Since the beginning of autumn, there has been talk in Ukraine about the prudence of regulating cryptocurrencies and how this might best be achieved. Any operation regarding cryptocurrency exists in a kind of “legal vacuum”. Despite this, figures within this “shadow” market are impressive. While exact numbers are unknown, it is estimated that Ukraine’s annual cryptocurrency market reaches over two billion hryvnia (that’s about 150 million USD), according to one USAID report. More precise information is hard to pinpoint as operators do not pay taxes and crypto-exchanges along with traders do not need to have a license. Moreover, even with millions of earnings coming in thanks to cryptocurrencies, no income tax is levied. It would seem the state is interested in creating legal conditions for the cryptocurrency market while also making a profit.

The situation began to change as early as 2018, when representatives of the NBU started to actively discuss Ukrainian cryptocurrency. The so-called “electronic hryvnia” (exchange rate 1: 1) allowed for payments. It also allowed for the regulation of paper money and printing of new bills.

Experts are ambiguous in their forecasts however as some believe that cryptocurrencies in Ukraine will gradually be legalised, while others expect the collapse of the banking system as a whole as cryptocurrencies stabilise. Despite this, all commentators agree that national virtual currencies have a great future. The Ukrainian cryptosphere is closely related to the international cryptosphere. And though discussions are taking place in the west and in Ukraine, representatives of the public sector are only eyeing technology at the moment. At the same time, an interesting trend is unfolding where officials are indicating cryptocurrencies on their tax declarations, where, in the last two years alone, there have been nearly 60 such examples.

Ukraine is gradually removing cryptocurrency from the shadows, thus continuing the European trend, where the market is allowed to actively develop and improve. And this is right: the legalisation of operations will benefit everyone, including the state, which will receive taxes, and the banks, which will be involved in exchange operations.

By the end of 2018, the Ministry of Economic Development of Ukraine had proposed a plan for implementing state policy regarding cryptocurrency regulation. As such, the legal status of cryptocurrency will be finalised throughout 2018-2019, key definitions will be given, and a corresponding legal framework will be created in 2020–2021, which looks to regulate the use of cryptocurrencies and the activities of organisations that handle them. Improvements will also affect taxation: the difference between the cost of selling a crypto unit and the cost of mining will be taxed, where initially the tax will be 5% of this difference, and from 2021 the tax will increase to 21%.

Discussions about the tax rate are also ahead of us. In the EU, Bitcoin has been considered a virtual currency since 2012, and since 2014, VAT is no longer a concern when converting Bitcoin into national currency. After all, if we accept that Bitcoin is a currency, then it’s right to assume that transactions involving it are foreign exchange, where VAT does not apply (this is, after all, a tax exclusively for goods and services). Here, however, it is worth noting the approach Germany has taken, where cryptocurrency is considered “private money” and can be used to pay legal entities. Interestingly, VAT is charged on these operations. However, the question of taxation on cryptocurrency in Germany is still open.

Global trends remain heterogeneous: if a number of countries see the source of new funds in cryptocurrencies, others believe that unstable virtual currencies undermine the foundations of the financial system and may provoke a crisis. Bitcoin fluctuations are an example of this: after the jump in December 2017, the value of Bitcoin exceeded a record $20 000 – that’s 47 times higher than its value at the beginning of the year, while in 2018 this cryptocurrency fell.

While the world continues the discussion about cryptocurrency, ordinary Ukrainians are already using it to make purchases for goods and services online. This is a good indication that the market will continue to develop and transform, responding to the needs of users as well as the regulatory actions of the state.