The law on virtual assets has been adopted

On March 17, 2022, the President of Ukraine signed the Law of Ukraine “On Virtual Assets” (hereinafter – the Law). Please be reminded that the said Law was previously returned without the President’s signature, with his comment about the inexpediency of creating a new body that would carry out state regulation of the turnover of virtual assets, and with proposals to appoint the National Commission on Securities and Stock Market and the National Bank of Ukraine as such bodies. The law was adopted by the Verkhovna Rada with the above proposals of the President.

According to the legislator, the Law will make it possible to provide participants of the virtual assets market with safe and high-quality services and will increase investment in the economy of Ukraine. This law, according to the plan of its authors, should reduce the share of the shadow economy associated with investments in virtual assets of citizens and businesses.

1. The Law applies to the following relationships:

– in case of provision of services related to turnover of virtual assets, if the subjects of such legal relations have a registered office or a permanent representation on the territory of Ukraine;

– in connection with a transaction, the subject of which is a virtual asset, if the parties have determined the law of Ukraine to be applicable to the transaction as a whole or to its separate part;

– in connection with the transaction, the subject of which is a virtual asset, if both parties to the transaction are residents of Ukraine;

– in connection with the transaction, the subject of which is a virtual asset, if the person conducting transactions with virtual assets in their interests (acquirer of the virtual asset) is a resident of Ukraine.

2. At the same time, the Law does not provide for the regulation of legal relations related to:

– issue, circulation, storage and redemption of digital money;

– operation of software or hardware-software complexes of electronic data exchange, where the implementation of these legal relations regarding financial instruments is ensured;

– arising in the exercise of professional activities in the capital markets and organized commodity markets.

3. What is a virtual asset

The law stipulates that a virtual asset will be recognized as an intangible good, which is an object of civil rights, which has a value and is expressed by the totality of data in digital form. Such wording allows not only cryptocurrency, but also other virtual assets, such as NFT, tokens, skins in video games, etc., to be referred to as virtual assets.

It is important that the law establishes that virtual assets are not means of payment in Ukraine, they cannot be exchanged for goods or services. In other words, the practice that actually exists today in Ukraine will be limited from the moment this law enters into force.

Virtual assets can be secured and unsecured. Unsecured virtual assets do not certify property rights. Secured virtual assets certify property rights, in particular, rights of claim to other objects of civil rights. The owner of a secured virtual asset acquires a claim to the object by which the virtual asset is secured.

Thus, for example, Bitcoin (BTC) is an unsecured virtual asset, because the right to claim other property is not “tied” to it – the value of this cryptocurrency is determined only by supply and demand.

Currently, the Law does not clearly define what objects of civil rights may secure an asset. However, the Law separately stipulates that virtual assets may be secured by monetary assets or securities. In this case virtual assets are financial assets and are regulated separately by the National Commission on Securities and Stock Market of Ukraine.

N.B. Please note that according to the logic of the Law, virtual assets are not considered cryptocurrency, but are defined as a kind of analogue of securities. In other words, for example, one cannot buy goods or services for Bitcoin (BTC) or altcoins, but one can exchange them for other virtual assets (cryptocurrencies), invest in them or sell them for real currency, making a profit. At the same time, such profit (or loss) must be reflected in the annual tax return.

4. Ownership of a virtual asset

Ownership of a virtual asset is evidenced by possession of the key of such virtual asset obtained by agreement (other transaction), by law, by court order, or by the creation of a virtual asset.

However, ownership of the virtual asset will not be recognized in the event of misappropriation of the key or if the key or virtual asset is deposited by agreement or by law or court order.

5. The following services will be considered related to the turnover of virtual assets:

• holding or administration of virtual assets or keys of virtual assets (securing virtual assets or keys of virtual assets with the ability to move such virtual assets independently for and on behalf of third parties). The provider of virtual asset holding or administration services or virtual asset keys shall move such virtual assets only if such movement is in accordance with the instructions of the virtual asset owner and expressly provided for in the relevant agreement with the virtual asset owner for its holding or administration);

• exchange of virtual assets (activities related to the exchange of virtual assets for other virtual assets and currency values, carried out for third parties and/or by proxy and in the interests of third parties);

• transfer of virtual assets (transfer of virtual assets for the benefit of third parties from the wallet of virtual assets of third parties to the wallets of virtual assets of others);

• intermediary services related to virtual assets (transactions with virtual assets (including public offerings of virtual assets) on behalf of third parties).

6. Who can be a provider of virtual services

By regulating the relations in this area, the Law provided an opportunity for cryptocurrency exchanges and stores that provide services for the sale/exchange of tokens and cryptocurrencies to operate officially in Ukraine. Transactions with virtual assets will become a type of financial services, so providers of such services will have to meet the requirements of the regulators.

The following legal entities may be a service provider associated with the turnover of virtual assets:

1) managers, chief accountant, owners of material participation and ultimate beneficial owners of which have impeccable business reputation;

2) those that have formed share capital in the amount prescribed by the Law and can confirm the legality of the receipt of funds aimed at forming the share capital of a legal entity;

3) which meets the other requirements of the Law.

Only a financial institution can be a provider of services related to the circulation of secured virtual assets secured by monetary assets.

In order to become a provider of services related to the turnover of secured virtual assets, one must meet the following requirements:

1. Obtain a permit in Ukraine for the use of virtual asset turnover services.

2. Have a formed authorized capital in the amount of:

7. Obtaining a permit to provide services

The law provides a procedure for obtaining permits for the relevant types of services with virtual assets.

The application for permission is submitted to the state body, which implements the state policy in the sphere of circulation of virtual assets – the National Commission on Securities and Stock Market.

The actual cost of obtaining a permit for the use of services related to the circulation of virtual assets will be set depending on the planned type of service and is: for Ukrainian residents from 68,000 UAH to 136,000 UAH, and for non-residents – from 340,000 UAH to 680,000 UAH.

The time for consideration of the application for the relevant permit is 30 days, and the permit itself is issued for a period of one year.

Please note that the Law in its current wording does not provide a procedure for renewing such a permit, only obtaining, therefore, the fee for the permit must be paid annually when applying for a new permit.

At the same time, along with the application for a permit, the law, among other things, determines the need to submit documents containing information about:

• business reputation of ultimate beneficial owners, owners of substantial participation;

• identification data, business reputation and professional experience of the applicant’s executives, business reputation of the applicant;

• identification data, professional experience and impeccable business reputation of the applicant’s founders, chairman and members of the collegial executive body (the person exercising the powers of the sole executive body), chairman and members of the supervisory board (if any) of such legal entity.

8. Time of entry into force of the Law and amendments to the Tax Code of Ukraine

It should be noted that the said Law will come into force on the day of enactment of the Law of Ukraine on Amendments to the Tax Code of Ukraine on peculiarities of taxation of operations with virtual assets, the draft of which was submitted to the Verkhovna Rada on March 13, 2022 No. 7150. The Draft Law will enter into force on October 1, 2022.

The version of the draft law provides for the taxation of profits of a service provider associated with the turnover of virtual assets at the rate of 5 percent, provided that such service provider does not receive other income than income from services related to the turnover of virtual assets or income arising from accrual of exchange rate differences.

A rate of 5 percent is also planned to be applied to the profit from operations with virtual assets for individuals. In addition, it is planned to establish the obligation to pay a military fee of 1.5 percent of the amount of investment income from operations with virtual assets.

The wording of this draft bill is currently under review in committee, and we will monitor its passage.