Yurii Boiko, Commissioner: Should Ukraine introduce European regulation of the crypto market?

After the publication of draft laws on the taxation of virtual assets in November 2023 (draft law No. 10225 and alternative draft law No. 10225-1), the main discussion turned to taxes. However, in this context, the difference in approaches to the peculiarities of market regulation in general remained less noticeable. Yurii Boiko, Commissioner, told Minfin about the peculiarities of this process.

What are we talking about?

In fact, Draft Law No. 10225 provided (with the exception of certain peculiarities) for the implementation of the basic provisions of Regulation (EU) 2023/1114 of the European Parliament and of the Council dated 31.05.2023 on Markets in Crypto Assets Regulation (MiCA), which was developed by the most influential experts of global importance.

This project completely changed the approaches to regulating the virtual asset market, which were laid down in the Law on Virtual Assets No. 2074-IX adopted in February 2022, which did not enter into force. These changes were developed primarily to introduce civilized European business rules and protect citizens in our country.

For its part, the alternative draft law No. 10225-1 essentially offers only a framework update of the aforementioned law No. 2074-IX, leaving a low level of protection for citizens and insufficient tools to oversee the transparency of the virtual asset market. At the same time, supporters of this draft law do not consider it appropriate to implement the MiCA in Ukraine, as they believe that the implementation of its rules will not allow our country to become an attractive crypto jurisdiction.

But a logical question arises here: are the MiCA and other EU rules concerning the regulation of virtual assets really so complicated and unacceptable for Ukraine that they will not allow us to form a market in our jurisdiction? And the answer to this question is impossible without understanding what is the peculiarity of the approaches proposed by the EU to regulate the virtual asset market?

The devil is not as black as he is painted

If we analyze in detail the requirements of the MiCA, the EU regulation establishes that:

1. A clear categorization of virtual assets, according to their intended purpose, which allows market participants to understand their nature and be informed about possible ways to use them in circulation.

2. The rules for the public offering of stablecoins and their admission to trading on the exchange, as well as the obligations of stablecoin issuers to their assets and reserves.

The MiCA introduces strict requirements for stablecoin issuers by establishing requirements for fiat-backed stablecoins in the form of 1:1 liquid reserves under third-party management to ensure independence from other assets, thereby prohibiting algorithmic stablecoins.

In addition to liquidity requirements, stablecoin issuers must also ensure that certain procedures are in place to protect reserve assets, establish complaint procedures, and procedures to prevent market abuse and insider trading.

At the same time, the admission of cryptoassets to public offering and trading requires the prior publication of a white paper disclosing information on the financial and technical aspects of such a token before its launch on the market.

If the token has no issuer, such as BTC, an official document prepared by the exchange should warn users about the potential risks of the token, and the exchange bears full responsibility for the token.

For Ukraine, such strict approaches to the regulation of stablecoins are useful not only as a way to protect the rights of non-professional investors from financial fraud, but also valuable in the context of the discussion of the possibility of allowing certain virtual assets to enter the Ukrainian market as means of exchange.

After all, it is no secret that there is a position that in order to protect monetary stability in Ukraine, it is possible to allow only transactions for the exchange of virtual assets for each other or for fiat money. However, this approach, for example, would make it impossible to conduct transactions to pay crypto exchange fees with tokens, which is currently a common practice.

At the same time, the MiCA’s liquidity requirements for stablecoins make them attractive for institutional investors and can also act as a guarantor for monetary stability.

3. Equal business conditions for service providers in the virtual asset market

All cryptocurrency-related service providers (CASPs) must be registered and licensed with the relevant regulator. This includes various services ranging from trading platforms to custodial services. The licensing requirement extends to the need for comprehensive governance and compliance with certain operating conditions that ensure transparency and consumer protection.

In particular, such requirements will include the need for an office and at least one resident director, anti-money laundering (AML) policies and procedures, continuity of services, data security, compliance with marketing communication rules, as well as the need to follow certain procedures to prevent market abuse and properly handle complaints, and publicity of pricing, costs and fees.

Of course, ensuring such approaches will require some effort from the CASP, but, in fact, for companies that will be authorized in the EU and in Ukraine, the relevant business processes will be established according to a single matrix. Therefore, if you have been authorized in Ukraine, it will make it easy to get authorized in the EU, and vice versa.

In general, it is clear that the main goal of MiCA is to protect consumers by ensuring that companies follow transparent audit procedures and maintain verifiable reserves. This need for transparency is hardly ignored in Ukraine, given the numerous collapses of large crypto companies, such as FTX, and the need to achieve financial and institutional stability in the market.

To summarize, if Ukraine has a Law on Virtual Assets with the MiCA regulations implemented in it, it will be easier for crypto companies to operate under the same rules in the future both on the Ukrainian market and throughout the EU. They will not need to develop other business approaches and adjust to the new rules.

Not the only MIСA

The integration processes in Ukraine also require taking into account other EU legislation related to virtual assets. These are:
– Regulation (EU) 2023/1113 of May 31, 2023 on information accompanying transfers of funds and certain cryptoassets,
– amending Directive (EU) 2015/849 or the Transfer of Funds Regulation (TFR),
– the eighth recast of Council Directive 2011/16/EU dated 15.02.2011 on administrative cooperation in the field of taxation or DAC8.

The new version of the TFR complements the implementation of the Financial Action Task Force (FATF) Recommendation 15 on money laundering and terrorist financing risks associated with virtual assets by extending existing rules on information accompanying fund transfers to crypto asset transfers (the so-called «traveling rule») across the EU.

The TFR requires CASPs that transact in cryptoassets on behalf of their clients to collect, store and exchange information about the sender and beneficiary involved in the transaction.

The TFR will also apply to crypto asset transfers made through crypto ATMs and to intermediaries: companies that are not the sender’s or recipient’s CASP but receive and transfer crypto asset transfers on behalf of one of these CASPs.

DAC8 provides for the automatic exchange of information about virtual assets. It establishes rules according to which EU-based CASPs, regardless of their size, must report transactions from EU residents.

The Directive covers a wide range of cryptoassets, using the definitions set out in the MiСA, but goes further by extending its regulation to any token that can be used for payment or investment purposes, including, for example, decentralized virtual and certain non-fungible tokens (NFTs).

In fact, DAC8 is the European version of the Cryptocurrency Asset Reporting Framework (CARF) and amendments to the Common Reporting Standard (CRS) recently issued by the Organization for Economic Cooperation and Development (OECD), which are designed to apply the CRS principles to cryptoassets and contain similar model rules and commentaries to the CRS that can be implemented in domestic legislation.

DAC8 would require CASPs to report transactions of EU-based customers, regardless of their size or location. The proposal covers both domestic and international transactions.

The information that CASPs will have to report is extensive. For example, with regard to the (EU) user to be reported, they will need to provide: name, address, TIN, country of residence in the EU, as well as date and place of birth. Regarding reportable transactions with cryptocurrency assets (transfer or exchange): full name of crypto assets, gross amounts paid and received, number of units, number of transactions, and fair market value. It is clear that in order to collect and report this information, CASPs will need to put in place effective due diligence procedures.

It is clear that DAC8 will require reporting even from non-EU registered CASPs where their clients are located in the EU. This element is clearly intended to ensure that there is no advantage for such service providers to relocate outside the EU to avoid reporting obligations.

In essence, DAC8 or CARF, whichever Ukraine integrates faster, will provide the effective tool for tax authorities to collect the necessary information to effectively tax virtual asset transactions.

To be continued…

The above-mentioned EU documents are, in fact, only the beginning. For example, Regulation (EU) 2022/858 of May 30, 2022 on a pilot regime for market infrastructures based on distributed ledger technology has already been adopted. Work is also underway on MiCA II, which should address the issue of regulating decentralized finance where there are no intermediaries and regulate decentralized virtual assets.

Information disclosure, transparent finance, and corporate governance have long been attributes of the civilized world that significantly reduce market abuse and investor loss.

And, given Ukraine’s plans to accelerate the European integration process as much as possible, we should hardly focus on draft laws that, once launched, will require harmonization with EU legislation in a year or two.

We are confident that our country should move in the European direction, which will allow us to create fair and transparent rules for doing business and ensure proper protection of our citizens.

Source: Ministry of Finance.