НААУ | Ринок віртуальних активів. Захист інвестицій. Частина 2

Taxation of Mining and Token Acquisition in Ukraine

Overview of Tax Regulations on Mining and Tokens

• The discussion begins with the clarification that mining activities and the free acquisition of tokens should not be taxed, as per recent explanations provided to tax authorities.

• It is noted that exchanges between virtual assets do not incur taxes, nor does the increase in market value affect taxation under current regulations.

Proposed Tax Limits for Securities Transactions

• A proposal was made to establish a non-taxable limit for general income from securities transactions, initially suggested at 100 minimum wages but later adjusted due to feedback.

• After negotiations, a compromise was reached where the committee agreed on a limit of one minimum wage for tax-free operations.

Challenges with Tax Authority Understanding

• There are concerns regarding how tax authorities perceive potential budget losses from these minimal limits; it was argued that processing declarations may cost more than the tax revenue generated.

• The speaker highlights a lack of economic efficiency consideration by the tax authority when evaluating procedural costs versus potential revenue.

Legal Framework for Corporate Entities

• For legal entities, there are no exemptions; all crypto-related activities will be taxed. The law distinguishes between income minus expenses and revaluation adjustments.

• Questions arise about how revaluation should be handled in accounting practices since specific guidelines are lacking in legislation.

Need for Methodological Recommendations

• The law mandates that the Ministry of Finance provide methodological recommendations regarding expense classifications related to token transactions.

• Without these guidelines, companies cannot include any expenses in their financial reports until official documentation is issued by regulatory bodies.

Implications for Individual Investors

• Individuals can only include expenses related to authorized tokens recognized by Ukrainian regulators; this limitation could exclude many previously acquired tokens from being deductible.

• There is an ongoing need for detailed regulations as technology evolves rapidly, which may lead to gaps or oversights in legislative updates.

VAT Considerations on Tokens

• A common misconception exists that all tokens are exempt from VAT; however, this stems from a 2016 ruling concerning Bitcoin specifically and does not apply universally across all token types.

• Current European directives suggest that if a token serves an investment function, it may be exempt from VAT. However, clarity is needed on how different types of tokens will be treated under existing laws.

Taxation of Decentralized Currencies and Reporting Requirements

Overview of Tax Categories

• Discussion on the separate taxation of decentralized currencies, suggesting they may fall into a distinct third category due to their lack of associated goods or services.

• Mention that currently, all operations by providers are exempt from VAT except for consulting services, raising questions about the rationale behind this decision.

Reporting Obligations for Providers

• Introduction of a special reporting requirement for providers in the proposed legislation, which includes both legal entities and individuals.

• Providers must register with tax authorities and report client transaction information; however, they are not required to withhold taxes due to complexities in fiat transactions.

Individual Tax Responsibilities

• Individuals will need to submit annual declarations detailing all income and expenses related to cryptocurrency transactions.

• Clarification on how income and expenses will be reported differently for cryptocurrencies compared to traditional securities, emphasizing the aggregation of all transactions rather than individual ones.

Losses and Exemptions

• Confirmation that individuals can account for losses up until full offsetting against gains is achieved, providing relief in tax calculations.

Legislative Improvements Needed

• Need for improved classification within the legislation as certain terms like "non-fungible tokens" were omitted during committee discussions.

• Proposal to introduce definitions for decentralized currencies and governance tokens (GMS tokens), highlighting their importance in regulatory frameworks.

Legal Framework Enhancements

Ownership Rights Transition

• Emphasis on regulating property rights transitions concerning real assets secured by tokens, addressing concerns over ownership transfer during liquidation events.

Smart Contracts Regulation

• Suggestion to enhance regulations surrounding smart contracts while considering existing frameworks from other jurisdictions like the Netherlands as potential models.

Regulatory Challenges in DeFi

Issues with Decentralized Finance (DeFi)

• Identification of challenges faced by DeFi systems regarding authorization processes traditionally applied to centralized systems.

Regulatory Authority Provisions

• Discussion on granting regulators authority over access controls related to accounts linked with DeFi platforms despite difficulties in classifying them under existing laws.

Technological Exemptions and Fraud Prevention

Staking Operations Definition

• Clarification needed around staking operations as they involve service exchanges rather than gratuitous transfers, impacting tax implications significantly.

Fraud Prevention Measures

• Highlighting the necessity for effective fraud prevention mechanisms including account blocking capabilities within regulatory frameworks.

Discussion on Regulatory Framework for Virtual Assets in Ukraine

The Need for Clear Regulations

• Acknowledgment of the necessity to explain the origins of certain practices, highlighting potential scrutiny from regulatory bodies like FATF.

• Suggestion that a tailored risk assessment system may be required for different client profiles, emphasizing the importance of compliance with regulations to avoid penalties.

Legislative Challenges and Market Access

• Discussion on legislative efforts aimed at preventing money laundering, indicating that failure to comply could lead to being blacklisted.

• Critique of excessive requirements for public offerings, questioning the feasibility of creating pools for investments without clear liquidity assurances.

Financial Monitoring and Compliance

• Current mechanisms allow monitoring through public offerings of stablecoins, which must adhere to financial requirements throughout their existence.

• Emphasis on accountability from state authorities regarding licensing decisions and their implications for citizens' rights.

Taxation Issues Related to Virtual Assets

• Introduction of taxation discussions, noting that currency exchange rates will play a role in determining tax obligations based on asset transactions.

• Clarification that tax calculations will rely on transaction dates rather than operator-set exchange rates, ensuring consistency with national bank standards.

Upcoming Speakers and Continued Discussions

• Transitioning to the next speaker, Tetyana Dmytrenko, who will address economic and legal risks associated with regulated virtual asset markets in Ukraine.

• Mention of ongoing themes related to regulation and taxation as foundational elements driving market legalization efforts in Ukraine.

International Context and Recommendations

• Overview of international legislative frameworks addressing virtual assets due to rising transnational crime involving cryptocurrencies.

• Reference to early guidance issued by UN agencies aimed at law enforcement's understanding and handling of cryptocurrency-related crimes since 2015.

This structured summary captures key insights from the transcript while providing timestamps for easy reference.

Cryptocurrency Market Insights

Risk-Oriented Approach to Regulation

• The cryptocurrency market is expected to benefit significantly, but there are challenges in implementing a risk-oriented approach for virtual asset circulation and service providers in Ukraine.

• Effective allocation of state funds towards regulating the market is crucial, focusing on crime-related risks while allowing the market to develop without unnecessary hindrances.

• Strategic considerations are necessary regarding what actions should be taken or avoided in terms of regulation and resource distribution.

Challenges Faced by Regulators

• Excessive regulatory barriers can deter business development; regulators often impose frameworks that may not align with market needs.

• During a Blockchain.Ua conference, about 50% of attendees indicated plans to license their businesses in Ukraine, highlighting interest despite regulatory concerns.

Jurisdictional Flexibility

• Attendees expressed willingness to change jurisdictions if local regulations were deemed too restrictive or unfair, as many countries offer streamlined licensing processes.

• The war has prompted many Ukrainian crypto companies to relocate abroad, emphasizing the need for favorable conditions to retain local businesses.

European Regulatory Framework

• A scientific perspective on the European taxonomy for crypto assets suggests a well-thought-out regulatory approach based on risk assessment and parallels with fiat instruments.

• The EU's classification system aims to regulate entities similar to money under specific directives while establishing clear guidelines for financial instruments.

Implementation of Regulations

• New regulations like MiCA (Markets in Crypto Assets Regulation) will standardize rules across EU member states without accommodating national peculiarities.

• The MiCA regulation requires immediate compliance rather than adaptation into national laws, which could create discomfort for countries with existing legislation.

Information Exchange and Compliance

• Updates such as DAC8 focus on tax information exchange standards parallel to international norms like Travel Rule, ensuring transaction transparency and risk assessment related to criminal activities.

• Since 2018, blockchain analytics companies have emerged as a distinct sector within the evolving legislative landscape surrounding cryptocurrencies.

The Evolution of Blockchain Regulation and Risk Assessment

Emergence of Regulatory Frameworks

• Prior to 2018, the blockchain market was largely unregulated, leading to minimal visibility regarding transaction risks. The introduction of legislation shifted this focus towards assessing participant and transaction risks.

• Without blockchain analytics, it is challenging to evaluate transactions for potential criminal activity. Traditional tools fail to provide a risk assessment for operations.

Role of Blockchain Analytics in Compliance

• Blockchain analytics has become integral in compliance procedures related to anti-money laundering (AML) and counter-terrorism financing (CTF), including Know Your Customer (KYC) protocols.

• There are ongoing legal cases where different blockchain analytics firms present varying interpretations of the same transactions, raising questions about accuracy and reliability.

Need for Standardization in Blockchain Analytics

• Law enforcement agencies require multiple software solutions to analyze transactions effectively; however, there is a growing need for standardization among blockchain analytics companies.

• Discussions are underway regarding the licensing of these companies as market participants, with an emphasis on creating ISO standards that define compliance requirements.

Software Variability and User Education

• Different software tools cater to various users: law enforcement, regulatory bodies, and individual investors. Each type serves distinct needs based on user expertise.

• Emphasis is placed on educating users about verifying the origins of funds before executing transactions, especially when purchasing virtual assets.

Legal Implications and Investor Protection

• Ignorance regarding the legality or origin of funds does not absolve individuals from responsibility under AML laws; awareness is crucial when engaging in financial activities.

• The speaker advocates using licensed providers for transactions while acknowledging that some experimentation may be necessary for understanding how markets operate.

European Legislative Framework

• European legislation prioritizes investor protection by integrating parts under electronic money directives and financial instruments regulations.

• Current thresholds for high-risk sectors have been lowered significantly due to their association with criminal activities; this necessitates careful monitoring by regulators.

Insurance Approaches in Crypto Industry

• There is a growing discourse around risk insurance within the crypto industry, particularly concerning decentralized finance (DeFi).

• Differentiating between investment risks—such as market volatility—and other types of risks remains essential as new insurance models develop globally.

Discussion on Risks and Regulation in the Crypto Market

Overview of Risks in Venture Investments

• The speaker discusses the inherent risks associated with investing in venture businesses, particularly those involving experimental tools like cryptocurrencies.

• There is a mention of fraud risks and criminal activities that necessitate regulatory responses to ensure market safety.

Importance of Technical Audits

• Emphasis is placed on the need for technical audits of smart contracts, highlighting that financial audits alone cannot identify coding vulnerabilities.

• The speaker advocates for an interdisciplinary approach to regulation, combining expertise from finance, IT, and law to effectively address these challenges.

Shortage of Risk Assessment Experts

• A significant shortage of specialists in risk assessment is noted, particularly concerning anti-money laundering (AML) and counter-terrorism financing (CTF).

• The speaker points out that while crypto assets are used in criminal activities, they do not exceed fiat currencies in this regard; both are utilized based on regulatory gaps.

Regulatory Developments and Challenges

• The IMF's research indicates proportionality between criminal activity using crypto assets and fiat currencies due to lack of regulation.

• Public-private partnerships have been initiated by FATF to develop effective legislation involving representatives from the crypto industry.

Education as a Preventive Measure

• Education is highlighted as a crucial element for prevention against cybercrime; digital inclusion should be integrated into educational programs.

• Initiatives by government agencies aim at improving public understanding of cybersecurity issues through expert-led discussions.

Cybersecurity Challenges Globally

• Implementation difficulties regarding cybersecurity regulations are acknowledged, with Europe facing similar challenges as other regions globally.

• The expansion of international conventions on cybercrime reflects ongoing efforts to combat these issues despite varying levels of commitment among countries.

Addressing Sanctions Evasion

• The issue of sanctions evasion remains prominent; countries lacking comprehensive regulations are often exploited for such activities.

Integrating Cyber Hygiene into Education

• A call is made for integrating cyber hygiene education into school curricula alongside parental involvement to foster awareness from an early age.

Discussion on the Effectiveness of Asset Recovery in Ukraine

Challenges in Asset Recovery

• The speaker highlights a concerning statistic regarding the effectiveness of asset recovery, emphasizing the need to improve collection efficiency.

• Virtual assets are identified as a potential area for enhancing recovery efforts, particularly in an economy where much activity is unreported.

Legal Framework and Issues

• The speaker notes that there is little legal precedent or guidance regarding virtual assets within civil and commercial law, indicating a lack of experience among colleagues.

• The process of asset recovery can be divided into three stages: detection, blocking, and conversion to traditional currency. Each stage plays a crucial role in overall effectiveness.

Importance of Detection

• Detection is critical; even identifying virtual assets can lead to actions such as restricting a debtor's ability to leave the country if they are evading compliance with court decisions.

• Once detected, debtors may be more inclined to negotiate payments or settle debts if their accounts are blocked.

Engagement with Exchanges

• A request was sent to multiple exchanges regarding asset inquiries; responses varied significantly based on exchange policies.

• Notably, major exchanges like Binance require all requests from government entities to go through specific systems (e.g., CODEX), while others reported no relevant users.

Registration Challenges with CODEX

• The speaker expresses surprise at how easily one could register on CODEX without extensive documentation despite submitting detailed requests.

• There are limitations on who can use CODEX; currently only law enforcement agencies have access, which restricts private executors from utilizing this tool effectively.

Reflections on CODEX Usage

• The speaker reflects on past experiences when anyone could register for CODEX and shares anecdotes about misuse by individuals not affiliated with law enforcement.

Conclusion and Transition

• As the discussion wraps up, gratitude is expressed towards participants for their engagement.

• Introduction of the next speaker who will discuss the arrest and cancellation of virtual asset seizures within Ukrainian legal practice.

Legal Aspects of Seizing Virtual Assets

Overview of the Presentation Structure

• The speaker outlines their presentation, which will cover three main parts: procedural aspects, judicial practice regarding asset seizure when representing victims, and practices for lifting seizures on virtual assets.

Procedural Aspects of Asset Seizure

• According to Article 170 of the Criminal Procedure Code (CPC) of Ukraine, a court can impose a seizure on virtual assets under certain circumstances.

• The definition of virtual assets is found in the Ukrainian Law on Virtual Assets, which has not yet come into effect; thus, while there is no law, seizures can still occur.

• Seizures may be imposed to preserve evidence, confiscate property, or recover damages related to criminal activities involving cryptocurrency theft.

Judicial Practice in Asset Seizure

• Lawyers increasingly receive requests from clients whose cryptocurrencies have been stolen or fraudulently acquired. Clients aim not only for accountability but also for financial recovery.

• A legal audit and engagement with blockchain analysts are essential steps for lawyers when addressing such cases. This includes filing crime reports and initiating investigations by cyber police.

• Civil lawsuits are filed once suspects are identified; this allows lawyers to petition courts for asset seizures based on civil claims.

Key Considerations in Filing Petitions

• Article 170 CPC permits asset seizures specifically aimed at recovering damages from suspects or accused individuals who bear civil liability under the law.

• It is crucial that petitions include substantiated claims regarding damage amounts and supporting evidence; mere assertions are insufficient for court approval.

Notable Case Examples

• A significant case involved a request to seize approximately $64 million worth of assets by an attorney representing a client seeking damage recovery; the court granted this request.

• Courts sometimes order exchanges to return seized virtual assets directly to victims rather than just imposing general asset freezes.

Lifting Seizures on Virtual Assets

• The third part discusses instances where prosecutors initiate asset seizures that may need lifting due to improper grounds or lack of material evidence.

• Most current practices involve seizing virtual assets primarily as evidence preservation (90%) versus confiscation (10%).

Legal Definitions and Implications

• A ruling emphasized that funds stored in crypto wallets do not qualify as individualized material objects necessary for them to be treated as physical evidence under CPC standards.

• The distinction between material objects and intangible benefits raises questions about why most judicial practices still treat virtual assets as if they were physical items subject to seizure laws.

Conclusion on Current Practices

• There is ongoing debate about whether it is appropriate to seize virtual assets intended as evidence since they do not meet established criteria outlined in Article 98 CPC concerning physical evidence.

Cryptocurrency and Legal Challenges in Criminal Proceedings

The Role of Cryptocurrency as Evidence

• The prosecution can utilize a document from the State Register of Pre-Trial Investigations (RDR), an analytical report, or a website review to establish cryptocurrency as material evidence.

• Recent judicial practices indicate that merely having one ruling recognizing cryptocurrency as material evidence is insufficient for imposing asset seizures.

Challenges in Seizing Virtual Assets

• Virtual assets are recognized in criminal proceedings as objects subject to seizure, presenting challenges for both the prosecution and defense.

• Lawyers representing victims can independently petition the court for asset seizure without needing prosecutor involvement, but must substantiate suspicion adequately.

Legal Requirements and Implications

• It is crucial for the suspect to have formal status; otherwise, there may be grounds for annulment if assets are seized without proper legal justification.

• If an arrest is made without adequate legal basis or evidentiary support, there exists a significant chance of it being overturned by the court.

Conclusion and Future Directions

• The discussion emphasizes the importance of understanding how to defend clients involved with virtual assets, highlighting ongoing developments in this area of law.

• Continuous collaboration with experts will help maintain knowledge levels regarding virtual asset legislation and its implications.