UPDATE: Since this article was originally released, Ukraine's September 2021 bill legalizing Bitcoin was vetoed by their president and sent back to parliament for changes in October. An amended version of the bill officially passed on February 17, 2022, making it legal in the country, but not legal tender.
Ukraine recently started accepting bitcoin donations for their army, in response to being invaded by Russia. Ukrainian non-governmental organization Come Back Alive also is also accepting bitcoin donations for the country's army, collecting over 191 BTC worth more than $7,845,000 at the time of writing.
On September 8, 2021, Ukraine legalized bitcoin within the country, providing clarity on the asset which was not clear before. Shortly after the bill was signed into law, Bitcoin Magazine announced our global expansion into the country, opening a bureau in Kyiv, Ukraine.
Ukraine is poised to become a Bitcoin powerhouse with the level of interest in the country. Ukraine is already home to the world’s fourth largest population of Bitcoiners, according to Chainalysis, as well as some of the country's politicians own BTC.
Bitcoin Magazine wanted to get the inside scoop on Bitcoin in Ukraine, so we sat down with Ukrainian entrepreneur and investor, Sergey Tron, the founder of White Rock Management, a firm that focuses on artificial intelligence, streaming computing, blockchain, logistics and energy, to dive into this topic. He spoke with us and gave a great insight into what’s been happening in the Bitcoin scene in the country.
Below, Sergey explains to us in detail what the new bill is all about and what it means when it comes to Bitcoin for the citizens, businesses and government operating in Ukraine.
Could you tell us about your experience and why you turned your attention to Bitcoin?
I got familiar with and later engaged in technology, innovation in 2016 after a visit to the leading data centers in China and Europe. Data center power and operation mechanisms impressed me so much that I decided to delve into the principles of work of “non-material,” “non-classical” entrepreneurship myself. I delved into it deeply enough. I understood how cryptocurrency originated, changed and was produced. After that, I decided to give it a try and started creating a mining infrastructure.
Thus, I started creating my own "crypto history" in 2016–2017. The business attracted me as an investor with its nonengagement and freshness. It was a real novelty in the world of technology! Blockchain and cryptocurrency technology seemed interesting and promising, so I started investing and it was the right decision.
How does your experience in banking influence your opinion about Bitcoin?
Initially, I dealt exclusively with the “real sector”: energy, banking. But the further into the 21st century, the more clearly I started to understand that the future belonged to technologies, and this future was happening right then. I decided to combine classic business with an "innovative" one. Such terms like bitcoin and blockchain, artificial intelligence, rendering and cloud computing have appeared in my entrepreneurial business vocabulary.
I think there is every reason to believe that, in the future, cryptocurrency will enter a new advancement phase and become a usual currency, and people will start paying with it for supermarket purchases and taxi services. Over time, the question will arise of the implementation of this newest currency in the existing state banking systems.
Tell us about your interaction with the politicians who participated in the development of the bill draft (Bill Draft No. 3637 "On Virtual Assets")?
As our group represents a kind of center of competencies in the crypto space in Ukraine, we have provided our views to the regulators. My collaborators had a number of very useful sessions and I was glad to note that part of our suggestions have been adopted in the final version of the law.
Can you describe the mechanism and terms for this bill to come into force?
First of all, the new law will allow crypto companies to work in the clearly understandable, legal field. This is an important step because it will finally lead to the legal existence of the virtual asset market. Thanks to this, the crypto industry in Ukraine will be able to develop rapidly and dynamically. Market players and investors will receive legal protection and the ability to make decisions on the basis of open consultation with government agencies and civil society. Finally, a transparent cryptocurrency investment mechanism will start working.
An industry-specific law is a guarantee for the crypto business not to fall victim to complex misinterpretations of classical legal norms. In fact, it gives transparency of rules and protection against regulatory institution free will.
A special regulatory institution of the virtual asset market will appear in Ukraine. We must combine a high level of economic and investment freedom with a high level of financial security. This is the only way the Ukrainian crypto industry can become a dynamic, civilized and competitive market.
The main aim of this law is to create a foundation for a full-fledged functioning cryptocurrency market with transparent game rules for each player.
The members of the country’s governments worldwide, as well as legislative establishments, understand that blockchain and digital assets will radically change most areas of human life in the next 5–10 years. Therefore, most developed countries have legalized cryptocurrency in one form or another.
Moreover, the digital asset market is a powerful driving force for the financial system, amounting to billions of investments. Nobody wants to be left behind. Ukraine should not only catch up but also create new technological and social trends. The legalization of virtual assets is the first step toward a proactive position of Ukraine and a powerful signal for global crypto investors.
What does the new law mean for bitcoin companies operating on the territory of Ukraine and for those who want to start their business activity there?
According to the new law, crypto companies can provide customers with the following services: storage or management of virtual assets, keys to virtual assets, exchange, transfer and other services related to digital assets.
Market participants, in turn, have the right to open bank accounts for settling transactions on virtual assets, judicial protection of their rights, receive information about their activities from service providers, independently determine prices for carrying out cryptocurrency transactions, and personal data protection.
Blockchain companies now have the opportunity to open bank accounts and accounts in other financial institutions to carry out virtual asset transactions.
Foreign crypto companies will also be able to register in Ukraine and make money in our country. In general, a special permit must be obtained for each separate type of activity. Thus, the market receives the basic game rules, and crypto investors will finally be able to leave the “gray zone.”
The law means access to the finances of the classic market. Therefore, the key benefit is the expansion of the field for the crypto business and another step toward mass adoption.
It is important to understand that the adopted law is a framework document, the beginning of the process, but not its completion. The cryptocurrency law needs to be substantially specified with the help of bylaws and other policy documents. Without this, the Ukrainian crypto industry will not receive the necessary push. The final goal is to launch a full-fledged mining infrastructure and trading cryptocurrencies.
The Law on Virtual Assets will come into force only after the tax code has been amended on the specifics of taxation of virtual asset transactions. Experts say the process could take up to one year. Of course, it is desirable that all necessary amendments are accepted as soon as possible.
Can you clarify what is meant by this passage using real-life examples, "Virtual assets are not a means of payment on the territory of Ukraine and cannot be exchanged for property/goods, works or services"?
It means that you cannot go to the supermarket and buy food with bitcoin. Or go to a hardware store and buy a washing machine for it either. Not for now. Also, you cannot formally exchange your cryptocurrency, for example, for real estate and any work. The state does not recognize cryptocurrencies as a currency. According to the new law, virtual assets have the status of an intangible value and of an object of civil rights. That is, you can officially own tokens, dispose of them, buy and sell, use the services of blockchain companies and crypto exchanges. But you cannot pay with them as you would with ordinary money.
A similar rule applies to foreign exchange. But this is not a limiting factor, but a space for the operation of payment solutions that can provide double conversion invisible to the client. Of course, we would like to avoid it, but the National Bank of Ukraine has concerns about the consequences of the massive crypto introduction for the Ukrainian UAH. We are confident that after a year of operation, the regulatory institutions will see that the concerns are unfounded, and it will be possible to talk about lifting this restriction.
You have worked in banking in Ukraine, could you describe market opportunities for bitcoin companies in Ukraine focused on customer service in terms of asset management and other financial services?
Now crypto companies can officially provide their services to the citizens and legal entities. Currently, there are about 100 companies in Ukraine whose activities are related to cryptocurrencies in one way or another, and there are also a lot of startups in this area. During the period from July 2019 to June 2020, $8.2 billion worth of cryptocurrencies were withdrawn from Ukraine, and $8 billion were introduced into it. This means that, in the future, the purchase and sale of tokens will become the same common practice as other common types of investment in Ukraine. People will have less reason to fear cryptocurrencies as a kind of “semi-legal topic,” bypassing it. We now have a basic document regulating digital assets, legal guarantees for market participants, rules for digital asset transactions. The official regulatory institution will be created soon. It is much easier to work even within a minimal legal framework.
The blockchain and cryptocurrency business is interested in popularizing crypto investment as much as possible, explaining to Ukrainians what it is, how it works, why it is profitable and safe to buy and sell tokens. Although the lack of regulations did not scare many clients even before the virtual asset law introduction.
Will there be another boom in bitcoin and cryptocurrencies in Ukraine? It depends on whether the state and crypto associations will be able to polish the law, effectively implement and specify its provisions and continue to legalize the market based on common sense and international experience. It is going to take a lot of time and a lot of work. Any mistake and ill-considered step, for example, strict or nontransparent tax regulations, can stop the development of the industry and scare off potential investors.
The new law does not cover or regulate cryptocurrency mining in any way. For example, the Ministry of Digital Transformation believes that the token mining procedure is legal by default and, after the adoption of laws, any claims against mining companies should disappear. It sounds good in theory but, in real life, the state should develop a real legal mechanism to protect and support mining. Law enforcement should not be able to "harass" honest miners unless the law is broken. As in other cases, this is a collaborative effort not only for officials and MPs but also for commercial sector stakeholders, as well as blockchain enthusiasts.
Are there any prospects for Ukraine to make bitcoin a legal currency as, for example, in El Salvador? Does the bill draft meet all the current needs?
Ukrainian policy in relation to cryptocurrencies is much more balanced. The example of El Salvador was, rather, a large-scale gamble, where the decision was made non-transparently, different people were also called the beneficiaries of the project. From the outside, it looked strange. To my mind, such projects are more likely to discredit the cryptocurrency than work in its favor.
In Ukraine, the bill draft has been developed for over two years. It was an open process. The state organized a special foresight with market participants and leading economists. All of this is a large process that has gained its speed and strength, and it is this movement that is capable of qualitatively changing the state infrastructure.
Currently, bitcoin poses a potential driving force of innovation in the country. Is this opportunity recognized by Ukraine and does it seek to benefit from it?
Ukraine has repeatedly tried to enter the field of blockchain technologies. But until now, these were rather pilot projects.
Despite certain positive signals from the authorities, in particular, the adoption of the virtual asset law, crypto industry development issue is not yet on the list of priorities. The state continues to deal with most of the issues inertly, as a complex bureaucratic mechanism. This approach will not get us far. We should not stop there. It is necessary to ensure that the virtual asset law enters into force as soon as possible and to develop new norms, bylaws and concepts straight away in order to launch a full-fledged mining and cryptocurrency market as soon as possible. It is necessary to establish communication between the crypto business and specialized institutions.
Our country has great potential, the ability to create the most favorable conditions, a paradise for crypto investors, and thus, earn billions of UAH. It is important to understand that positive changes will affect all Ukrainians without exception. Both domestic and foreign crypto companies will pay taxes. Then these funds can be invested in the development of infrastructure, medicine, social sphere, increasing pensions and social benefits for people. But this requires a clear strategy, political will and joint work of all interested parties — not only business and specialized associations but also the state. It is important not to stop halfway and work for long-term goals. In the world, there are many successful cases of cryptocurrency legalization and the attraction of international crypto giants. For instance, the experience of such a country like Kazakhstan, which has already been called digital Switzerland, is worth paying attention to.
In your opinion, how does Ukraine plan to regulate the bitcoin market in the future to make sure that innovation is not suppressed?
So far, the law does not specify the regulation of the virtual asset market and the powers of the regulatory institutions. Many experts criticize the initiative because it lacks a clear division of powers between the new body, the Ministry of Digital Transformation, the National Bank of Ukraine, and the National Commission on Securities and Stock Market.
Investors and mining companies are very well aware of the situation and, in the case of tightening the screws, they immediately move to a jurisdiction with more attractive conditions. In the spring of 2021, the PRC government began to systematically put pressure on miners and limit the circulation of cryptocurrencies in order to create noncompetitive conditions for its new project — the digital yuan. As a result, the crypto companies, the mining pools, simply left the country and relocated their mining capacity. The same situation could develop in the United States if legislators and the White House administration go too far with taxation and control. We must take advantage of the situation and show crypto investors that Ukraine creates the best conditions for virtual asset mining and trading, implements real mechanisms for industry protection and development. There are many competitors in the market who have already offered unprecedented liberal conditions for investors and blockchain companies. Therefore, any "downtime" and mistakes will lead to Ukraine losing its chance.
So far, the public position of the Ministry of Digital Transformation is encouraging. The ministry communicates openly, negotiates with the world's largest players and demonstrates its readiness to create the friendliest environment in the country in every possible way.
How important do you think it is for the country to provide nonbanking citizens with access to nonbanking technologies that will allow them to preserve and increase their savings, thereby improving the quality of life?
First of all, it is necessary to launch a wide information campaign to show the advantages and safety of cryptocurrency investments. For the majority of the population, bitcoin and blockchain mechanisms remain a mystery, not to mention the rules of the market, the specifics of different cryptocurrencies, opportunities and pitfalls. An information campaign is something that the crypto business primarily needs. It is blockchain companies that will offer their services to people, and their further earnings depend on public awareness. But it is the main task of the state to develop financial and digital literacy of all Ukrainians, regardless of age and place of residence. It is necessary to start with the educational component, with the basic things.
Of course, if a full-fledged digital asset market is launched, people, even with a small fortune, will be able to invest and earn on tokens. This will significantly raise the living standard in the country and open up new opportunities for Ukrainians. And this is a very realistic prospect. However, in order for the corresponding goal to be achieved, it is important to keep in mind that all the components listed above are necessary: a clear strategy, joint work of all interested parties, a strong legislative framework, educational activities, real legal guarantees for all market participants and favorable investment conditions.
According to the Ministry of Digital Transformation, the daily turnover of cryptocurrencies in our country is 1 billion UAH (approximately $37.6 million USD). At the same time, Ukraine ranks fourth in the ranking of crypto asset use and first in terms of the volume of virtual asset transactions among market participants in the world. Also, Ukraine is in the top-10 countries with the highest bitcoin earnings. And all this was before the adoption of the framework law on virtual assets. Imagine what opportunities will open up for Ukrainians if the crypto industry is systematically supported by the state.
What does the government think about bitcoin mining and the use of Ukrainian energy potential for this?
This issue is very closely related to the technical features of the energy system in Ukraine. It's no secret that Ukraine has colossal surpluses of electricity generation, and today we have 55 GW of the total installed capacity of power plants, of which only 20 GW is in active use, even during peak consumption periods.
The reason for this imbalance is apparent. It is a drop in industrial production, which, unfortunately, we have been witnessing since 1991. And last year, the energy system set a kind of anti-record: During the period from 1991 to 2021, the generation and consumption of electricity fell by more than one half (from 300 to 143 billion kWh per year).
Domestic nuclear power plants occupy a special place in the energy system of Ukraine. A number of complicated tasks have been accumulated for dealing with the nuclear-industrial complex, which led to low efficiency of NPP operation, among the main ones are: low volume of electricity consumption in Ukraine, caused by a drop in industrial production; the inability to sell electricity to the ENTSO-E energy system, therefore, the sale of nuclear electricity to the EU countries got blocked; reduction of investments in the modernization of stations; uncontrolled RES increase in the power system; a high share of nuclear electricity in the total energy balance of Ukraine (50% or more), resulting in the overflow of the basic segment of the electric power system.
These features lead to catastrophic consequences for nuclear power plants: An increase in the share of renewable energy sources, simultaneously with the forced increase in the volume of generation of TPPs to ensure daily balancing, against the drop in consumption leads to the displacement of the share of nuclear power plants from the power system (the ICUF of Ukrainian NPPs in 2020 was approximately 61%, tentative electricity underproduction by nuclear power plants in 2020 amounted to 20.84 TWh, i.e., equivalent of 3 VVER-1000 units).
The question arises how to get out of this difficult situation? Industrial development is not a quick decision, it requires significant investments and resources.
Taking into consideration the current situation in the energy system of the country, in particular the problem of excess electricity generation by the Ukrainian nuclear power plants and the lack of effective sales mechanisms, there is an option that, in our opinion, will allow it to be solved.
A key feature of data centers as an electrical energy consumer is a significant amount of consumption 24/7/365 on a linear load schedule.
The implementation of the power supply scheme for the data processing center directly from nuclear power generation will ensure stable and mutually beneficial cooperation conditions for all parties: Nuclear power plants will receive an additional opportunity to sell products at a competitive price with guaranteed and timely settlement; data centers will have a guaranteed and reliable source of power supply; the energy system of Ukraine will unload the basic segment of the market, creating additional opportunities for daily balancing.
The construction and operation of a high-tech, multipurpose data processing center using advanced computing equipment, with the power supply by a nuclear power plant, makes it possible to implement a project with the highest and fault-tolerant performance characteristics with no analogs in Ukraine.
Is the country going to make tax cuts or incentives to stimulate investors and attract capital to the country?
As I’ve already mentioned, Ukraine has a more well-thought position. And more structural. The tax rate is being discussed now, similar to the investment instrument — 5% on net position. Operations of some virtual asset exchanges for others are not subject to taxation. It looks extremely attractive.
Will Ukraine stimulate the recognition of bitcoin among citizens and explain why they need it and how to use it?
As far as I know, the Ministry of Digital Transformation has developed and is conducting a special information campaign. Therefore, the state does everything in its power here. Also, in Ukraine, there is a very strong crypto community, and it is also actively involved in the process of popularizing the cryptocurrency.
Can you tell us about the position of Ukraine regarding CoinJoin and other tools that ensure the confidentiality of bitcoin?
The position of State Committee for Financial Monitoring, the body responsible for compliance, is extremely careful in all matters related to anonymity. For a country that is actively fighting against terrorism and corruption, this issue is acute. But so far, any official position has not been formed yet.
And finally, about the prospects. Do you think there are plans to incorporate bitcoin into the current banking system? If so, will those who prefer to store their bitcoin in banks learn about the importance of storing their crypto assets on their own? Will the bank be able to provide a multisignature storage solution for those who still want to go this way?
Even the largest and state-owned banks have been already discussing these opportunities. The banking system of Ukraine is distinguished by being fairly customer-friendly and customer-oriented, so banks will surely find something to offer to the crypto business.