Ukraine’s Push for Crypto Regulation: Aligning with EU MiCA

As Ukraine charts its course towards greater integration with European economic structures, the nation is concurrently advancing its framework for digital assets. This proactive approach aims to establish a regulated environment for cryptocurrencies, reflecting a global trend towards legitimizing and overseeing this burgeoning sector. The development of comprehensive crypto legislation is a pivotal step, signifying Ukraine’s commitment to embracing financial innovation while ensuring market stability and investor protection.

Legislative Overhaul: Aligning with European Standards

Ukraine is actively reshaping its approach to virtual asset regulation, with a new bill recently gaining initial support from the Verkhovna Rada’s Committee on Finance, Tax, and Customs Policy. This legislative effort marks a significant departure from previous proposals, largely driven by Ukraine’s status as an EU candidate. The National Securities and Stock Market Commission (NSSMC) has been a key participant in this process, collaborating with specialists, including those from Ernst&Young, to align the national framework with the European Union’s Markets in Crypto-Assets (MiCA) regulation.

The adoption of MiCA as a foundational model is considered almost inevitable given Ukraine’s EU aspirations. “We took MiCA as a basis,” stated Ruslan Magomedov, head of the NSSMC, highlighting the necessity of harmonizing with established European standards. While the country might seek certain deferrals or adjustments, particularly considering the ongoing war, the core requirements of MiCA are expected to be implemented.

Regulatory Responsibilities

The initial proposal from the NSSMC envisioned a dual regulatory structure: the National Bank of Ukraine (NBU) would oversee money-related crypto assets like CBDCs, while the NSSMC would manage assets linked to financial or commodity instruments. However, committee revisions have adjusted this, retaining the NBU’s role but suggesting that another body, to be determined by the Cabinet of Ministers in coordination with the NBU, would take on the remaining responsibilities. This approach avoids creating an entirely new regulatory entity, aligning with European practices where existing financial market authorities and central banks typically share oversight.

The development of the current bill initially involved key state stakeholders such as the NSSMC, the NBU, the Ministry of Finance, and the Ministry of Digital Transformation. Wider consultations, including with the crypto community, are anticipated as the bill progresses towards its second reading.

Taxation and Ownership: Key Considerations

A significant part of the regulatory discussion revolves around the taxation of cryptocurrency transactions. The NSSMC developed a “taxation matrix” as a starting point for dialogue, aiming to clarify how crypto activities could be integrated into the national tax system. The current proposal suggests a standard personal income tax rate of 18% plus a military levy on profits from crypto assets.

However, for the first year following the law’s enactment, a transitional, reduced rate of 5% personal income tax is proposed. During this initial period, individuals would not be required to disclose the origin of assets for their first sale, effectively offering a form of tax amnesty. Despite this, concerns remain within the crypto community. Magomedov pointed out the importance of this amnesty extending beyond just tax obligations. “We need a full amnesty so that no one can ‘harass’ us, so that the capital from which we pay tax for the first time is already recognized as clean and white,” he emphasized, highlighting the need for protection against subsequent legal challenges regarding asset origins.

The Primacy of Property Rights

Beyond taxation, Magomedov stressed the critical importance of clearly defining property rights for virtual assets within the new legal framework. He argued that the mechanisms through which the state will recognize and control ownership—including procedures for asset seizure or freezes—are fundamental. “I would advise the crypto community to pay more attention to this section than to taxation,” he stated, suggesting that without clear rules on ownership, the basis for taxation itself would be undermined, as participation in the market would dwindle if the rules of engagement remain ambiguous or unfavorable.

Specific Crypto Activities and Market Infrastructure

The regulatory proposals also touch upon the tax treatment of specific crypto-related activities. The NSSMC initially suggested that activities such as mining, staking, and airdrops could be exempt from taxation to stimulate the growth of these sectors within Ukraine.

However, the final decision on these exemptions is uncertain. Magomedov acknowledged the influence of Ukraine’s international financial partners, especially in the context of wartime economic reliance. “They say: ‘Look, we give you money for which you live and fight for your independence. And at this time, you are simplifying and reducing the tax base. We do not agree to this,’” he explained, indicating that such exemptions might face opposition if perceived as reducing potential state revenue while the country depends on external aid.

Reopening Fiat Gateways

The issue of fiat gateways, which facilitate the conversion of traditional currency to cryptocurrency and vice versa, is another area awaiting regulatory clarity. Direct operations between crypto platforms and Ukrainian hryvnia bank cards have been largely suspended since early 2023. It is anticipated that once the new law is adopted and regulatory responsibilities are clearly defined, the National Bank of Ukraine will establish rules for their operation, potentially leading to the reopening of these crucial channels.

A Forward-Looking Perspective from the NSSMC Head

Ruslan Magomedov brings a unique perspective to his role, having previously co-owned a cryptocurrency exchange. “This is so that everyone understands that I am not some official who wants to ban everything,” he shared, underscoring his personal experience and fundamental belief in technological progress. “I am a technocrat, I love all new technical things.”

He views cryptocurrencies not merely as a fleeting trend but as an inevitable component of the future financial landscape. He draws a parallel with the adoption of touchscreen technology, which existed for years before becoming ubiquitous. “Crypto is definitely already here, definitely already being used, but for the state, it’s still like the touchscreen was for humanity in the 90s,” Magomedov mused. He foresees a “breakthrough” by the end of the decade, where governments will fully recognize the benefits of blockchain and virtual assets, actively encouraging their integration.

Currently, he observes a tension: consumers are increasingly adopting crypto, influencing public opinion, while governments remain cautious, balancing the desire for control and tax revenue against fears of losing existing oversight mechanisms.

Navigating Regulatory Implementation Amidst National Challenges

The ongoing war casts a significant shadow over Ukraine’s crypto-regulatory ambitions. Magomedov emphasized the profound impact of the conflict, stating, “Ukraine is now very weak because it is at war. And therefore, mistakes that the state can make when implementing regulation can be critical. The economy may not withstand it.”

This precarious situation necessitates a cautious and potentially delayed approach to full-scale implementation. While the legislative framework is being developed in line with international standards like MiCA, the practical application, particularly concerning taxation of virtual assets, might be deferred. “In my opinion, the real implementation of taxation of virtual assets, and accordingly the launch of real regulation, will take place only after the end of the full-scale war, because it is very risky,” Magomedov concluded. This pragmatic stance reflects the understanding that stabilizing the nation and its economy takes precedence, and any regulatory missteps in the volatile crypto sector could have severe consequences during such a critical period for the country.