In Ukraine, updates to the already adopted law “On Virtual Assets” are being prepared. Another revisions are being made in connection with the EU’s approval of the MiCA regulation on the regulation of the crypto industry.
Full implementation of European provisions into Ukrainian legislation at this stage may not help the legalization and development of the bitcoin industry in the country, but even harm the process.
The Incrypted editorial team spoke to Oleksandr Borniakov, Deputy Minister of Digital Transformation for IT Development, about the risks that the introduction of MiCA into Ukrainian regulation could potentially pose to cryptocurrency market participants at this stage.
“Regulatory Vacuum.”
Bornyakov believes that MiCA provisions should be introduced into Ukrainian legislation gradually. Among the risks that could potentially hinder the development of the local crypto market are the regulatory vacuum for virtual assets that have been left unaddressed by MiCA.
He noted that within the EU, issuers of cryptoassets that would meet the attributes of financial instruments would be subject to the regulation of existing financial markets legislation. MiCA, however, does not regulate cryptoassets that have the following attributes:
- financial instrument in accordance with part one of Article 7 of the Law of Ukraine “On Capital Markets and Organized Commodity Markets”;
- deposits in accordance with the Law of Ukraine “On Banks and Banking Activity”;
- money in accordance with the Law of Ukraine “On Payment Services”, except for electronic money tokens;
- securitization position in the context of securitization in accordance with the legislation regulating relations in the field of securitization;
- insurance product for classes of life insurance and classes of insurance other than life insurance, as well as reinsurance (retrocession) services in accordance with the Law of Ukraine “On Insurance”;
- pension payments in the systems of compulsory state pension insurance and accumulative pension provision
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“In Ukraine, the same approach is proposed, without proposing the necessary changes to the national legislation on classical financial markets. In this regard, issuers of cryptoassets, which will have the signs of financial instruments, will find themselves in a legal vacuum, that is, they will not be able to obtain authorization in Ukraine at all,” – said in a conversation with Incrypted Alexander Borniakov.
He said it will be nearly impossible for businesses to know exactly what legal regulation will apply to “his particular token” and whether it even exists once the law goes into effect.
It will be nearly impossible for businesses to know what legal regulation will apply to “his particular token” and whether it even exists once the law goes into effect.
Additional costs
Another possible challenge could be excessive compliance costs.
According to the European Commission’s 2020 assessment of the impact of MiCA on crypto market participants in the EU, regulatory compliance for cryptoasset service providers will result in significant costs for cryptoasset service providers. In particular, one-off compliance implementation costs will range from €2.8 million to €16.5 million and annual compliance costs will range from €2.2 million to €24 million, depending on the type of service provider.
In addition, the bill provides for the imposition of “regulatory fees,” and separately from them it also provides for the imposition of “fees for the provision of administrative services,” which is effectively double charging businesses for market administration services, Bornyakov said.
The bill contains many regulatory requirements that “are adequate for a developed market with a large number of professional and large players, but are clearly premature for a market that is only to be created.
The document contains quite a few regulatory requirements that “are adequate for a developed market with a large number of professional and large players, but are clearly premature in a market that is just about to be created,” said the deputy minister of digital transformation for IT development.
In particular, these are:
- conditions for the disclosure of insider information;
- prohibitions on insider trading;
- prohibitions on illegal disclosure of insider information;
- prohibitions on manipulation in the market for virtual assets;
- prudential and other requirements and obligations for service providers.
Each of these requirements and a bunch of others will require additional compliance costs from businesses, Alexander Borniakov pointed out:
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“This means that companies will have to significantly increase spending money on lawyers, auditors, programmers, security specialists, financiers, which will additionally increase costs for companies very significantly. This raises the “entry barrier”, artificially restricts competition and, as a result, also hits the end consumer financially. Businesses will always try to pass the incurred compliance costs onto users’ wallets, i.e., they will raise the fees for using their services.”
Businesses will always try to pass the incurred compliance costs onto users’ wallets, i.e., they will raise the fees for using their services.
The regulator’s “unprecedented influence” on the industry
In addition, the draft law provides for a separate procedure for the admission of virtual assets to circulation in Ukraine. At a basic level, it undermines the notion that all IAs are equally legal by dividing them into “put into circulation” and respectively “not put into circulation,” Borniakov told Incrypted:
And it undermines the understanding that all IAs are equally legal by dividing them into “put into circulation” and “not put into circulation” respectively.
“For example, in order to freely trade bitcoin, a cryptocurrency exchange must obtain permission from the National Commission to do so. An exchange can shed 500 tokens or more. Therefore, regulatory approval will be required for each of them. It will potentially take a very long time before global crypto platforms can start full-fledged operations in Ukraine”.
This provision, however, is not “borrowed” from MiCA, but is a proprietary invention of the National Commission on Securities and Stock Markets of Ukraine (NCSSM), Borniakov said. He added that it “essentially proposes an unprecedented level of regulatory influence over an industry that does not yet exist”.
The bill provides 72 options for possible violations. For 66 of them there is a possibility of fines for legal entities in the amount of up to UAH 200 million. Such an approach doesn’t look attractive to potential investors, the Ministry of Finance emphasized.
Such an approach doesn’t look attractive to potential investors, the Ministry emphasized.
Other risks
The Deputy Minister of Digital Transformation for IT Development also pointed out that non-residents offering their own IAs to Ukrainians will be obliged to fulfill the requirements of our law. For issuers, these requirements may seem excessive:
“Just as a bunch of projects once placed bans on U.S. citizens purchasing their tokens for fear of prosecution by the United States Securities and Exchange Commission.”
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The bill establishes that currency restrictions that already exist in Ukraine will also apply to stackablecoins denominated in foreign currencies. Therefore, we may get a situation in which Ukrainians will be significantly restricted in their rights to use “stable coins,” Borniakov said.
Bornyakov said.
In implementing MiCA, the EU is introducing new standards while also creating new opportunities – the so-called “passport regime”. Under MiCA, any company authorized in one EU member state can offer its own services in the single European market, to consumers in all 27 EU member states. Therefore, this “passport regime” is a significant advantage of the European regulation, says the deputy head of the Ministry of Digitra.
At the same time, Ukraine, together with the implementation of MiCA provisions, will not be able to provide similar benefits to its own service providers related to the circulation of virtual assets, as it is not yet an official member of the EU, Borniakov says:
“The lack of access to the European market for Ukrainian service providers while imposing strict and expensive regulatory requirements will limit the attractiveness of the Ukrainian jurisdiction to a dramatically low level, will lead to the absence of professional players and the market itself, will not lead to the detenization of the existing market (gray/black market) and will not create a new source of tax revenues to the state budget, which would be extremely important and appropriate in such difficult times for our state.”