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From Risky to Promising: Ukraine's Quest to Become a Dream Crypto Jurisdiction

Ukraine is the leader in global crypto adoption but it isn't crypto's favorite jurisdiction yet – though the country is trying to change this.

May 17, 2021 at 3:48 p.m. UTC
Updated Sep 14, 2021 at 12:56 p.m. UTC

Ukraine, one of the most active crypto nations in the world, is striving to be a dream jurisdiction for crypto businesses. Legislators and the local crypto community are working together on a package of laws that would write crypto into the country’s legal system, open the banks for crypto startups and offer a simple procedure for tax reporting. 

But Ukraine still has an important obstacle to overcome: real-world politics. 

Russia annexed the Crimea peninsula in 2014 and has sponsored soldiers who invaded the Eastern part of Ukraine. A civil war ensued that turned into a standoff. The conflict has been draining Ukraine’s economy ever since.

In the middle of April I wrote to Mikhail Chobanyan, the founder of Ukrainian crypto exchange Kuna, to ask what’s the latest news in Ukrainian crypto. 

We will explore Ukrainian crypto in the Crypto State track at Consensus by CoinDesk, our virtual experience May 24-27. Register here.

“Not sure about crypto, but everyone’s panicking because of your troops,” he responded, referring to the troops that Russia, where I’m based, had accumulated near the Ukrainian border. The troops, armed with heavy ammunition, were soon called back, but the possibility of a war is something Ukraine has to live with day in and day out.

Political complications

In September, Chainalysis reported that Ukraine leads the world in crypto adoption, in large part thanks to its tech-savvy population. Ukraine is also known for good developers, including some prominent Bitcoin Core contributors including Gleb Naumenko and Hennady Stepanov. 

But last year Bermuda-based crypto exchange Bittrex Global stopped serving users from Ukraine and other nations including Belarus, Burundi, Mali, Myanmar, Nicaragua and Panama. In a Sept. 11 blog post, the company cited the “current regulatory environment,” without further details.

Alex Bornyakov, deputy minister of digital transformation of Ukraine, told CoinDesk the Ukrainian government got in touch with Bittrex Global about the issue and was told Ukraine had occupied territories inside its borders.

That most likely meant the Crimea peninsula, Bornyakov said. The U.S. and European Union prohibit doing business with counterparties in Crimea under threat of sanctions. So serving residents of Crimea might get Bittrex sanctioned. It is hard to separate Crimean users from the rest of the country, the exchange said, according to Bornyakov. 

The Ministry of Digital Transformation suggested some technological options to facilitate separating Crimea from the rest of the country so Ukrainian citizens with no connection to disputed territories could use the exchange. The ministry is waiting for Bittrex to consider those options and respond, Bornyakov said. 

Bittrex Global spokesperson John McLeod declined to comment on this subject.

Risky region

Geopolitics is not the only obstacle to the nation becoming a crypto hub. Ukraine is not considered a safe jurisdiction for global business interactions. Cybercrime flourishes across Eastern Europe, including hacking and active use of crypto for illicit purposes. 

According to the recent report by Chainalysis, Eastern Europe receives more ransomware proceeds than other region in the world and is actively sending and receiving money from dark web marketplaces, especially the illegal drug market Hydra.  

So, great IT talent aside, Ukraine is struggling to promote its companies on the global stage.

“Companies from the U.S. and Europe openly told us that working with this jurisdiction is a risk for them,” said Alex Momot, CEO at a Ukrainian startup Remme. 

It turns out, however, that crypto can be more forgiving than more traditional industries. Remme started out selling cybersecurity products, but quickly learned being from Ukraine made some clients hesitant to do business.  

“When we started building our product in 2018, we talked to a water utility company in one of the states [of America], and the person we talked to simply said: ‘Guys, all is great but I can’t tell the management that our critical IT solution comes from Ukraine,” Momot told CoinDesk. 

At IT conferences, Momot and his team noticed that people in the West liked Ukrainian coders but didn’t want to buy a finished product from a company based in Ukraine. Remme had some clients, but the revenue was not great, Momot said. The coronavirus pandemic was the final straw. 

“In April 2020, we were thinking of closing shop as we were selling our last crypto [holdings]. So we decided to switch entirely to crypto.” Now Remme is selling trading bots for DeFi, and clients don’t care about jurisdictions, only about the company’s track record, Momot said. 

Keeping it clean

Corruption is another obstacle Ukraine must overcome to become a global crypto hub. According to the World Bank’s overview of the country, “Ukrainians continue to feel that more needs to be done to improve governance. Lack of trust in public institutions remains a fundamental concern for most people.” 

In March, the National Anti-Corruption Committee published instructions mandating how civil servants in Ukraine detail how much crypto they own in their annual property declarations.

When the public officials complied, hundreds of them reported owning whopping amounts of bitcoin. Vyacheslav Mishalov, the most crypto-rich (on paper) of the civil servants and a member of the Dnipro city council, claimed he didn't actually own 18,000 BTC – once the nation’s anti-corruption agency announced it would investigate all these bitcoin holdings.

Regulators at work

Despite these challenges, Ukrainians aren’t giving up on their dream of making the country a destination for crypto businesses. 

Ukraine already has laws related to crypto including one that cryptocurrency transactions, like bank wires, are subject to anti-money laundering monitoring. 

But some people are thinking much bigger. At the moment, Ukraine has a framework draft bill awaiting passage in the national parliament, the Verkhovna Rada. The Draft Bill on Virtual Assets passed its first hearing on Dec. 2, 2020. Now the lawmakers are working on a set of amendments to get it ready for the next two hearings, after which it can become a law. 

The bill defines virtual assets as “a set of data in electronic form,” which “can be an independent object of civil transactions, as well as certify property or non-property rights.” Virtual assets can not be a legal tender in Ukraine. 

Artem Afyan, partner at the Juscutum law firm and a participant in the working group that authored the bill, told CoinDesk the measure treats virtual assets as a non-material asset, similar to intellectual property. 

Under the new law, crypto service providers will have to register and provide information on their ownership structure and beneficiaries, take measures against money laundering and make sure their users’ personal data is protected.

After the main bill is passed and crypto gains legal status, lawmakers will be able to work on establishing a favorable taxation regime for crypto. According to another draft bill that’s been waiting in the parliament since 2019, crypto will be taxed at a 5% rate for the first five years after the law is in force, and at the personal income rate of 18% after that. 

Afyan believes that if Ukraine passes the bill, the country might become very popular among crypto startups, surpassing jurisdictions with better reputations as crypto-friendly destinations, such as Switzerland. Why? Ukraine has lower taxes and it’s much easier to open a bank account due to less-onerous onboarding rules and procedures.

“Ukraine has a real chance to become one of the most attractive jurisdictions for crypto,” Afyan said. 

DISCLOSURE

The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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