December 2020 – On 2 December 2020, Ukraine's parliament adopted in the first reading the Bill on Virtual Assets No. 3637, which is available in Ukrainian here). The proposed legislation is the latest in a series of attempts by lawmakers to regulate virtual currencies or, more broadly, virtual assets in Ukraine. However, in the current proposal the parliament has approached the matter in a more consistent manner—first, by rolling out a new anti-money laundering law, and then following that up with creating the appropriate regulatory framework. The next and final step is expected to be the introduction of a tailored tax regime, as currently transactions with virtual assets remain subject to the generally applicable tax rules.
The Act of Ukraine on Preventing and Fighting Money Laundering and Financing of Terrorism and WMDs Proliferation No. 361-IX (the "AML Act") was adopted by the parliament on 6 December 2019 and came into effect on 28 April 2020. In line with the 5th EU AML Directive, the AML Act names the providers of virtual asset services as obliged entities for reporting purposes.
Also, in September 2019, Ukraine's Cabinet of Ministers created the Ministry of Digital Transformation and vested it with the authority, in particular, to regulate virtual asset service providers as well as to exercise AML-related powers in relation to these businesses.
With both institutional and AML frameworks in place, the Bill lays the groundwork for the regulation of the virtual asset industry and also sets out special rules applicable to contracts with virtual assets. The Bill applies only to (a) a virtual asset service provider that is a Ukrainian entity or has a permanent establishment in Ukraine and (b) a contract that "has been determined by the parties to it to be governed by Ukrainian law". The Bill, therefore, does not have extraterritorial reach and would not apply in a situation when a non-Ukrainian virtual asset service provider, such as a crypto-currency exchange, provides an exchange service to a Ukrainian customer. We note though that, with effect from 23 May 2020, Ukraine's tax law has been amended to include rules on deemed permanent establishment in Ukraine. While there is no such practice at present, if the tax law test for a deemed permanent establishment is considered appropriate for other purposes in the future, a non-Ukrainian virtual asset service provider could be subject to the Bill.
The AML Act and the Bill share the same definition of a virtual asset service provider, namely, a person or an entity that provides any of the following services to another person or entity or on its behalf: (a) exchange of virtual assets to other virtual assets or fiat currencies, (b) transfer of virtual assets, (c) custody of virtual assets and administration of private cryptographic keys, and (d) financial services related to the public offering and placement of virtual assets. A person or an entity may provide any such service only if it has been registered as a virtual asset service provider by the Ministry of Digital Transformation. However, the Bill is not aligned with the AML Act on the definition of a virtual asset. The AML Act replicates the FATF definition of a virtual asset (available here) as the digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes. Under the Bill as it stands now, a virtual asset is not recognised as legal tender in the territory of Ukraine.
A person or an entity applying for registration as a virtual asset service provider would need, in particular, to demonstrate that it has an impeccable business reputation (as defined under the AML Act) and must disclose its ownership structure and ultimate beneficial owners (UBOs). An entity that has been licensed by the financial services regulator to provide the foregoing financial services related to virtual assets will be able to benefit from a simplified registration procedure.
We are monitoring the Bill's progress in the parliament and will update this information following any new developments.
Originally Published by Kinstellar, December 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.