Ukraine, a small Eastern European country in the midst of war, is embracing cryptocurrency.
A relatively unstable state – with a technically sophisticated population – creates a fertile ground for crypto adoption. Now, regulators are working with Ukraine’s crypto entrepreneurs to decide the future of digital currency.
Gleb Naumenko, a prominent Bitcoin developer from Ukraine who recently got a $100,000 grant from BitMEX, puts it this way: “Our political situation is somewhat unstable, and Ukrainians are tech-savvy, so this combination creates incentives for people fleeing from fiat to crypto.”
Since Soviet times, Ukraine has been a hotspot for science and engineering. When people see the national currency losing value, they are keen to explore the options technology can offer, Naumenko said.
Ukraine is the birthplace to teams that founded crypto startups Bitfury, Hacken and Propy, not to mention numerous crypto developers. While many of these developers are now based abroad, the country is still a competitive jurisdiction for crypto startups, believes Alex Bornyakov, the deputy minister for digital transformation of Ukraine.
Ukraine is now in the midst of passing a law that will regulate crypto as a type of property and describe legitimate procedures for crypto businesses in the country. The law is still waiting for a hearing, which is yet to be scheduled, in parliament.
Ukraine has been the site of a simmering conflict since 2014, when Russia annexed the Crimea peninsula and filled the eastern part of the country with weaponry and unidentified troops. Ukraine is striving to become a part of the West while relying heavily on the financial help from the U.S. and the European Union.
Crypto offers new economic opportunities. A regulated digital economy can bring tax revenue to the government, help banks serve crypto businesses and attract and retain startup talent.
The Financial Action Task Force’s 2019 directive for monitoring crypto transactions added some urgency to the need for crypto regulation. The intergovernmental watchdog asked countries to implement stringent know-your-customer rules for crypto exchanges and transactions. Countries that fall egregiously out of compliance with FATF’s recommendations risk being put on a blacklist, meaning they might lose some access to the global financial markets.
Later that year, Ukraine’s e-government agency published a Google Doc folder with recent drafts for a future crypto regulation bill. Everyone in the community was welcome to add comments.
An organized community
Some hardcore cypherpunks immediately wrote scathing remarks about the drafts. Big players including Binance, Bitfury and even Telegram sent back-channel feedback.
Earlier this year, before a U.S. judge banned the launch of the Telegram Open Network blockchain project, Telegram’s legal team looked at the draft of the crypto bill, provided some feedback and even considered registering an entity in Ukraine, Bornyakov said.
All through the process, government officials and small crypto startups have been talking and fighting in social networks.
If this doesn’t look like your ordinary lawmaking process, it’s not. Ukraine’s small crypto community may be better organized than its relatively unstable government. The authors of the crypto regulation bill also include Ukraine’s early crypto enthusiasts.
Take Mikhail Chobanyan, a member of the working group for Ukraine’s upcoming regulation for crypto. While not all crypto entrepreneurs are supportive of the government’s efforts, Chobanyan believes it’s better to take part than not.
Chobanyan founded the first crypto exchange in Ukraine and launched the first Bitcoin meetup in the center of Kyiv in 2014. A book kiosk in the park agreed to host the meetups and the first bitcoin ATM in Ukraine, he said.
The office of his exchange, Kuna, which started as an over-the-counter (OTC) service, was located across the park from the national tax agency. Chobanyan said he believes taxmen would walk into his office from time to time, ask about bitcoin and even buy some.
“They did not say they’re from the agency, but with my experience with the government I can tell a bureaucrat by looking at one,” he said.
If you can’t beat ’em…
The government took note, too. In November 2014, the National Bank of Ukraine wrote a letter to Chobanyan saying his crypto enterprise was illegal and had to be closed. In April 2015, he was called in for an interview at the district attorney’s office and in November, law enforcement searched his apartment.
Chobanyan’s laptop, old cell phone collection, bank cards and even his pager were confiscated during the search, although not his crypto. “I was the first crypto guy who got searched in the post-Soviet space,” Chobanyan said, somewhat proudly. Two years later, he got his stuff back.
He wrote about the search in Facebook and immediately got direct messages from multiple entrepreneurs, journalists and even a presidential administration official. During a TV show shooting, he met Anton Herashchenko, now deputy minister at the Ukrainian Ministry of Internal Affairs, who sympathized with his case.
Soon, Chobanyan became a volunteer adviser to the Ukrainian cyber police and got to know people at the National Bank of Ukraine. Since then, he said, he hasn’t been searched or interrogated.
“It was just the government’s way of getting to know people,” Chobanyan said. “We joke that a police search at your office is a sign of success. The way you manage such a situation is also an indicator: If you can defend yourself, you are a good partner to deal with. All the people I do business with had been searched at some point.”
When asked why he wants to help the government regulate crypto in his country, Chobanyan points at Russia as a bad example next door. The crypto community is not that proactive, so the regulations are written by politicians and bureaucrats not familiar with the industry, he said.
Ukraine’s crypto community took a different approach: “We came out and said, ‘You don’t understand a thing here but we do, you need to comply with the FATF requirements, so let’s write a law that would be good for us,’” Chobanyan said. “If you can’t defeat it, you should take the helm.”
Alex Bornyakov, the deputy minister for digital transformation of Ukraine, has a long personal experience with crypto. He said he mined bitcoin back in 2012 but sold everything fairly quickly, then dove into the initial coin offering (ICO) craze, investing in some projects and even consulting one (he won’t say which). The performances of those early enterprises had a sobering effect, he said: “They all are doing not that great now.”
Bornyakov believes clear crypto regulation will attract crypto startups to Ukraine, but startups don’t necessarily agree.
Max Krupyshev, CEO of Cryptoprocessing.com and one of the first crypto enthusiasts in Ukraine, is sceptic. Krupyshev, who now lives in Berlin, said that as Ukraine is not a part of the European Union, a local license will not matter on the global scene.
Max Demyan, the head of the working group at the Ministry of Digital Transformation, agrees that given Ukraine’s business climate, new regulation will not be enough to attract new crypto businesses to the country. Ukraine ranked 64th out of 190 in the Doing Business ranking by the World Bank this year, and the country also is known for a high level of corruption.
“This regulation will mostly target the domestic market, but even this is a win,” Krupyshev admits, adding that now even domestic crypto startups are registered anywhere but Ukraine.
Bornyakov echoed this sentiment. “Our minister said that we needed to make all possible efforts to make the digital economy bring money [into the country’s budget]. Until now, crypto has been in the gray zone, so if we address that, a big leap can be made,” he said.
The new law can also help protect the property rights of crypto holders from harassment by law enforcement officials, Dubetsky said.
Blockchain developer Andriy Khavryuchenko, Dubetsky’s former business partner, does not believe the new law will protect crypto holders’ rights. Instead, he thinks the law will be a magnet for corruption.
For example, a government officer might use the status of registered business to extort a bribe from a company willing to be regulated. “The registration is done only to have something to deny or revoke,” Khavryuchenko said.
As for individuals, declaring their crypto for taxation will only open them to new threats, Khavryuchenko said. “The data of crypto owners will immediately be leaked to criminals, including home addresses and family members information.”
Moreover, the government itself might be the thief to be afraid of, Khavryuchenko believes, voicing the concerns of those Ukrainians who don’t trust the government and fear it will abuse its powers – which is a stance shared by a major part of the population.
It could be risky, for example, to draw the authorities’ attention to the fact you own crypto, just like “showing you own gold after the issuance of the [government’s] decree on the confiscation of gold,” Khavryuchecnko said.
Looking for mass adoption
Demyan, who is also head of the blockchain startup GeoProtocol, notes that some members of the community will always be allergic to any interventions from the government. But regulation is inevitable, he said.
At the moment, there is no single crypto-related bank account in Ukraine, Demyan said. “Banks would love to [serve crypto businesses], they are always interested in new ways to make money. But for them, it’s important to understand how to perform financial monitoring in this case – it’s doable, but only after there is a law in place.”
Krupyshev said the first bitcoin enthusiasts in Ukraine, like himself, have been “dreaming of such a law back in 2014.”
Ukraine’s crypto market is indeed very active, he said, and with the new law, crypto businesses will stop hiding from the tax agency.
“Many old crypto folks will react, as usual, saying ‘leave us alone with your regulations,’ but let’s get real, we need the government’s support if we want mass adoption. People should not be afraid of this technology but be able to use it in safe conditions,” Krupyshev said.
The banks are also looking forward to the new money flow, Dubetsky said. “The opportunities for banks to make money are shrinking now because of the innovations in fintech and crypto.”
Oleksiy Feshchenko, an adviser on anti-money-laundering and counterterrorism financing (AML/CFT) at the United Nations Office for Drugs and Crime, which is also helping Ukraine to draft the crypto regulation, said there is no time to waste.
“Crypto is a new global market, and there are still vacant seats at the table. The nations that offer good conditions for crypto businesses with strong consumer protection and risk management still have time to grab a piece of that global market,” he said.