crypto market.
The Law on Virtual Assets has not yet been entered into force, pending the adoption of the law on taxation of transactions with virtual assets. There is no set date for implementation, and the current war could cause delays. Once it is put into effect, the law will offer users new cryptocurrency opportunities in Ukraine.
