The problems and prospects of Web3 in Ukraine have been studied

The results of the study will be taken into account when forming and implementing state policy in the field of digital economy, digital innovation and technology in Ukraine, noted Minister of Digital Transformation Mikhail Fedorov.

The editors of Incrypted reviewed the research and selected the most interesting theses. For more information on the full report, please follow the link .

Impact of the war

The full-scale invasion of the Russian Federation into the territory of Ukraine has led to the fact that Ukrainian Web3 startups are faced with currency restrictions, restrictions on traveling abroad and the risks of war for foreign investors, partners and clients.

Investments

It has become much more difficult for Web3 startups to attract investment. The industry has become more mature, venture funds have gained more experience and expertise. In addition, the market has not yet recovered from the 2022 crisis, regulatory risks have increased, and new narratives have emerged - for example, artificial intelligence.

Startups that have received highly-valued funding in a rising market are now finding it harder to raise the next round of investment.

Often, both funds and retail investors are interested in quickly recording profits from investments by selling startup tokens, that is, the prospects for a rapid increase in the price of a token, rather than the long-term prospects of the product. For projects, such an investor strategy can have negative consequences, so now some founders are refusing to launch a token in favor of selling a stake in the company.

Startup ecosystem

There is no full-fledged ecosystem for Web3 startups in Ukraine. There is no full-fledged school of founders, there is no mechanism for transferring experience from more experienced founders to novice founders. Support programs for Web3 startups have not been implemented.

Banking services

Web3 startups do not have access to full-fledged banking services. Financial institutions are reluctant to deal with companies in the sector due to a lack of regulation, the report says.

Blocking banking transactions related to the purchase and sale of cryptocurrencies does not allow Web3 businesses to launch products in Ukraine and leads to the emergence of “homemade acquiring”. Also, blocking the ofrmp reduced the effectiveness of using cryptocurrency donations to support Ukraine, the study notes.

Banks do not work with virtual assets, so Web3 businesses have to look for ways to exchange cryptocurrencies in a gray area, which creates additional risks, including in the area of ​​interaction with law enforcement agencies.

Regulatory uncertainty

The lack of clear rules of the game forces Ukrainian Web3 projects to register in foreign jurisdictions. Of particular concern to businesses and consumers is the uncertainty of taxation and the risk of retroactive application of laws. Consumer rights in the Web3 sphere and mechanisms for their protection are not defined.

Dialogue with regulators

Web3 business was guided by the regulatory regime approved by the adopted law “On Virtual Assets”, but subsequently a course was announced towards significantly more stringent requirements of the European MiCA regulation.

Ukrainian exchanges worked in anticipation of regulation, cooperated with the authorities, but there is still no regulation, and claims from the authorities against the exchanges for operating in a gray zone are already arising.

In general, it is stated that legislators are not very interested in the needs of Web3 business and its expertise.

“A typical case: a Ukrainian Web3 company is involved in the development of the European blockchain infrastructure, cooperates with the UAE in licensing Web3 companies, participates in the development of regulation of the virtual asset market in Bahrain, but there is no demand for such expertise from the Ukrainian regulatory authorities,” it says in the report.

Respondents who participated in the working groups to develop the law on virtual assets and pilot projects consider the results of these activities to be unsatisfactory. Founders are skeptical about the prospects for dialogue with regulators and the ability to influence the rules of the game. The risks that these rules can be changed at any time without taking into account the interests of business are assessed as significant.

MISA

Ukraine is not ready to accept MiCA. Respondents are also unanimous that the provisions of the regulations cannot simply be copied—Ukraine needs regulatory arbitration.

One of the competitive advantages of Ukrainian jurisdiction could be the legalization of decentralized autonomous organizations (DAOs), which are not specified in MiCA:

“Ukraine was not one of the first countries in the world with a regulated virtual asset market, but it now has a chance to be among the first countries that allow the registration of DAOs, the launch of DAO governance tokens and their initial offering.”

Asset tokenization

Tokenization of assets, in particular real estate and shares in small and medium-sized businesses, can “breathe life” into the Ukrainian stock market and become a point of growth, respondents believe.

Licensing and standardization

The latter are a necessary stage in the development of the Web3 economy to ensure the protection of the interests of investors and consumers.

Even those founders who consider licensing for Web3 an outdated approach agree with the need for standardization, but not by the state, but by specialized associations.

Positioning of Ukraine in the Web3 world

Ukraine needs to retain, retain, and transform the existing resource of “technical talent” into successful Web3 product companies.

The development strategy for the segment in Ukraine may include: programs for joint investment by the state and venture funds in Ukrainian startups and support for their activities, legalization of DAOs, the ability to attract investments in stablecoins, special conditions for industrial mining, residency for digital nomads, etc.

Web3 for the state

Ukraine is ahead of many developed countries in terms of digitalization, and Web3 technologies can strengthen its leadership in this area.

Web3 technologies can reduce costs and enhance elements of direct democracy and citizen participation in the distribution of budget funds at all levels, the report notes. These solutions may initially be implemented as pilots in small communities.

Other ideas expressed by respondents included:

• Web3 ID based on zero-knowledge proof;
• electronic queues in government agencies using decentralized registries and digital signatures;
• jury trials using digital IDs and zero-knowledge evidence;
• decentralized platform for conducting government tenders and the like.

Regulatory sandbox

This tool can lower the entry threshold for Web3 startups and increase the pace of their creation in Ukraine. It should be noted that earlier the Ministry of Digital Development announced work on a regulatory sandbox for innovative projects.

Mass Adoption

Ukraine is one of the leaders in the use of cryptocurrencies. Despite these high positions, the founders are not unanimous regarding the number of Ukrainian users and the attractiveness of the local market for Web3 companies. Some believe that there are enough retail users, some believe that there are few of them, and the outflow of specialists from the country will lead to an even greater decline.

There are few real Web3 users because there are not enough Web3 products that solve the real problems of the mass user, the report notes.