March 2022 was a breakthrough month for the virtual assets market in Ukraine. With the help of Ukraine‑based Everstake and Kuna, the Ministry of Digital Transformation of Ukraine set up a fund to accept donations in crypto assets to primarily support Ukraine’s military needs. According to the Ministry, Ukraine’s government has raised over USD60 million in crypto donations to date. Also, Unchain Ukraine, a project of Ukrainian blockchain activists, launched a card that has been marketed as ‘the first charitable cryptocurrency card’ powered by Weld Money and Unex Bank. The crypto assets raised are exchanged into UAH and made available to women and children in need using Unchain Help Card, a virtual card issued by Unex Bank.
In the wake of these events, on 15 March 2022, the President of Ukraine signed the Virtual Assets Act that previously had not been receiving much attention. The Act will enter into effect simultaneously with the act on the taxation of crypto transactions. The most recent bill on taxation of such transactions was registered in the parliament on 13 March 2022 and, in accordance with the current draft, is proposed to enter into force on 1 October 2022.
Under the Act, a virtual asset service provider is an entity that provides any of the following services: (a) custody of virtual assets and administration of private cryptographic keys, (b) exchange of virtual assets for other virtual assets or fiat currencies, (c) transfer of virtual assets, and (d) intermediary services in the interests of third parties, including public offerings and placements of virtual assets.
An entity may provide any such service if it has been issued a permit by the National Commission for Securities and Stock Market (the “Securities Commission“). When applying for the permit, a virtual asset service provider would need, in particular, to demonstrate that it has an impeccable business reputation under Ukraine’s AML Act (as defined below) and must disclose its ownership structure and ultimate beneficial owners.
In April 2020, the new Act of Ukraine on Preventing and Fighting Money Laundering and Financing of Terrorism and WMDs Proliferation No. 361-IX (the “AML Act“) came into effect. In line with the 5th EU AML Directive, the AML Act names providers of virtual asset services as obliged entities for reporting purposes. The Virtual Assets Act brings further updates to the AML Act in relation to the AML obligations of providers of services on transfer of virtual assets.
If the service concerns virtual assets related to currencies or other currency valuables, such as stablecoins, a service provider must be also licensed as a financial company in Ukraine.
Under the Virtual Assets Act, a foreign crypto business may provide services to Ukrainian clients if it complies with the requirements for this type of activity under the law of its home jurisdiction, has a charter capital of the amount required by the Act, and has been issued a permit by Ukraine’s Securities Commission as discussed above. The Virtual Assets Act provides that the Securities Commission shall approve a special regulation regarding the activities of non-resident service providers within six months following the Act entering into effect.
Ukraine has not followed certain other jurisdictions in recognising virtual assets as a digital representation of value that can be used for payment. Under the Virtual Assets Act, a virtual asset is not considered legal tender in the territory of Ukraine, and can only be exchanged for other virtual assets or fiat money.
More recently, in an attempt to limit the outflow of capital from Ukraine, on 20 April 2022, the National Bank of Ukraine prohibited Ukrainian banks from processing instructions of Ukraine individuals on purchasing virtual assets in an amount exceeding UAH100,000 per calendar month and/or using UAH funds. This limitation is likely to remain in place as long as the Russian aggression continues.
We are monitoring developments related to the Virtual Assets Act and will be providing updates. For more information, please contact Andriy Nikiforov, Partner.