It’s not a secret that the 21st Century is a period of breakthroughs and progressive digital technologies as a basement for humanity to create a new phenomenon, and virtual assets are among them. The global trend of recent years demonstrates that the use of virtual assets has stepped to a new level, gained overwhelming velocity and has strong potential. However, speaking sincerely, for the digital assets market, the previous year was a period of a prolonged decline in prices [1]. I believe that an active distribution of virtual assets shall only grow. It is hard to stop it because it is a flexible ecosystem that can keep its users safe in large-scale economic shocks. Modern trends in the crypto industry are always pushing the market to solve problems fast. Besides, the global distribution and practical experience in the use of virtual assets forces states to accept the rules to regulate these essentially new legal relations.
The virtual assets market in the European Union (hereinafter – the EU) has been developing for many years already, and it is also important for Ukraine because the people of Ukraine are interested in European integration.
Given this, on March 15, 2022, the President of Ukraine Volodymyr Zelensky approved the Law “On Virtual Assets” (hereinafter – the Law). The Law established clear work and cooperation rules for basic players of the virtual assets market – relevant authorities on behalf of the state, service operators and other participants. Virtual assets shall finally get legal status, allowing domestic businesses to enjoy bank services while running activities with these assets legally and declare incomes. Remarkably, the Law is not in force yet. According to transitory provisions, it will occur since another law comes into force – "On Amendments to the Tax Code of Ukraine on Peculiarities of Taxation on Virtual Assets Transactions".
The first paragraph of the first part of Article 1 of the Law defines that a virtual asset is an immaterial value, that is an object of civil rights, has its cost and is expressed through a set of electronic data. It is worth emphasizing that according to part three of Article 2 of the Law, it is not applied to the turnover of electronic money and securities. Simultaneously, a digital asset could not be used to pay for goods or services and is not a payment mean in the territory of Ukraine (part seven of Article 4 of the Law).
The Law also gives no definitions to a range of important terms: cryptocurrency, NFT, digital tokens, etc. This leads to a kind of uncertainty and confusion, and, in my opinion, needs prompt corrections. As I have mentioned above, virtual assets are immaterial values, i.e. they are objects of civil rights and subject to protection by the law. From this point of view, virtual assets could be a subject of litigation according to a civil proceeding procedure, as well as a subject of a criminal proceeding, for instance in a case of a virtual asset relates theft or fraud.
Article 4 of the Law specifies that a virtual assed could be as secured (certifying property rights), as unsecured (not certifying ones). According to the first part of Article 4 of the Law, there are only four grounds to acquire a title to a virtual asset, namely: at the moment of such an asset's creation; committing and fulfilling a deal related to a virtual asset; under applicable regulations; based on the court decision. And it's not over yet. An owner of a virtual asset must possess a virtual asset key. According to paragraph 5 of the first part of Article 1 of the Law, the said key is a set of technical means expressed in a system of virtual assets turnover support, enabling control over the virtual asset.
Provisions of the Law of Ukraine "On Virtual Assets" are mostly framework and will require alterations and amendments in the future. Ukraine's obtaining a status of a candidate for the EU [4] was a powerful impetus for such changes. Because of this, provisions of Ukrainian legislation need even more adjustment with the European standards, namely considering the Markets in Crypto-Assets [5] (hereinafter - MiCA). As of 31.01.2023, the EU has not finally approved the MiCA. The voting of the European Committee on the implementation of the proposed MiCA regulations for crypto assets has been postponed till February 2023 [6]. The MiCA is expected to come into force by January 01, 2024.
According to the MiCA rules, crypto assets services providers (CASP) will have to comply with the requirements aimed at the protection of consumers. The service providers will be held accountable for the lost assets of investors. Trade platforms will get a requirement to provide a white paper and sanctions for the use of misleading information. Disclaimers stipulated for users will mention risks of loss associated with crypto assets, the same for companies – marketing communication rules. CASP will need permission to work in the EU. The European Security Markets Authority (ESMA) will control the largest crypto assets services suppliers. Just to remind you, the European Council and the European Parliament have adjusted a preliminary version of MiCA at the beginning of July 2022.
The comparison of the Law of Ukraine "On Virtual Assets" and MiCA regalement shows that the last one gives a wider definition of terms and accurately differentiates their separate categories, namely: Asset referenced tokens (ARTs) — tokens connected to assets; E-money tokens (EMTs) — tokens of digital money; Utility Tokens – assets created to have access to digital transactions, accepted only by the specific asset’s developer.
The analysis of a world map of states successfully working with crypto assets shows, that Norway and Germany were European pioneers. In 2013, Norway acknowledged cryptocurrency as a digital asset and imposed income tax on the relevant transactions [7]. In the same year, Germany awarded bitcoin with a status of a currency unit, allowing their use as a means of payment [8].
On the contrary, since September 2021, China has prohibited mining [9] and the use of any cryptocurrency and everything related thereto, including storage and distribution, and blocked all websites associated with cryptocurrency and investments therein. The digital currency developed in the People's Republic of China differs strongly from bitcoin. The international society calls it "central bank digital currency" (CBDC).
African continent doesn’t fall behind. Nigeria was the first African state to implement CBDC. Last year, the Central Bank of Nigeria (CBN) launched the final testing of its CBDC currency – “digital Naira” or eNaira [10].
Salvador has chosen a way of crypto market liberalization. Since October 2021, Salvador is the first state to legalize cryptocurrency turnover completely [11]. Crypto assets are an official currency here. In other words, one can use bitcoins to pay for any goods or services.
In the USA, cryptocurrency regulations depend on both federal laws applied in the whole territory of the USA and specific laws of every individual state. The USA doesn't prohibit cryptocurrency directly, but the American government worries about fraud and deception which may occur in this market. Given this, on September 16, 2022, the White House published a draft of regulations for the cryptocurrency industry [12]. The main purposes of this regulation were measures to protect consumers' rights, support financial stability, prevent the illegal use of cryptocurrencies, preserve the leadership of the USA in the global financial sector, and responsible implementation of technological innovations. The decree also stipulated an extension of cooperation between the USA and its partners within the limits of G7, G20, the Financial Action Task Force (FATF), and the Financial Stability Board (FSB).
But let’s return to Ukraine. For a full-scale start of virtual assets market regulation, the Parliament first has to pass a draft law on amendments to the Tax Code of Ukraine regards imposing taxes on virtual assets transactions to specify changes to the basic law in the branch. Today, the work is still continuing. Besides, after the European Commission approves the MiCA, the Law of Ukraine on virtual assets will need an update to comply with the general European standards on cryptocurrency regulation. It is an ordinary practice, while the virtual assets market is changing every day, demanding upgrades to some provisions.
Considering the above, I see the legalization of virtual assets as a positive option for Ukrainian economics. The crypto business will be able to work openly, follow clear rules, and not be afraid of a corruption component. The activeness of the crypto market shall have a proportional positive effect on the state budget due to the inflow of taxes associated with such transactions. There is a lot of work ahead, but I'm sure that all will win in the future!