By Daryna Antanork I Kyivpost
Ukraine is dubbed the Wild East of cryptocurrencies for a reason.
The country has become the world leader in the number of people who use digital money, according to a report published on Sept. 1 by Chainalysis, a cryptocurrency analyst.
For the report, Chainalysis claims to have counted how much cryptocurrency is in the digital wallets of Ukrainians and the number of transactions done with cryptocurrencies.
Venezuela took second place in the ranking, while Russia was third and the United States — fifth.
Ukraine’s Ministry of Digital Transformation also claims that the Ukrainian cryptocurrency community is the third largest in the world, while literacy about the technology is fifth best. Many Ukrainian businesses use the tool, too.
Industry experts agree: Buying virtual money like bitcoins in Ukraine is as easy as topping up a cellphone — everyone with a valid email or phone number can do it.
However, cryptocurrencies have no legal status in the country — there are no laws that define them. Ukraine doesn’t recognize them as securities or property, nor as any other valid payment tool. So virtual assets are neither legitimate nor forbidden in Ukraine, leaving their owners in a dangerous gray zone.
To change that, the Digital Transformation Ministry has introduced a bill aimed at legalizing cryptocurrencies in Ukraine by amending the Tax Code.
But the bill has provoked controversy. On the one hand, new regulations will protect Ukrainians who buy, use and trade virtual assets. On the other, they run contrary to the essence of cryptocurrencies — to be encrypted and anonymous.
Uncertainty, raiding, terrorism
Globally, the market value of cryptocurrencies amounts to $327 billion. Businesses use them as a financial tool, and governments don’t like it, because they cannot control the transactions made with a currency that doesn’t exist in a physical form and doesn’t belong to any country.
Besides, there is no single way to classify them. For example, China treats bitcoin as a “virtual commodity” rather than currency, while it is an “intangible asset” in Canada.
Ukraine’s central bank is also uncertain about the virtual money and remains neutral — it does not forbid people from using cryptocurrency, but they can only do it at their own risk, as the government won’t be able to protect them.
The lack of control also opens doors to abuse of power, experts agree.
Although there are no laws against cryptocurrency, Ukrainian law enforcement agencies deem virtual money a scam and conduct raids of the businesses, often confiscating expensive equipment without any grounds.
Ukrainian law enforcement agencies can also accuse cryptocurrency owners of financing terrorism and prosecute them, according to Tim Karpinsky, director of operations at the Ukrainian Cyber Alliance.
Given the anonymous nature of cryptocurrency transactions, the authorities can hardly prove that this activity threatens the security of the state, but they still find ways to put pressure on the cryptocurrency industry and confiscate equipment.
However, it is not always clear who’s right and who’s wrong because the cryptocurrency market is gray and risky, Karpinsky says.
“The cybercriminal groups in Ukraine and Russia are very active,” said Karpinsky.
Earlier in July, for example, Ukraine’s Security Service (SBU) conducted raids of eight properties across Kyiv that were part of an international cryptocurrency scheme, reportedly financed by the Russia-backed militants occupying parts of Ukraine’s Donetsk and Luhansk oblasts.
Crackdowns by Ukrainian law enforcement on cryptocurrency operations happen all the time. Suspects behind the scheme are usually accused of not declaring their assets, and hence avoiding taxes — the issues that the new cryptocurrency legislation aims to solve.
If the regulatory framework for virtual assets in Ukraine does not change, many companies in the industry will leave the country, reads the report by the Ukrainian Blockchain Association, published in May 2019.
Although Ukraine has a dynamic community of blockchain enthusiasts and industry experts, their businesses have no value to the country’s economy because they are not officially registered in Ukraine, said Max Demyanyuk, an expert on virtual assets development at the Ministry of Digital Transformation.
There’s no legal framework allowing cryptocurrency companies to work with Ukraine’s banking system, receive loans and attract investments.
The local blockchain community includes thousands of Ukrainians who trade, use or develop cryptocurrency. All of them will benefit from new legislation, according to Demyanyuk.
Ukrainian businesses and startups could sell cryptocurrency in the form of so-called “tokens” to raise capital. Tokens are like shares, but they aren’t always secure shares in a company for those who buy them.
This type of funding is called ICO (initial coin offering) and it serves as an alternative to the traditional IPO (initial public offering), when a company sells its stocks to the general public.
Although 75% of such coin offerings have turned out to be scams, they still can be used as a financial tool by honest companies.
For example, Ukrainian real estate startup Rentberry raised $30 million by selling its tokens, called “Berries.” Those who bought berries can use them as money on the Rentberry platform to pay for the startup’s services.
The Ukrainian government cannot simply create a new law to regulate virtual assets without amending the Tax Code. According to the draft law, Ukrainians will pay a 5% tax on any income gained from cryptocurrency trading.
The financial monitoring law, which the Ukrainian parliament passed on April 28, requires that people investing in or trading with cryptocurrencies disclose their personal information.
This law is designed to prevent money laundering, but Ukrainians using digital money worry that the new rules allow the government to track cryptocurrency transactions, which are meant to be anonymous and untraceable — one of the main reasons why the digital money is so popular in the first place.
Crackdown on privacy
Recognizing cryptocurrency is vital for the burgeoning industry, but applying too many rules can stifle innovations and put pressure on businesses, according to industry experts.
From the beginning, cryptocurrency was encrypted, anonymous, and decentralized — no one controlled it and anyone could own and even produce it by solving complex mathematical equations with powerful computers.
This created room for fraud: Anonymity allowed for using the digital money to finance terrorism, legalize criminal assets and buy drugs or weapons.
But supporters say cryptocurrency also does good. Such money liberalizes the market, as neither governments nor banks can control how people use their money, according to Stanislav Podyachev, managing partner at the consultancy BlockchainLab.
Cryptocurrency is also an effective tool against corruption, because one “cannot bribe a system.” Moving to digital money also decreases the amount of cash used — the main driver of Ukraine’s shadow economy, which, according to Ukraine’s Ministry of Economy, accounted for 30% of the country’s gross domestic product in 2019.
Nevertheless, experts are wary of the government setting its sights on cryptocurrency. If the government starts to regulate the cryptocurrency industry as much as it currently regulates the use of traditional money, digital money will be just as controlled and there won’t be any freedom in using it, according to experts.
“The best the government can do is to admit that the market exists and abstain from creating any obstacles,” Podyachev told the Kyiv Post.
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