Ukraine
The Current Status of Crypto Adoption in Ukraine
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As peace settles in Ukraine, the ripple effects of the Russia-Ukraine war have impacted every sector of both countries, particularly Ukraine. Despite its strained economy, Ukraine still persists, all thanks to financial support and donations from the United States and other well-meaning organizations and individuals.
The country's Gross Domestic Product (GDP) grew from 3.6% to 3.8%, according to Interfax. Inflation remains high and is currently pegged at 12%, based on reports from The Kyiv Independent. Ukraine's fiscal situation remains fragile. The World Bank has pegged that the country needs about $524 billion for total post-war reconstruction and recovery.
Though Ukraine has no full-fledged working regulatory framework, there are significant legislative steps toward determining the legal status of crypto assets, taxation, and licensing. As the country prepares a bill, ready to be tabled by early 2025, it is standing at the cusp of fully legalizing cryptocurrency, bringing forth specific taxation rules, and adding digital assets into its monetary framework.
However, the country itself has multiple involvements with cryptocurrency as it heavily relies on virtual currencies, particularly when in difficulty. When the 2022 Russian invasion came about, Ukraine used crypto donations and raised over $212 million of funds in aid of the war and human support efforts.
The effectiveness and boundary-less nature of such exchanges reflected the possible capability of decentralized finance on real battlefields.
Big-ticket DeFi transactions in the country have grown over the past year, according to Chainalysis. Blockchain technology is increasingly being utilized by companies and individuals alike, from securing digital documents to developing new financial products.
“DeFi transaction sizes for the past year reveal two key trends, particularly among regional leaders, Ukraine and Russia. Ukraine saw a 361.49% increase in large institutional transactions (i.e., those greater than $10M), which drove most of its DeFi growth.” — Chainalysis
Ukraine's experience with crypto has also been subject to global regulatory pressures. In 2023, the country embraced FATF compliance regulations to avoid being put on the financial "grey list" allowing crypto to become a legitimate and safe part of its economy.
As the first reading of the crypto legalization bill looms, Ukraine is solidifying its status as a pro-crypto nation. The new legislation not only guarantees clarity for investors and companies but will serve as a model for other nations to follow through the murky landscape of digital assets.
Crypto Law In Ukraine
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Currently, Ukraine lacks a comprehensive regulation of cryptocurrency. Nevertheless, two significant legislative propositions are shaping the state policy on crypto-regulation.
First is the Law of Ukraine "On Virtual Assets." This law, adopted by the Ukrainian Parliament in February 2022, is intended to regulate the circulation of virtual assets, define the rights and obligations of market participants, and establish state policy in the sector. However, the law has not yet entered into force because it requires supporting amendments to the tax code.
The other is the Tax Code of Ukraine Amendments, designed to enact the Virtual Assets Law, draft bills such as Draft Law No. 10225 and its alternative, No. 10225-1, establish regulations for taxing crypto transactions. The legislation has been endorsed by central regulatory bodies, including the National Securities and Stock Market Commission (NSSMC) and the Ministry of Digital Transformation.
However, the Markets in Crypto-Assets Regulation of the European Union (MiCA) does not apply in Ukraine, and thus crypto businesses cannot be granted a MiCA license according to Ukrainian legislation.
Once the Law on Virtual Assets comes into force, several crypto services will fall under the licensing of the NSSMC. Some of the affected services include the storage and administration of virtual assets, exchange of virtual assets for other assets or currencies, transfer services for virtual assets, virtual asset intermediary services, and more.
When it comes to how offshore companies offering cryptocurrency-related services function, Ukraine states they are allowed to provide services to Ukrainian customers both on an active solicitation and reverse solicitation basis. However, these businesses must comply with Ukraine's anti-money laundering (AML) legislation to legally operate.
“The main statute setting out the AML regime in Ukraine is the Law of Ukraine on Prevention and Counteraction of Laundering of Proceeds of Crime, Financing of Terrorism and Financing of the Proliferation of Weapons of Mass Destruction (‘AML Law’). Certain norms regarding this regime are also set out in the Law of Ukraine on Banks and Banking Activities. Thematic bylaws are also adopted and applied – for example, Order 182 of the State Financial Monitoring Committee of Ukraine dated 25 December 2009 on Approval of the Typology of Laundering of Proceeds Obtained through Criminal Means – Properties and Signs of Operations Related to Money Laundering by Withdrawal of Cash: Tactical Research and Practical Investigation.” — Mondaq
While companies can be run without a license by opening an LLC within two working days, it should not take more than a month to open a crypto company in Ukraine after the Law on Virtual Assets is enacted.
As aforementioned in earlier paragraphs, the proposed new bill, initiated by Danylo Hetmantsev, chairman of the Finance, Tax, and Customs Policy Committee of Ukraine, will regulate crypto transactions formally.
Unlike the tax-free policy in some countries, Ukraine is instead choosing a risk-averse stance, taxing gains on crypto-only when converted to fiat currency, similar to security trading. The National Bank of Ukraine and the International Monetary Fund (IMF) are proactively influencing such policies to meet international financial standards.
Taxation of Cryptocurrency in Ukraine
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Even though the country has not finalized an overall regulatory regime for virtual assets, Ukraine has taken giant steps toward legislating and governing cryptocurrency through the Law on Virtual Assets. The country is harmonizing its regulation to the EU's Markets in Crypto-Assets (MiCA) Regulation but tax regulations remain pending parliament's approval.
It's essential to understand that cryptocurrencies have been identified as virtual assets according to Ukrainian law, but not as legal tender and thus can't be accepted as a means of payment for goods and services.
The Law on Virtual Assets, enacted in March 2022, is the primary legislation that regulates crypto-assets in Ukraine. The said law, though, is still not in full operation due to the need to amend the Tax Code prior to its entry into force.
Still, Ukraine hasn't adopted a separate tax system for cryptocurrencies, and usual taxation rules apply. A draft of the cryptocurrency taxation bill is currently being considered, and a new tax system is being developed to align with EU law.
As of writing, there is no clear method for calculating tax on crypto transactions and legal entities (companies) should pay an 18% corporation profit tax on income earned through crypto transactions. Individuals pay 18% personal income tax and 1.5% military tax on gross income earned through crypto transactions.
Following the new draft tax law, individuals shall be subject to a lower rate of 6.5% (5% personal income tax + 1.5% military tax) on income earned through selling virtual assets. Crypto-to-crypto transactions (e.g., BTC to ETH) are treated the same as crypto-to-fiat transactions and gain or loss from such trading is to be calculated under local Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS.)
“Project No. 10225 introduces taxation of virtual assets for the first time (previously, they were not taxed). The new tax, called the Investment Income Tax, is set at 18% of the profit generated from virtual assets. Owners of virtual assets are also required to pay a military fee of 1.5% of their profit. Profit from virtual assets is calculated at the time of sale, exchange, or gifting of such assets as the difference between the selling and buying prices.” — Vox Ukraine
Crypto losses on deals can be set off only against subsequent gains arising from cryptos; they cannot be used for other taxable income.
Ukraine does not have specific accounting and record-keeping requirements for crypto-asset owners. However, taxpayers must maintain accounting records (e.g., contracts, invoices, bank statements) as proof of income and expenses, and crypto exchanges are obliged to report crypto trades to tax authorities.
Factors Driving Crypto Adoption in Ukraine
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Ukraine has emerged as a significant player in the international cryptocurrency ecosystem, with the development of adoption driven by economic, political, and technological factors. Some of the most significant drivers of crypto adoption in Ukraine:
Economic Instability and Currency Devaluation
Ukraine currently faces economic difficulty, including inflation and devaluation of the country's currency, the hryvnia. Cryptocurrencies like Bitcoin and stablecoins (e.g., USDT) serve as an inflation hedge and store of wealth, hence their popularity in Ukraine.
Remittances from Abroad
The country receives substantial crypto remittances from its diaspora based overseas. This is because cryptocurrency is a faster, low-cost, and more efficient way to send money across the world compared to the traditional banking system or remittance operations.
War and Geopolitical Tensions
The war with Russia has created uncertainty and disturbed traditional financial channels. Cryptocurrencies serve as a censorship-resistant and decentralized way of holding and moving funds, especially in times of crisis.
Government Support and Regulatory Clarity
The Ukrainian government has been forward-thinking in its handling of cryptocurrencies, passing bills to make the industry legal and regulated. This has given an accommodating environment for crypto users and firms, fostering trust and adoption.
Challenges Facing Crypto Adoption in Ukraine
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Although Ukraine has witnessed tremendous growth in cryptocurrency adoption, some challenges remain in the way of its general use. The challenges to crypto adoption in Ukraine:
Regulatory Uncertainty
Although some progress has been made, the regulatory environment for cryptocurrencies in Ukraine is still not complete. Lack of clarity on taxation, legal status, and compliance requirements raises uncertainty among businesses and individuals, deterring general adoption.
Volatility of Cryptocurrencies
The high volatility of cryptocurrencies like Bitcoin and Ethereum makes them unsafe for everyday transactions and savings. It discourages people from embracing crypto as a reliable medium of exchange or value store.
Limited Merchant Acceptance
While crypto adoption is on the rise, there are not many merchants and businesses that accept cryptocurrency as payment. Without mass usage, cryptocurrencies cannot work as a practical alternative to fiat currency.
Infrastructure and Accessibility Issues
While Ukraine is building a budding tech sector, not every region has stable internet access or technical infrastructure to enable the widespread use of cryptocurrency. The digital divide hinders adoption, particularly in the countryside.
Economic Instability and War
The conflict with Russia and economic instability create an uncertain environment for crypto adoption among Ukrainians who are solely focused on rebuilding. Furthermore, overall uncertainty does not permit people to focus on adopting new financial technologies.
Potential Benefits of Crypto Adoption
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The adoption of cryptocurrency has numerous potential benefits, particularly in countries like Ukraine, where economic and geopolitical problems have created a unique environment for digital money. Some potential benefits of crypto adoption are;
Faster Cross-Border Payments
Foreign bank transfers can take 3-5 business days, while cryptocurrency transfers typically take minutes to hours. This is particularly useful in Ukraine, where remittances account for 10% of GDP.
Hedge Against Inflation
The inflation rate in Ukraine was 24.4% in 2022, which undervalued the hryvnia. Stablecoins like USDT and USDC, pegged to the US dollar, are a safe store of value in such an environment.
Transparency and Security
Since blockchain keeps the record immutable, it remains nearly impossible to falsify transaction records. This is particularly significant in Ukraine, which is placed 116th among 180 countries on Transparency International's Corruption Perceptions Index (2023).
Humanitarian Aid and Crowdfunding
Ukraine raised over $225 million in crypto donations in the Russia-Ukraine war (Elliptic, 2023). Crypto donations were used to fund military gear, humanitarian aid, and reconstruction, proving that blockchain-based fundraising is useful.
Conclusion
Ukraine's involvement in cryptocurrency has revealed the country's heavy investment in the development of digital assets. This zeal has been followed by legislative initiatives, like the Law on Virtual Assets, aimed at legal certainty but yet to receive vital tax reforms for complete implementation.
Even where there have been regulatory loopholes, Ukraine has made great strides in mainstreaming crypto within its economy.
The National Bank of Ukraine (NBU) has also tested out a digital hryvnia (CBDC), and the government has spent more than $225 million in crypto donations on waging war. Such moves say something about the opportunity as well as the necessity of having a clear, well-defined regulatory framework.
But there are still challenges. Taxation is still unclear, mining and staking are not clearly defined, and DeFi and other new crypto models are in legal limbo. However, Ukraine's adoption of the EU's MiCA regulations indicates a desire to establish a structured, transparent framework that promotes both innovation and investor protection.
