The Future of Crypto-Regulation in Ukraine: Should It Follow the EU and MiCA?

For several years, Ukraine has been discussing the introduction of virtual asset legislation, yet no effective law has been passed so far. The initial efforts, dating back to 2017, were ambitious, positioning Ukraine as one of the potential pioneers in creating a favorable regulatory environment for the cryptocurrency market. However, the global regulatory landscape has evolved significantly since then. Today, virtual assets and services are regulated in most developed countries, and even regions traditionally known for their lenient regulatory stance, such as offshore jurisdictions, are now introducing virtual asset service provider (VASP) regulations under pressure from international bodies like FATF and major players like the EU and the U.S.

Ukraine's lack of regulation is not just causing economic losses; it is also delaying the establishment of a formal crypto market. Developing the necessary infrastructure and expertise takes time, and without a clear legal framework, Ukraine is already 3-5 years behind the European Union in this regard.

This article explores potential crypto regulation models for Ukraine.

MiCA: A Blueprint for Ukraine?

In 2023, the European Union introduced the Markets in Crypto-Assets Regulation (MiCA), which sets forth a comprehensive legal framework for virtual assets. MiCA began to take effect in June 2023 and builds on earlier regulations, such as the EU's Fifth Anti-Money Laundering Directive, which was implemented in 2020 and covered virtual asset service providers (VASPs).

As Ukraine seeks to join the EU, MiCA’s influence on the country's legislative agenda is significant. The National Securities and Stock Market Commission of Ukraine (NSSMC) has proposed a draft law inspired by MiCA, and the draft is currently being considered by the Ukrainian parliament. The NSSMC has translated MiCA into Ukrainian and adopted its framework without significant reservations.

How Does MiCA Work?

MiCA introduces a highly regulated authorisation model, requiring crypto market participants to meet strict technical, organisational, and qualification standards. For example, obtaining a license for a crypto exchange under MiCA is as challenging as obtaining a Multilateral Trading Facility (MTF) license for trading securities.

The primary goal of MiCA is investor and consumer protection, achieved through clear and detailed rules for market operations. However, the stringent and bureaucratic requirements could make it difficult for market participants to obtain licenses and conduct business, which could stifle industry growth and innovation.

In 2020, the European Commission conducted an impact assessment of MiCA, estimating that the one-time compliance costs for VASPs could range from €2.8 million to €16.5 million, with annual costs between €2.2 million and €24 million, depending on the service provider. The authorisation process could take 3 to 12 months, with European regulators able to issue only a limited number of licenses per year. This could make entry into the market difficult for smaller players, with larger companies dominating.

Why is the EU Implementing MiCA Now?

MiCA's primary aim is to harmonise crypto regulations across the EU and prevent regulatory arbitrage within the bloc. In the past, countries like Lithuania and Poland have attracted crypto businesses through simplified VASP registration processes. For instance, according to some estimates Lithuania has approximately 1,800 VASP registrations, while Poland has around 1,400. By implementing MiCA, the EU seeks to eliminate such jurisdictional competition.

At the same time, there are concerns that MiCA's strict rules could push businesses to move their operations to less regulated jurisdictions outside the EU.

The Impact of Comprehensive Crypto Regulation: Lessons from Other Jurisdictions

The experience of implementing comprehensive regulations similar to MiCA in other countries has predominantly occurred in smaller jurisdictions, where such regulation often leads to high barriers to entry for new players. These stringent frameworks tend to be unpopular among market participants, usually attracting only large, well-established players while discouraging smaller or emerging businesses from entering.

For example, prior to 2018, Gibraltar was considered a favorable crypto jurisdiction, with straightforward regulatory guidance and minimal compliance requirements. This attracted numerous blockchain projects, including those conducting initial coin offerings (ICOs). However, with the introduction of the more complex Distributed Ledger Technology (DLT) Provider license in January 2018, Gibraltar rapidly lost its appeal as a crypto hub. Only 13 companies were able to obtain licenses post-2018, reflecting a sharp decline in interest from issuers and crypto service providers.

A similar trend was observed in Malta. Since implementing its Virtual Financial Assets (VFA) framework in 2018, only 15 licenses have been issued, demonstrating that comprehensive regulatory approaches can limit market dynamism. Other jurisdictions have also seen limited uptake after the introduction of similarly complex regulatory requirements. These cases highlight that while such regulations aim to bring stability and protection to the market, they can stifle growth and innovation by imposing excessive burdens on smaller players.

Should Ukraine Adopt MiCA?

There are several factors to consider before Ukraine adopts a MiCA-like framework. First, MiCA was designed to eliminate regulatory competition within the EU, and while its strict standards come with the benefit of market access across the EU, adopting this model in Ukraine won’t provide the same advantages. Ukrainian companies would not gain access to the EU market simply by complying with MiCA.

Second, the virtual asset markets in the EU and Ukraine differ significantly in terms of size, customer base, transaction volume, and investment potential. While the EU has a well-established market, Ukraine’s crypto industry remains in the shadows, lacking substantial investment and infrastructure. This disparity has led many Ukrainian crypto projects to relocate to the EU or offshore jurisdictions.

In essence, MiCA is a response to an already developed and mature market in the EU, while for Ukraine, it would be the first major regulation in a nascent market.

Third, MiCA grants regulators broad powers that resemble, in some respects, the functions of a law enforcement agency, including the right to conduct inspections, investigations, and access business premises. At this stage, such extensive regulatory powers seem disproportionate for Ukraine’s emerging virtual assets market and would require a significant increase in regulatory staff and resources. According to estimates, the cost of regulatory enforcement under MiCA could range from €350,000 to €500,000 per year, with additional one-time expenses of up to €140,000. The oversight of individual market participants could cost as much as €250,000 annually. Establishing such a bureaucratic system for a market that is still in its infancy seems premature.

If Not MiCA, Then What?

Regulating the crypto industry is about finding a balance between consumer protection and encouraging innovation. Countries like Switzerland, Gibraltar (before 2018), Lithuania, and certain offshore jurisdictions have successfully adopted a combination of minimal restrictions and a “wait and see” approach. This strategy allows the market to develop organically without overly burdensome regulation, while still giving regulators the discretion to intervene when necessary.

At this early stage of market formation, minimal regulation can foster growth and innovation. Regulators should have the power to clarify or prohibit unfair practices without imposing unnecessary barriers to entry. Among the draft laws under consideration in the Ukrainian parliament, the one proposed by the Ministry of Digital Transformation aligns most closely with this approach. For instance, the "regulatory sandbox" proposed in the draft law allows projects to test innovative products and services without needing full authorisation.

Opportunities for Competition With Other Countries

With global crypto regulation on the rise, Ukraine has an opportunity to differentiate itself by offering more accessible and simplified rules for market participants. As countries like the EU adopt stringent frameworks like MiCA, Ukraine can attract crypto businesses through regulatory arbitrage by creating a more favourable and flexible environment.

Ukraine could stand out by offering more liberal requirements for virtual asset issuers and service providers. This might include streamlining authorisation procedures, shortening application review times, expanding exemptions from authorisation requirements, and recognising foreign licenses through simplified procedures. Moreover, developing specific rules for decentralised autonomous organisations (DAOs) could give Ukraine a unique competitive edge, as only a few jurisdictions are actively working in this area.

It's important to note that simplifying regulation doesn’t mean sacrificing oversight. Ukraine can still ensure adequate investor and consumer protection while creating flexible and adaptive rules that reflect the fast-evolving nature of the virtual asset market.

By adopting this approach, Ukraine could create a supportive environment for the growth of the crypto industry, attract new projects and investments, spur innovation, and generate new jobs. This would enhance the country's global competitiveness and position it as an attractive destination for crypto businesses.