Vadym Kolokolnikov, an attorney at Barristers Law Firm, provided a comment to the publication "Loyer" regarding the legal status of cryptocurrencies in Ukraine

What is the current situation regarding the legal status and regulatory framework for Bitcoin in Ukraine: the regulators’ position and expert opinions. Loyer, together with Opendatabot, sought to get to the bottom of this issue. Is cryptocurrency money or a currency? Or is it a means of payment or electronic money? Or is it securities, or perhaps a money substitute? Unfortunately, there is still no definitive answer to this question. Moreover, regulators’ opinions on this matter differ. This is because Ukraine does not have a single law or subordinate regulatory act governing transactions involving cryptocurrency. But let’s take it one step at a time.

Bitcoin & the NBU

Back in 2014, the 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.

According to many lawyers, this position of the NBU is not entirely correct or clear. Vadym Kolokolnikov, an attorney at Barristers Law Firm, commented on this issue as follows:

“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 assets.

Since no cryptocurrency exists in the form of banknotes, I do not know what exactly guided the NBU’s leadership in classifying Bitcoin as a monetary surrogate. Why, then, did the NBU express such caution, which borders on suspicion? Presumably because any cryptocurrency is, in essence, encrypted information that cannot be copied. Moreover, cryptocurrency is issued directly on the network and is in no way tied 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 distanced themselves from addressing the issue of the legal status of cryptocurrencies and the legislative regulation of transactions involving them.”

For his part, Vitaliy Nakonechny, head of the legal department at the “Smile Development” group of companies, believes that this has resulted in law enforcement agencies exerting pressure on businesses.

It is worth noting that in March 2018, the NBU, in another letter, announced that the aforementioned NBU letter dated December 8, 2014, was no longer in effect.

According to attorney Vadym Kolokolnikov, 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.

Bitcoin & the Ministry of Finance

As is well known, the Ministry of Finance of Ukraine also does not recognize Bitcoin as having value. This is due to the complex legal nature of cryptocurrencies and the lack of a consolidated approach to their classification and the regulation of transactions involving them worldwide.” This was, in fact, the response sent by the Ministry of Finance to our official inquiry. To be more precise, the letter stated:

“According to a joint statement by financial regulators, cryptocurrencies currently do not have a defined legal status in Ukraine. The complex legal nature of cryptocurrencies does not allow them to be recognized as cash, foreign currency, a means of payment of another country, a monetary asset, electronic money, securities, or a monetary surrogate.”.

In addition, we tried to find out exactly when this issue would be resolved, but, of course, we did not receive a specific answer. As noted by the Ministry of Finance, “On July 20, 2018, at a meeting of the Financial Stability Council, the concept of regulating cryptocurrency transactions was discussed and endorsed. This concept provides for the recognition of certain categories of cryptocurrencies and tokens as financial instruments, as well as the roles and functions of government agencies (the NBU, the NSSMC, the Ministry of Finance (State Fiscal Service), and the State Financial Monitoring Service) in regulating the circulation of these instruments, the licensing of transaction participants, disclosure of information, and so on.”

We were also informed that “following the meetings, a model for conducting cryptocurrency transactions in Ukraine (through cryptocurrency accounts registered on licensed crypto exchanges) was discussed, the responsible financial regulator (the National Securities and Stock Market Commission) was identified, and a number of issues regarding the reporting and taxation of income from such transactions were discussed.

In addition, with the agreement of all participants and the support of members of the Verkhovna Rada’s Committee on Financial Policy and Banking, it was decided to draft a bill amending the legislation to introduce into the legal framework such concepts as “cryptocurrency,” “token,” “mining,” “ICO,” and other terms, as well as to regulate the procedures for conducting cryptocurrency transactions, declaring ownership of cryptocurrencies, and their taxation.”

Bitcoin & Bills

Currently, two bills have been registered with the Verkhovna Rada of Ukraine that are intended to regulate this issue.

Bill No. 7183 dated October 6, 2017, “On the Circulation of Cryptocurrency 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 parties to cryptocurrency transactions, and so on.

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

We reached out to the author of one of them—Serhiy Rybalko, a Member of the Ukrainian Parliament and a member of the Verkhovna Rada Committee on Financial Policy and Banking—for clarification on why this is happening.

“For a long time, the Main Scientific and Expert Directorate (GNEU) of the Verkhovna Rada of Ukraine was unable to prepare an opinion on our bill because the experts in that directorate did not know what to write in it. And according to the Verkhovna Rada’s Rules of Procedure, without a GNEU opinion, the relevant committee has no right to consider bills.

At a meeting of our Finance Committee on February 8 of this year, it was decided to create a working group to prepare a revised draft law on stimulating the cryptocurrency market based on the main and alternative draft laws. After all, these draft laws are conceptually different. The working group has been established and is working on the new draft. It is this revised bill that will be submitted for consideration in the plenary session.”

Bitcoin & the Courts

Currently, there are already a significant number of cases in the court registry involving Bitcoin or other cryptocurrencies.

“The Unified Register of Court Decisions contains isolated instances of civil cases involving cryptocurrencies; therefore, 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—that is, virtual items that lack the characteristics of the physical world—to the plaintiff,” and therefore denied 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,” Vadym Kolokolnikov is convinced.

In addition, according to him, a similar situation exists with regard to the courts’ consideration of administrative cases involving cryptocurrencies. However, such cases are also few and far between.

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 a brief preview, we note that the tax advisory issued by the State Fiscal Service of Ukraine 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 allows Ukrainian courts to apply not only Ukrainian law (which lacks any regulation on these issues),” the attorney believes.

Regarding whether it is currently difficult for Ukrainian courts to hear cases involving cryptocurrencies in the absence of legal regulation, Kyrylo Garnik, a judge of the Kyiv City District Administrative Court, noted:

“As for cases involving cryptocurrencies that have been heard by the courts, in my view, it is not difficult for the courts to render any decisions at this time in the absence of legislative regulation. For example, a contract between two companies for the supply of goods, in which one party undertakes to deliver the goods and the other to pay for them in cryptocurrency, will have no legal force until the legislature regulates this type of legal relationship.”

In his view, there are currently two most important issues that lawmakers must address: 1) recognizing cryptocurrency as either a means of payment or a commodity; and, the more complex one, 2) proposing an effective taxation model. Only then should they determine the procedure for cryptocurrency mining and regulate the establishment and operation of cryptocurrency exchanges, etc.

“The first country to officially recognize Bitcoin as a means of payment was Japan—a country with a very strong economy. I am confident that we, too, need to implement the latest technologies (blockchain) to strengthen the stability of our economic situation. This is an opportunity for the country that we cannot afford to miss,” the judge concludes.

As for court practice regarding the adjudication of criminal cases, the situation there is quite interesting.

As Vadym Kolokolnikov notes, 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.

Incidentally, MP Serhiy Rybalko also pointed out this problem:

“Unfortunately, law enforcement agencies are currently seizing cryptocurrency, equipment, and external storage devices from entrepreneurs without justification, and with impunity, they either simply steal them or demand bribes. The market operates in the shadows, and every entrepreneur tries to reach an ‘informal’ agreement with law enforcement. But Ukraine needs a normal, transparent market with clear and civilized rules.”

Bitcoin & Tax Reporting

Government officials, including members of parliament, are already actively declaring their Bitcoin holdings. Although this is more the exception than the rule.

“There is no direct ban on the acquisition, ownership, or disposal of cryptocurrency in Ukraine. Some officials have been listing cryptocurrency in their declarations for several years now. So far, I don’t see a problem here; the declarant is required to list everything that, in their opinion, represents value. However, these issues may arise once a specific law is enacted. The law should be drafted in such a way that if a person can explain and provide documentary evidence of the source of income used to purchase cryptocurrency, then no questions should arise,” says Kirill Garnik.

Incidentally, as of today, the National Agency for Corruption Prevention (NAZK) has not yet made any decision regarding the requirement to declare cryptocurrency. According to the NACP’s position, since cryptocurrency lacks a legal definition, the NACP will make a decision on the issue of declaring cryptocurrency after Ukrainian legislation establishes its legal status.

“Since crypto wallets cannot be identified, it is impossible to track 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 compliance with the law.

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 do not even consider the possibility of tax or other regulatory authorities gaining access to the crypto wallets of such declarants. The reason is the lack of appropriate authority on the part of such agencies, 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 for future asset purchases,” Vadim Kolokolnikov is convinced.

Bitcoin & Taxation

Experts’ opinions differ regarding the taxation of Bitcoin. For example, Vitaliy Nakonechny believes that “in this case, the positive difference between the purchase and sale (exchange) of cryptocurrency at the time of its conversion into cash, goods, or services should be taxed. This transaction should be taxed at a rate of 18% plus a 1.5% military surtax.

However, in essence, income from cryptocurrencies is passive income, for which a 5% personal income tax rate is established, which, in my opinion, is fair. However, it is not possible to apply this rate because income derived from cryptocurrency transactions is not included in the list of passive income specified in the Tax Code of Ukraine.

A similar approach may be applied to business entities with regard to corporate income tax (18% rate) or the single tax (5% rate).

With regard to VAT, Bitcoin transactions do not constitute the supply of goods or services; therefore, such transactions cannot be subject to VAT. In its ruling in the case “Skatteverket v. David Hedqvist,” the Court of Justice of the European Union concluded that Bitcoin transactions are exempt from VAT because they constitute payment transactions involving currency, banknotes, and coins.”

For his part, Kirill Garnik is convinced that, due to the high volatility of Bitcoin and all altcoins, the most appropriate approach would be to tax only the profit when converting funds to fiat currency. “However, it should be noted that tracking the entire chain from purchase to withdrawal is not that simple for any given reporting period. Therefore, it would be correct to file a tax return based on the date of both the purchase and the sale. This will allow you to record the purchase/sale exchange rate and avoid manipulation.”

Incidentally, it was recently reported that a bill is currently being drafted that would provide for the taxation of cash withdrawals and the purchase of goods and services using cryptocurrency.  People’s Deputy Oleksiy Mushak is working on the bill together with a group of 20 representatives from various companies.

The tax will be levied only when funds are converted to fiat currency or when goods and services are purchased. It will amount to 5% of the difference between the token’s sale price and its documented purchase price (or mining cost). Individuals will also pay a military levy of 1.5%. The taxation provided for in the bill is currently intended as a temporary measure from 2019 to 2025.

But this is just another draft law, which will likely suffer the same fate as its “cryptocurrency counterparts.” It seems that Ukraine’s financial regulators are unwilling to take responsibility for resolving the issue of the legal status of cryptocurrencies and the legislative regulation of transactions involving them. And while they hold yet another series of numerous meetings, cryptocurrencies have been operating in Ukraine for nearly 10 years without any regulatory body or central bank. Moreover, Ukraine ranks among the top 10 countries in the world in terms of the number of Bitcoin users. So sooner or later, regulators will have to make a decision and grant cryptocurrencies legal status.