Vadim Kolokolnikov, an attorney at Barristers LLP: Financial regulators have effectively stepped aside from addressing the issue of the legal status of cryptocurrencies

In an interview with *Loyer*, Vadym Kolokolnikov, an attorney at Barristers Law Firm, discussed the nuances of Bitcoin’s legal regulation in Ukraine, as well as court practice, taxation, and the reporting of cryptocurrencies.

As a reminder, a full analysis of this issue can be found in the article “Bitcoin: A Legal Outlook.” 

– Mr. Kolokolnikov, in your opinion, does Bitcoin have a defined legal status in Ukraine and is it subject to regulatory oversight? Is it possible that laws regulating this issue have already been enacted?

As of today, no cryptocurrency (including Bitcoin) has a defined legal status in Ukraine.

Furthermore, there is no law or subordinate regulatory act governing transactions involving its use.

Back on December 8, 2014, the National Bank of Ukraine (NBU) issued a letter regarding the legality of using “virtual currency/cryptocurrency” in Ukraine Bitcoin, in which it proposed treating Bitcoin as a monetary surrogate not backed by real value, and also stated that the use of monetary surrogates as a means of payment is prohibited, as it contradicts the provisions of Ukrainian law.

However, according to Article 1 of the Law of Ukraine “On the NBU,” a monetary surrogate —any documents in the form of currency notes that differ from the monetary unit of Ukraine, issued into circulation by an entity other than the National Bank of Ukraine, and produced for the purpose of making payments in economic transactions, excluding foreign currency valuables.

Since no cryptocurrency exists in the form of banknotes, I am unaware of the specific grounds on which the NBU leadership classified Bitcoin as a monetary surrogate.

I would also like to point out that the hryvnia also exhibits characteristics of monetary surrogates, since, according to Article 32 of the same Ukrainian Law “On the NBU,” no official parity is established between the hryvnia and gold or other precious metals.

At the same time, the NBU stated that the international spread of such payments makes this category of services attractive for illegal activities, including the laundering of criminally obtained funds or the financing of terrorism.

Why, then, has the NBU expressed such caution—which borders on suspicion?

Probably because any cryptocurrency is, in essence, encrypted information that cannot be copied.

Moreover, cryptocurrency is issued directly on the network and is not linked in any way to any currency or state monetary system, nor to its owner.

It appears that, lacking an understanding of the mechanism for regulating its circulation and unwilling to assume political responsibility, Ukraine’s financial regulators have effectively stepped aside from addressing the issue of the legal status of cryptocurrencies and the legislative regulation of transactions involving them.

I would note that cryptocurrencies have been in use for about ten years (including in Ukraine) without any regulatory body or central bank, which allows transactions to be conducted completely anonymously, without any user identification.

In fact, this lack of any control or identification is the main appeal of the blockchain system in which cryptocurrency transactions take place.

Therefore, it appears that the Ukrainian financial regulators’ stated goal of such regulation, namely combating money laundering and other illegal activities, identifying transaction participants (financial monitoring), establishing a mechanism for taxing income received, filing tax returns, and so on—is likely to remain merely on paper.

Incidentally, the State Fiscal Service has also remained silent on the issue of cryptocurrency taxation, specifically regarding the bitcoins declared by certain members of parliament.

It is worth noting that on March 22, 2018, the National Bank of Ukraine (NBU), in its latest letter, announced that the aforementioned NBU letter dated December 8, 2014, was no longer relevant.

This revocation may indicate a positive shift in the NBU leadership’s understanding of the nature of cryptocurrencies; however, the issues of classification, regulation, and taxation of cryptocurrencies remain unresolved and open.

Furthermore, since there is no direct legislative ban on transactions involving cryptocurrencies in Ukraine, no clarifications from the NBU, the National Securities and Stock Market Commission (NSSMC), or the State Fiscal Service (SFS) can replace a law that would regulate or prohibit the circulation of cryptocurrencies.

It is worth noting that even among regulators in leading countries around the world, particularly those in the European Union, there is no unified approach to determining the legal status of cryptocurrencies and regulating transactions involving them.

It should also be noted that while financial regulators have yet to determine the status of cryptocurrencies in Ukraine, two bills on this issue are currently under consideration in the Verkhovna Rada of Ukraine.

– Bill No. 7183 dated October 6, 2017, “On the Circulation of Cryptocurrencies in Ukraine”;

– Bill No. 7183-1 dated October 10, 2017, “On Stimulating the Market for Cryptocurrencies and Their Derivatives in Ukraine.”

Both bills establish the need for state regulation in the field of cryptocurrency circulation, grant the regulator the authority to determine the procedures for the establishment and operation of cryptocurrency exchanges, monitor cryptocurrency transactions, identify participants in cryptocurrency transactions, and so on.

However, these bills have been under consideration by the relevant committee for nearly a year, and the timeline for their review and adoption by the Verkhovna Rada of Ukraine remains unknown.

– There are quite a few cases involving Bitcoin in the court registry. In your opinion, how should courts proceed when considering such cases?

The Unified Register of Court Decisions contains only a few instances of civil cases involving cryptocurrencies, so it is impossible to provide a definitive answer regarding judicial practice as of today.

For example, in the decision http://reyestr.court.gov.ua/Review/56686444, the court agreed with the NBU’s position regarding a “monetary surrogate” and stated that “the court cannot compel the defendant to transfer ownership of goods in the form of Bitcoin digital assets …—that is, virtual items that lack the characteristics of the physical world—to the plaintiff,” and therefore dismissed the claims.

The appellate court, incidentally http://reyestr.court.gov.ua/Review/62052778погодилась, noting that the circulation of the virtual currency/cryptocurrency Bitcoin is not regulated by law, and therefore upheld the decision of the court of first instance.

In any case, it appears that Ukrainian courts are not yet ready to recognize cryptocurrency as a commodity.

A similar situation exists regarding the courts’ consideration of administrative cases involving cryptocurrencies; however, such cases are also few and far between, so it is impossible to provide a definitive answer regarding judicial practice as of today.

http://reyestr.court.gov.ua/Review/62079235 the court of first instance,

http://reyestr.court.gov.ua/Review/63548614, the appellate court.

In this case, a notice (tax advisory) from the State Fiscal Service of Ukraine regarding the VAT treatment of cryptocurrency transactions was challenged.

To give you a preview, I’ll note that the State Fiscal Service of Ukraine’s tax advisory was revoked, and the administrative courts, acknowledging that the issue was not regulated by national legislation, applied European case law.

Thus, in the case of Hedqvist v. Sweden, in its decision dated October 22, 2015, the European Court (erroneously referred to as the European Court of Human Rights in the appellate court’s text) ruled that transactions involving bitcoins and other virtual currencies within the European Union should not be subject to VAT.

According to the European Court’s ruling, transactions involving the exchange of traditional currencies for Bitcoin must be exempt from VAT, as EU rules prohibit the imposition of such a tax on transactions involving the exchange of currencies, banknotes, and coins.

In fact, even this practice is positive, as it enables Ukrainian courts to apply not only Ukrainian law (which lacks any regulation on these matters).

The most interesting aspect is the judicial practice regarding the adjudication of criminal cases by the courts.

For example, the years 2017–2018 were marked by a series of searches and seizures of computer equipment conducted by law enforcement agencies from individuals involved in cryptocurrency transactions (miners).  According to law enforcement officials, these individuals converted the cryptocurrency they received into e-money from official payment systems, which they subsequently used at their own discretion.

It should be noted here that in all court decisions listed in the registry, cryptocurrency mining itself or standard civil transactions involving cryptocurrencies (sales, exchanges, etc.) are not the subject of judicial review.

In criminal proceedings, cryptocurrencies or transactions involving them are considered to be related to drug trafficking, money laundering, tax evasion, theft, extortion, fraud, the importation of equipment without proper documentation, and so on.

In other words, to draw a parallel, in these criminal proceedings, cryptocurrencies or transactions involving them are used as a commodity or a means of payment, which is fundamentally no different from the similar use of bank payment cards or electronic money from official payment systems to commit criminal offenses.

As of today, there are no convictions in the registry of court decisions against individuals engaged in cryptocurrency mining.

Even in the future, the very possibility of law enforcement agencies proving the guilt of such individuals is in doubt, primarily due to the lack of regulation in this area.

Therefore, it appears that all attempts by law enforcement to equate cryptocurrency mining with fictitious entrepreneurship or the legalization of proceeds obtained by criminal means, etc., are currently doomed to failure.

At the same time, this—to put it mildly—negative reaction by government agencies to the very existence and use of cryptocurrencies is entirely logical and understandable for the reasons outlined above.

Therefore, both the NBU and regulatory authorities are attempting to minimize the appeal of transactions involving cryptocurrencies, for the same reasons.

Similarly, the very possibility of tax authorities exercising control over transactions involving cryptocurrencies, as well as the taxation of income derived from cryptocurrency mining, is currently doomed to failure.

Thus, at present, cryptocurrencies in Ukraine are an anonymous asset and a means of payment that exists on the fringes of legality.

However, there is no liability for the purchase, sale, or use of cryptocurrencies as a means of payment.

– Is there already case law or established judicial practice regarding the adjudication of cases involving Bitcoin or cryptocurrencies in general?

The only case law I am aware of concerning cryptocurrencies is the aforementioned decision of the European Court of Justice in the case of “Hedqvist v. Sweden” dated October 22, 2015, which held that transactions involving Bitcoin and other virtual currencies within the European Union should not be subject to VAT.

Ukrainian courts have not yet established a body of case law on this category of cases, due to the lack of regulation regarding the legal status of cryptocurrencies in Ukraine, as well as the fact that most miners refrain from officially registering their activities as business operations.

Not to mention including cryptocurrencies in a company’s assets or recognizing them on a business entity’s balance sheet…

Such caution is logically justified, since it is unknown how tax authorities will verify the accuracy of the income reported by such entrepreneurs, determine the tax base, confirm gross expenses, and audit the “supply chains” that are all too familiar to every business entity.

The most logical (and at the same time, fantastical) scenario for such oversight would be granting tax authorities access to a business entity’s crypto wallets for verification purposes. At the same time, this would destroy any anonymity—which was, to a large extent, the very reason this system was created in the first place.

It would be funny if it weren’t so sad.

And the long-established practice of administrative courts in cases brought by business entities against the State Fiscal Service of Ukraine (and its regional offices) is a more than vivid example of this.

I do not know how these issues will be resolved, and I can only express my sincere hope that Ukrainian courts will continue to apply the principle of the presumption of innocence for taxpayers.

And after reading all of the above, every actual (or potential) miner or cryptocurrency owner must decide for themselves which option is safest for them.

– Government officials, including members of parliament, are already actively declaring their Bitcoin holdings. Is this an obligation or a gesture of goodwill? Am I correct in understanding that, for now, declarants are not required to declare Bitcoin until it is recognized as an asset? Are they subject to taxation?

Indeed, declaring cryptocurrencies is currently the exception rather than the rule.

Moreover, as of today, the National Agency for Corruption Prevention (NAZK) has not yet issued any decision regarding the necessity of declaring it.

According to the NACP’s position, since cryptocurrency lacks a legal definition, the NACP will make a decision regarding the declaration of cryptocurrencies only after Ukrainian legislation establishes their legal status.

Accordingly, declaring cryptocurrency in Ukraine is not mandatory but voluntary.

As noted above, since crypto wallets cannot be identified, it is impossible to trace who owns the cryptocurrency.

Therefore, the declaration of cryptocurrencies (aside from the legal aspect) can be considered in two additional ways that are unrelated to legal compliance.

First, it provides a legal means to legitimize acquired funds and explain the origin of other tangible or intangible assets.

For example, by declaring the purchase five to eight years ago of a significant amount of cryptocurrency (at a low cost) and subsequently selling it—say, in 2016—such a declarant will be able to confirm the legality of the funds used to acquire assets already in their possession.

Of course, we are not even considering the possibility of tax or other regulatory authorities gaining access to the crypto wallets of such declarants.

The reason is that such authorities lack the necessary powers, as well as the anonymity of the crypto wallet owners themselves.

Second, this provides a legal means to conceal future income.

For example, by similarly declaring the purchase five to eight years ago of a significant amount of cryptocurrency (at a low cost) and subsequently selling it—say, in 2018—such a taxpayer will be able to confirm the legality of the funds used to acquire assets in the future.

As for taxation, the income received from the sale of cryptocurrency is subject to tax.

How the amount of income tax will be determined (other than by the taxpayer calculating it themselves) is currently unknown; the State Fiscal Service of Ukraine has not provided any clarification on these matters.