Developing Ukraine into the world's biggest cryptocurrency market

Since the arrival of Bitcoin in 2009, cryptocurrencies haven’t been far away from the headlines. This is particularly true in Ukraine, which is reportedly among the top countries in the world with the largest number of crypto owners and is ranked third on the Chainalysis 2022 Global Crypto Adoption Index. It is estimated that roughly 6.5 million Ukrainians (15.72 per cent of the Ukrainian population) own cryptocurrency. Ukraine was also one of the first countries in the world to adopt a legislative framework for cryptocurrency. Furthermore, cryptocurrency is playing a key role in the context of the Russian invasion of Ukraine – a substantial amount of donations to help fund the war effort were made in crypto.

While the legal status of crypto in Ukraine remained in flux for some time, this did not stop users from engaging with various cryptocurrencies. On 17 February 2022, Ukraine adopted the Law on Virtual Assets and became one of the few jurisdictions to implement regulation of cryptocurrency.

What was the status of cryptocurrency prior to the reform?

The release into circulation of the first cryptocurrencies in the 2010s aroused considerable interest in Ukraine in using crypto as a source of income and as a payment instrument. Ukraine, however, did not have a proper legal framework to regulate such use.

Whilst article 177 of the Ukrainian Civil Code includes “money and securities” as objects that may be subjects of proprietary rights, the Law on Payment Systems and Transfer of Funds prescribes that hryvnia, the Ukrainian national currency, is the only legal means of payment in the territory of Ukraine. Ukrainian legal practice therefore interpreted this as excluding cryptocurrency as a valid form of contractual payment.

Notwithstanding the legal uncertainty, users and businesses started engaging with cryptocurrencies, which naturally resulted in numerous disputes surrounding the legal nature of crypto assets. Consequently, in 2014 the National Bank of Ukraine (NBU) published a letter where it stated that the issuing of Bitcoin has “no backing and legality behind it” and is not controlled by the state authorities of any country (NBU Letter). The NBU thereby defined Bitcoin as a monetary surrogate with no real value. Moreover, the NBU claimed that buying or selling Bitcoin in exchange for foreign currencies was indicative of “pyramid schemes” and might suggest potential involvement in dubious transactions falling under the anti-money laundering legislation. The position of the NBU raised doubts among business parties about the legality of the use of cryptocurrency in contracts.

Disputes involving the use of cryptocurrency that were litigated in Ukrainian courts also produced conflicting results. By way of example:

• In 2016, the Darnytskyi District Court dealt with a contract for services where payment was expressed in cryptocurrency. When the recipient of the services did not pay for the services, the service provider sued him for the payment. The court considered the NBU Letter and dismissed the service provider’s claim for payment in cryptocurrency. Whilst the contract itself was valid,  in the opinion of the court the remedy (i.e. payment in cryptocurrency) was impossible.
• In 2020, the Kyiv Court of Appeal on the other hand upheld a claim by a crypto investor against his bank for unlawfully blocking the transfer of cryptocurrency from the investor’s cryptocurrency wallet into his bank account. The court ruled that the sale and purchase of cryptocurrency was not fraudulent and supported the legalisation of cryptocurrency transactions which are made on cryptocurrency market websites. The court ordered the bank to unblock the transaction.
• At the same time, in 2020, the Odessa Administrative Court found that a letter from the Ukrainian Cyber Police Department to a crypto exchange, requiring it to freeze an account of one of its Ukrainian users for suspected stolen cryptocurrency, was enforceable and lawful.

To mitigate the uncertainty, parties developed a practice where they would draft contracts that used cryptocurrencies as contracts of exchange to avoid cryptocurrency being qualified as a (un unenforceable) means of payment. By virtue of this approach the cryptocurrency qualified as goods which were being exchanged rather than as a currency. This practice became widely spread and supported the development of the Ukrainian crypto market. Ukraine is, in fact, the first place where a real estate transaction using blockchain and cryptocurrency was executed back in 2017 when a Ukrainian developer sold an apartment in Kyiv to the co-founder of a tech news site, for cryptocurrency. The transaction was expressed in the form of a smart contract of exchange. The blockchain technology behind cryptocurrency allowed transactions to be fast, cost-efficient and transparent.

To find out more about smart contracts, please read this article by Gernot Fritz and Lukas Treichl.

How does the new law regulate cryptocurrencies?

As the demand for legalising the use of cryptocurrency was increasing in Ukraine, the government took several steps in recent years to do so, such as initially by creating a special working group on virtual assets and initiating parliamentary debates on the topic. This culminated in the enactment of the Law on Virtual Assets on 17 February 2022. The law regulates several important aspects. It:

• allows foreign and Ukrainian crypto investors to operate legally by recognising and acknowledging their legal status;
• defines the virtual assets as intangible goods that are objects of civil law rights, that have value and are expressed as a set of data in electronic form;
• distinguishes secured and unsecured virtual assets, providing that secured virtual assets can certify property rights and have the backing of securities or national currencies;
• regulates the licensing of (i) administrators of the keys to virtual assets and (ii) service providers for the exchange of virtual assets with other virtual assets or currencies; and
• introduces financial monitoring measures for the crypto market.

The Law on Virtual Assets has yet to come into force, pending the approval of the Ukrainian law on Taxation of Transactions with Virtual Assets. Whilst there is no scheduled implementation date, timing of this may be delayed due to the ongoing war. Upon implementation, the law will provide users with new cryptocurrency opportunities in Ukraine.