A new cryptocurrency-related bill in Ukraine will allow payments in cryptocurrencies like Bitcoin (BTC) despite not recognizing crypto as legal tender, a government official claimed.
Oleksandr Bornyakov, deputy minister of Ukraine’s Ministry of Digital Transformation, is confident that it would be “quite legal to pay with cryptocurrencies” in Ukraine through payment intermediaries enabling crypto-to-fiat conversions.
The official said in a Friday interview with local financial publication Minfin that Ukraine’s draft bill on virtual assets “clearly states” that cryptocurrencies do not constitute legal tender in the country, only allowing crypto purchases.
However, the bill stipulates that local payment processors would still be able to provide services for converting crypto to fiat to enable payments deriving from crypto, stating:
“Today, the legislation in Ukraine also does not allow you to pay in dollars, but you can easily pay for purchases with a dollar card. Currencies are converted instantly during payment. […] Therefore, it will be quite legal to pay with cryptocurrencies in Ukraine, but through an intermediary.”
Bornyakov also noted that the upcoming bill will officially legitimize the process of cryptocurrency trading and reporting. “We expect that there will be a whole market of intermediary services for payment of goods by cryptocurrencies, their storage, and exchange. This will expand the possibilities of their use,” he added.
As previously reported by Cointelegraph, the Ministry of Digital Transformation recommended the adoption of an updated draft bill “On Virtual Assets” in the second reading in late June. Local e-bank Monobank subsequently disclosed plans to launch a debit card featuring Bitcoin trading.
The news comes shortly after Ukrainian President Volodymyr Zelenskyy signed another digital currency-related law, referred to as the law On Payment Services. The law officially enabled Ukraine’s central bank to issue a central bank digital currency, the digital hryvnia.
A relatively hidden provision in the $1 trillion bill plans to help pay for new roads and bridges by making the tax collection of crypto activities more efficient. However, it is inadvertently casting to wide a net over the industry, threatening its very livelihood in the U.S. A group of senators is pushing back on the language to make it more precise, but hurdles remain.
In this report, I break down what to expect in the coming days and break down what lawyers and industry participants need to know and decisions they must make.
I currently provide legal consulting to cryptocurrency and fintech companies. Prior to consulting, I spent years as Regulatory Counsel for various companies in the
I currently provide legal consulting to cryptocurrency and fintech companies. Prior to consulting, I spent years as Regulatory Counsel for various companies in the cryptocurrency space including Silvergate Bank, bitFlyer and Coinbase. I also previously served as Secretary of the Virtual Commodity Association.
For months, the U.S. crypto industry has speculated on what form increased regulation might take. This week, we got some answers in the form of a new crypto bill that’s been put before the House of Representatives.
The Digital Asset Market Structure and Investor Protection Act of 2021, introduced by Representative Don Beyer, sets out a framework designed to clear up a lot of the existing grey areas in crypto legislation.
As a result, the measured — and at times positive — tone of the new bill is almost refreshing.
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What’s covered by Beyer’s crypto bill
Introducing the bill, Beyer said that, “Digital assets and blockchain technology hold great promise, and it is clear that assets like Bitcoin and Ether are here to stay.”
However, he labeled current laws as “behind the times” and argues that a comprehensive framework for digital assets would protect investors, promote innovation, and create jobs. Beyer said that many of the 20-46 million Americans who own Bitcoin are “average Americans” rather than large institutional investors. And he argued that too many had fallen victim to fraud and hacks.
Here are some of the bill’s proposals and why they matter:
Define which government department is in charge of what assets
One challenge for crypto regulators is that it comes under the remit of several different authorities. That makes it easy for bad actors to fall between the cracks. Cryptocurrencies function in different ways. Some are straightforward currencies, some are programmable blockchains, and some are more like traditional securities. The bill would categorize the different types of digital assets and define which department would regulate them.
Clear up confusion on what is considered a cryptocurrency exchange
The bill also wants to differentiate between money service businesses (MSBs) and securities or commodities exchanges. Right now, U.S. cryptocurrency exchanges have to register as MSBs, but some may be better defined as securities exchanges — and would have to follow stricter regulations.
Formalize digital assets as “monetary instruments”
This would mean cryptocurrencies would be subject to existing anti-money laundering (AML) and reporting requirements. It isn’t yet clear how this would impact anonymous decentralized exchanges as the main thrust of AML legislation is removing anonymity.
Open the door for a digital dollar
The Federal Reserve announced earlier this year that it was considering a digital dollar. This would have the advantages of cryptocurrencies — like fast transactions and increased security — but without the risks. As a centralized currency, it would be backed by the government — exactly as the dollar is.
Clamp down on stablecoins
Stablecoins are cryptocurrencies that are pegged to other commodities such as gold or the U.S. dollar. They have come under fire recently because there isn’t enough transparency on whether they are backed by sufficient cash to support the number of coins in circulation. Authorities are also concerned stablecoins may operate like banks, but without the same level of regulation.
Require clear consumer warnings on certain products
Right now, various decentralized finance (DeFi) applications offer products that look like savings or loans from traditional banks. Indeed, the whole point of DeFi is to remove the middleman — banks — from these activities. But, cutting out the banks also cuts consumer protections. For example, a DeFi savings account may not have FDIC insurance. The new bill would mandate that consumers understand what protections they do or do not have.
How will the bill impact the crypto market?
The bill is still in its early stages and will likely be adapted and changed as it progresses through the House. However, as it stands, it seems to address a number of legitimate problems without being too heavy-handed.
In the long term
Increased cryptocurrency regulation is unavoidable. But it could help to increase consumer confidence and adoption of digital payments. It will almost certainly undermine the original ethos of Bitcoin, which was designed to cut out central authorities from financial transactions. But if cryptocurrency is to continue toward mainstream adoption, clearer rules are essential. And many players in the industry would actively welcome more guidance.
For example, right now the SEC is pursuing a lawsuit against cryptocurrency Ripple (XRP). The SEC argues that Ripple has acted as a security, not a cryptocurrency, and as such, it has broken U.S. security laws. But since the rules on what is or is not a cryptocurrency were not clearly defined, Ripple executives argue they have done nothing wrong.
Or, to give another example, take stablecoin Tether (USDT). We have a coin that is supposedly pegged to the U.S. dollar, but it hasn’t always had enough reserves to support itself. So if lots of people get scared and suddenly want to withdraw all their Tether, we can’t be sure they’d be able to do so. That’s something consumers should be protected against.
That’s before we consider the various cases of fraud and misrepresentation that have cost investors millions of dollars. When you buy a cryptocurrency today, it is difficult to know if you can trust the information that’s been provided. And in an industry with a market capitalization of over $1.5 trillion, that’s a worry.
In the short term
Increased regulation will probably hit cryptocurrency prices in the short term as the market adapts to the new rules. Any additional regulation is likely to spread fear and uncertainty. And Beyer’s bill is only one of several proposals in the pipeline.
But overall, the bill is a great starting point. We’ll have to watch what other bodies propose and see whether the bill gets strengthened or watered down as it moves through the legislative process.
They see the new reporting requirements as potentially damaging the economic viability of cryptocurrency markets, which have seen a rapid expansion in new users during the pandemic.
Given how much new tax revenue could be at stake and the amount of progress that has been made on the bill, many doubt the language will be eliminated, so they are focused on efforts to make what they see as improvements.
Industry groups including the Blockchain Association, Coin Center and the Association for Digital Asset Markets outlined their opposition to the requirements in statements on Thursday, taking particular note of provisions in the draft version that could lead to targeting of individual users.
Perianne Boring, founder and president of the Chamber of Digital Commerce, said in an interview on Friday that her group proposed amending the bill language to “tighten the definition” of what constitutes brokering activity to exclude artificial intelligence platforms or business transmitters.
“The idea of shoving this into a congressional mandate or as a as a revenue-generator for something completely unrelated, is not the preferred way or the right way to get the best policy,” Boring said, noting that ADAM and others have repeatedly asked for more guidance from the IRS on how to enforce existing laws.
ADAM’s CEO, Michelle Bond, said “it is critically important for the industry to be at the table to provide technical assistance for proposals of this magnitude.”
Tax compliance is considered a major problem with cryptocurrencies, and lawmakers are hungry for the $28 billion their proposals are said to raise to help finance their big-ticket spending plans.
The issue is complicated, potentially affecting banking and securities law. It also crosses jurisdictions in Congress, from the tax committees to banking panels.
The move to boost cryptocurrency reporting requirements comes after Republicans killed a plan to boost IRS enforcement by greatly expanding the agency’s budget — something Democrats are expected to tackle in a separate tax-reconciliation package.
IRS Commissioner Charles Rettig has repeatedly asked lawmakers for more power to improve tax compliance in the cryptocurrency industry, where many market participants are unaware of their obligations or are outright cheating.
Though industry officials vow to fight the proposals, they’ll likely face an uphill battle.
The plan is headed for a quick vote in the Senate, and lawmakers will be loath to blow a hole in the infrastructure proposal after struggling for weeks over how to defray its cost of the plan.
The fact that few lawmakers understand cryptocurrencies and their relationship to taxes means that any lobbying effort will require a major educational campaign. Congress’s most expert member on the issue, Sen. Rob Portman (R-Ohio), happens to be one of the main authors of the broader infrastructure package.
Much of the proposal is designed to replicate the reporting regime imposed when people sell stocks in companies like Apple or Ford.
Brokers would be required to report people’s so-called basis, or the price at which they bought cryptocurrencies, as well as their gross proceeds — which would make calculating their tax bills much easier. Studies have long shown that when people know someone else is independently reporting their income to the IRS, they are far less likely to skirt tax obligations.
Lawmakers also want toinclude anti-money laundering provisions sought by the Treasury Department that would require transactions worth more than $10,000 to be reported to the government.
Behind the scenes, lawmakers have debated language that would expand the definition of broker to include decentralized exchanges, without traditional middle men, and peer-to-peer transactions, though some say the language of the proposal is broad enough to sweep in others like cryptocurrency miners.
“The extension of the definition of ‘broker’ is a surprise,” said Lisa Zarlenga, a partner at the firm Steptoe & Johnson LLP who works on cryptocurrency tax issues.
Another source of contention: provisions that could potentially go beyond cryptocurrencies to other types of digital assets like non-fungible tokens.
The Treasury Department had already been working on rules to tighten reporting requirements on brokers like Coinbase, but having Congress’s imprimatur would help head off any potential legal challenges to the agency’s authority to issue new regulations.
Industry officials are vowing a fight.
Blockchain Association Executive Director Kristin Smith expressed frustration with the last-minute scramble to write the legislation, saying it could impose new requirements on “all sorts of different actors in the ecosystem.”
“We think it would have the effect of potentially driving a lot of these actors and businesses and individuals involved in crypto overseas and really stifling the innovation in this space here in the United States,” she said.
Though the plan is said to raise $28 billion, that’s highly uncertain and the estimate immediately raised some eyebrows.
While Congress’s budget forecasters can predict with confidence the cost of tax changes that are similar to ones lawmakers have made before — such as expanding the child tax credit — they invariably have a harder time for more novel policy proposals.
Cryptocurrencies present a particularly difficult challenge because their valuations can fluctuate wildly, it’s hard to know how many people are buying and selling the assets, and forecasters have to make guesstimates about the tax rates they likely pay.