Ukraine Introduces Cryptocurrency Control

Опубликовано: 17.06.2021

The Committee on Digital Transformation submitted to the Verkhovna Rada a draft law “On Virtual Assets” for consideration in the second reading, which will legalize the cryptocurrency market in Ukraine and regulate the relevant legal relations. The law defines the rights and obligations of participants in the virtual asset market and the principles of state policy in the field of their turnover.

Anti-Money Laundering

Virtual assets, being one of the mechanisms for the movement of valuables, are subject to the requirements of compliance with anti-money laundering (AML) legislation.

The draft law “On Virtual Assets” provides for the creation of a regulator, whose competence will include issuing permits to professional market participants having a registered location or permanent representative office in Ukraine to use virtual assets and control their entrepreneurial activities.

They will be subject to the provisions on AML as subjects of primary financial monitoring, including the Law of Ukraine “On Prevention and Counteraction to Legalization (Laundering) of Criminally Obtained Incomes, Financing of Terrorism and Financing the Proliferation of Weapons of Mass Destruction”.

State registration of Service Providers Involved with Virtual Assets

Currently, providers of services related to the circulation of virtual assets function as financial intermediaries. They operate in an uncertain legal environment and are, therefore, less accountable than banks and other financial institutions. The new law provides for the formation of legal relations with service providers related to the circulation of virtual assets – cryptocompanies and cryptoprojects.

In order to be registered with the state, such service providers must disclose their ownership structure so that is it possible to identify the ultimate beneficiaries and introduce internal financial monitoring procedures to prevent money laundering.

Cooperation between Ukraine and FATF

As defined by the FATF (Financial Action Task Force on Money Laundering), a virtual asset is a digital embodiment of value that can be sold or digitally transferred, as well as used for payments or investment purposes. Virtual assets do not include digital representations of fiat currencies, securities and other financial assets described in other FATF recommendations.

Since these assets do not have a centralized control system, regulators need to establish transparent mechanisms for their legal regulation. The position of the Group proclaims that states should be guided by the principle “it is better to allow and set a framework than to ban a notion completely”, since the legalization of virtual assets will be carried out by the state. This will ensure compliance with international requirements in the field of combatng money laundering and terrorism financing.

A jurisdiction that does not comply with the FATF recommendations will be considered more risky. In the long term, this will complicate the conduct of business for the cryptocompanies that are registered in Ukraine and cooperate with companies from other jurisdictions with stricter AML rules.

Authors of the draft law express the opinion that its adoption will have a positive effect on the long-term prospects for the development of cryptobusiness in Ukraine. Local companies working with virtual assets will have full access to banking services, and banks will provide services for the storage of such assets and open accounts for transactions with them. The creation of a legal framework will attract investors, which will stimulate liquidity and reduce the volatility of the virtual asset market.

Control of Virtual Assets in the World

The Organization for Economic Co-operation and Development (OECD), in its report “Taxation Virtual Currencies: An Overview of Tax Treatments and Emerging Tax Policy Issues” (2020), recommends that virtual asset law drafters ensure the presence of the following:

  • clear understanding of how virtual currencies fit into the existing tax system. Amendments to existing regulations, or even specific regulations for these assets, can be helpful to ensure legal clarity among taxpayers;
  • recommendations regarding the main taxable events and forms of income associated with virtual currencies, especially for their inclusion in income taxes, VAT and property tax or property transfer tax;
  • instructions on how to handle other forms of cryptoassets (including security tokens and utility tokens) for tax purposes;
  • determination of whether the tax regime for virtual currencies should be consistent with the tax regime for other types of assets;
  • possibility of providing a simplified tax regime for persons who are not engaged in commercial activities and receive limited amounts of non-employment income.

Furthermore, the report takes into account such cryptocurrency market terms as hard fork, stablecoins and central bank digital currencies (CBDC). The OECD advises to accelerate the development of new legislation to regulate these rapidly evolving instruments and, in particular, to identify cases where a taxpayer is considered to be the recipient of these new types of assets for tax purposes.

The Proposal for a Regulation of the European Parliament and of the Council on Markets in Cryptoassets, and Amending Directive (EU) 2019/1937 sets the following objectives:

  • elimination of regulatory obstacles to the issuance, trading and subsequent trading of cryptoassets that qualify as financial instruments;
  • expanding sources of funding for companies by increasing the number of initial offerings of coins and securities tokens;
  • limiting the risks of fraud and illegal activities in the cryptoasset markets;
  • providing consumers and investors from the EU with access to new investment opportunities or new types of payment instruments, in particular, for international transactions.

The United States is also planning to introduce new control mechanisms: the Congress is expected to provide the country’s Internal Revenue Service with the authority to collect data on transactions with companies‘ cryptocurrencies in the amount of $ 10.000 or more. According to the Commissioner of the Service, Charles Rettig, transactions with cryptocurrency have begun to fall out of sight of tax authorities and often become a way to avoid paying taxes.

The US Treasury’s “The American Families Plan Tax Compliance Agenda” states the following: “Despite constituting a relatively small portion of business income today, cryptocurrency transactions are likely to rise in importance in the next decade, especially in the presence of a broad-based financial account reporting regime. Within the context of the new financial account reporting regime, cryptocurrencies and cryptoasset exchange accounts and payment service accounts that accept cryptocurrencies would be covered.”


Read more:

How Bankers Identify Dirty Money Launderers among Their Clients

One More Step Towards FATF (in the Fight Against Money Launderers)


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