Virtual Assets Law: Help or Barrier?

For a long time this market remained unsettled. So the conceptual goal of adopting a law on virtual assets is, first of all, to move the market and activities with virtual assets into the legal field. This means granting a certain legal status and concept to virtual assets (which, by the way, is not limited to cryptocurrency only), direct recognition of virtual assets at the legislative level as objects of legal relations, regulation of their circulation, determination of the rights and obligations of participants in the virtual assets market and the establishment of public policy principles and regulation in the sphere of their circulation.

Not without benefits
The main advantages of such legal regulation are, firstly, that market participants will be able to obtain the official status of their activities, legal protection of their rights and recognition and the possibility of declaring profits from their investments in virtual assets.

Secondly, the law is an important step in ensuring the fight against money laundering, in particular given the size of the market. The law is based on the current standards for regulating transactions with virtual assets of the international Financial Action Task Force on Money Laundering (FATF). The adopted norms establish rules for service providers related to the circulation of virtual assets and contribute to the deshadowing of this market.

Thirdly, the legislative recognition of virtual assets can help attract virtual asset providers and, accordingly, investors to Ukraine, and hence the further growth of both this and the wider market. This can bring economic benefits for Ukraine as a whole, given the budget revenues from the introduction of tax regulation in this area.

Regulation or control?
So the adoption of the law can be generally assessed as a positive step. At the same time, it is clear that the introduction of regulation of any activity implies the establishment of control. The purpose of such control should be primarily to ensure the rights and protection of the interests of market participants, in particular against the financial and fraud risks associated with such activities. Here it is important for such specific objects as virtual assets to determine the correct regime and measure of such control: too liberal can interfere with the provision of the expected benefits, too harsh can lead to the destruction of the market.

Now, according to the law, control over the implementation of legislation in the field of circulation of virtual assets will be entrusted to the Ministry of Digital Development as the main regulator. The Ministry will form and ensure the implementation of the state policy for the development of a new market, facilitate the adaptation of Ukrainian legislation to international standards and protect the rights of market participants.

Also, according to the law on virtual assets, a service provider that is a bank will have the right to provide services only on the basis of a banking license and permission to provide services related to the circulation of virtual assets. Non-banking financial institutions will have the right to provide services on the basis of the NBU license to carry out foreign exchange transactions and permission to provide services related to the circulation of virtual assets.

With regard to financial monitoring, professional service providers (crypto exchanges) will be required to register with the Ministry of Digital Development. The Ministry enters information about providers of services related to the turnover of virtual assets in the State Register of providers of such services. Law No. 361-IX will also apply to providers of such services as subjects of primary financial monitoring. They will be required to monitor controversial and suspicious transactions.

To date, the proposed approach to regulation looks somewhat chaotic and raises questions about the need for such a large number of regulatory bodies, the incomprehensible distribution of functions between them, and so on. However, even more ambiguity with the subject of regulation.

Residency virtual relationship
In essence, the law applies to virtual assets and transactions with them if they contain a “Ukrainian” element and, of course, cannot extend its regulation beyond the territory of Ukraine. Thus, the law on virtual assets applies only to transactions under the following conditions:

if the subjects of the supply of services related to the circulation of virtual assets, or the parties to the transaction are registered (or have a permanent establishment) in Ukraine;
if the subject of the transaction is a virtual asset, and the parties have determined the law of Ukraine as the applicable law to such a transaction;
in connection with the transaction, the subject of which is a virtual asset, if the purchaser of the virtual asset is a resident of Ukraine.
At the same time, the law does not define the concept of a transaction with virtual assets. However, as defined by VA service providers, they may carry out one or more activities.