How can we make sure that Ukraine comes out of the “shadow” of virtual assets and creates rules for their management?

In the modern era, businesses and ordinary citizens actively use virtual assets, as well as the usual technological achievements of the 21st century, for example, Google Drive or copier.

According to leading blockchain analytics company Chainalysis , Ukraine ranked third out of 146 countries in the global digital asset usage index in 2022. According to unofficial data, the turnover of this market as a whole amounts to hundreds of millions of hryvnia daily.

Despite the rapid development, virtual assets most often circulate in the “gray” or even in the “black” zone. According to the Ukraine Economic Outlook study, since 2016, Ukraine has lost $48.8 billion in direct income for individuals and companies and $10.4 billion in tax revenue due to the lack of regulation of crypto assets. Some businesses, even in war conditions, are not interested in working legally and developing the Ukrainian economy.

Networks of legally unregulated crypto exchanges continue to operate. They provide peer to peer operations, allowing funds to be withdrawn into uncontrolled shadow circulation (including from territories temporarily occupied by Russia).

In the context of the Russian invasion, the legalization of digital funds has become even more relevant - is it worth remembering the receipt of foreign donations in cryptocurrency to finance the Armed Forces of Ukraine? According to Deputy Prime Minister and Minister of Digital Transformation of Ukraine Mikhail Fedorov, over more than three weeks of war, “the Ukrainian crypto fund has collected over $54 million in crypto assets.”

Use in a black way

Along with the “gray” use of virtual assets, there is also a “black” one. Digital assets in the modern world are increasingly used as a means of confirming property rights and payments in criminal activities, including in operations for the purpose of legalization and money laundering. And Ukraine is no exception in this matter.

For example, there are fraudulent Internet resources that transfer “dirty” tokens to bank accounts controlled by criminals. Moreover, increasingly, criminals use online stores and instant messengers to sell their goods (in particular, drugs) and services, receiving funds in virtual asset wallets. The latter are used in fraudulent “fees” schemes for the Armed Forces of Ukraine, as well as to hide financial statements, avoid taxes, illegally withdraw funds abroad and purchase real estate bypassing sanctions.

On the darknet/darkweb, criminals and other interested parties have actually created a global market where you can purchase any illegal product or service - from an access key to a critical enterprise management system to military personal data.

Some possible bribery schemes closely reflect the digital context in which we live. Virtual assets are not only electronic money, but also the rights to use, for example, expensive accounts in online games (such as World of Tanks or StarCraft). In general, criminals can receive a bribe in the form of any intangible gift, the use of which brings prosperity and material stability to the corrupt official (illegal in essence).

Under the spotlights

The actual chaos in the regulation of virtual assets is like air to criminals. The legal field is still problematic. Let me be clearer: there are no rules to the game.

The first step to establish them was the Law of Ukraine “On Virtual Assets”, signed by the President of Ukraine on March 15, 2022. Let me remind you for those who haven’t been following: the document for the first time defined a virtual asset as an intangible benefit that is the object of civil rights, has a value and is expressed by a set of data in electronic form. “Crypto” has become a digital thing (in the meaning of Article 179-1 of the Civil Code of Ukraine). The logical conclusion suggests itself is that a digital asset has been recognized as a type of property, due to which it can be the subject of a crime under Article 209 of the Criminal Code of Ukraine (“Legalization (laundering) of property obtained by criminal means”).

But in this area, as they say, the sky is the limit. As of the end of November 2023, the Law “On Virtual Assets” does not work. It will come into force only with the adoption of the Law “On Amendments to the Tax Code of Ukraine on the peculiarities of taxation of transactions with virtual assets” and a number of other documents.

The next step in the development of the turnover of digital assets was the draft law No. 10225-1 on the turnover of virtual assets, supported by the Ministry of Digital Development, registered recently, on November 17. Among other things, the document defines the legal status of such assets and provides simple tax conditions for businesses operating in the relevant field.

Since virtual assets will receive legal status in the future, those areas of their circulation that are already actively functioning in Ukraine today, but are not controlled by the state, will also be legalized. In particular, foreign and Ukrainian crypto exchanges will be able to operate legally and pay taxes. Banks will open accounts for crypto companies, and Ukrainians will declare their virtual income.

ARMA: subjugate the virtual

It is in this context that ARMA, interacting with law enforcement and virtual service providers (cryptocurrency exchanges), identifies and searches for tokens that may be seized.

This year, the Agency intensified cooperation with the world's largest exchanges in the field of information exchange in criminal proceedings at the request of law enforcement agencies. Such cooperation allows ARMA to establish the facts of the existence of digital and virtual assets of the defendants. From the second half of 2022 until mid-November 2023, Agency specialists identified and searched for virtual monetary assets for an estimated amount of more than UAH 8 million (in equivalent). Over the same period, the authority sent 24 requests to exchange addresses.

The next step is the adoption of a primary legislative framework for the management of seized virtual assets. During the meeting at ARMA, held on October 18, 2023, the parties agreed to develop a general mechanism for transferring digital assets to the management of ARMA. The document should resolve the issue of management risks and preserving the value of volatile crypto-assets (Bitcoin and others). This is of particular interest within the Agency's mandate to preserve the economic value of seized assets.

I will add that the participants of that meeting agreed to coordinate joint actions in the field of confiscation of virtual assets blocked in EU countries within the framework of the sanctions mechanism.

Now ARMA and all other interested bodies are looking for answers to the questions:

— can virtual assets be transferred for management?

— if so, who will be able to manage such assets?

— How exactly can the state receive income from the management of digital assets?

By answering these questions, the Agency will be able to manage not only electronic monetary assets/tokens, but also other intangible goods (for example, accounts on Twitch or YouTube, “pumped up” characters in computer games, or digital real estate and land in the metaverse).

To summarize, Ukraine urgently needs to complete the writing of the rules of the game for virtual assets. This is beneficial not only for the state budget, which will receive revenue from the management of various tokens and unclassified virtual assets, but also for the security and international image of the country. After all, why shouldn’t Ukraine become the first state in Europe to implement the European rules for regulating virtual assets MiCA?