Ukraine -- Securities Classification Regulatory Overview

Ukraine has established a legal framework for virtual assets, which includes provisions for classifying certain cryptocurrency tokens as securities. The primary legislation is the Law of Ukraine "On Virtual Assets" (No. 2074-IX, adopted February 17, 2022, and largely effective from April 28, 2024), which interacts with the existing Law of Ukraine "On Capital Markets and Organized Commodity Markets" (No. 3480-IV).

The National Commission on Securities and Stock Market (NCSSM) is the primary regulator responsible for virtual assets that qualify as securities.

The Legal Test for Classifying Virtual Assets as Securities (Howey Equivalent)

Ukraine does not use a direct "Howey test" equivalent as found in U.S. law. Instead, the approach is to determine if a virtual asset falls within the definition of "securities" or "financial instruments" as defined by the existing Law on Capital Markets and Organized Commodity Markets.

The Law "On Virtual Assets" explicitly distinguishes between:

1. Virtual Assets: A general category of intangible property represented in digital form, which can be stored, managed, and transferred using distributed ledger technology or similar.
2. Virtual Assets that are Securities: These are virtual assets that, by their economic substance and the rights they grant, meet the definition of any type of security as per the capital markets legislation.

Therefore, the "test" involves analyzing the characteristics of a token against the established legal definitions of securities in Ukraine. This typically involves assessing:

• The nature of the rights conferred by the token: Does it represent ownership (e.g., shares), debt (e.g., bonds), a right to a share of profits, a right to receive payments, or participation in a collective investment scheme?
• The economic purpose of the token: Is it issued primarily for investment purposes with an expectation of profit from the efforts of others, rather than solely for utility within a specific network or access to a product/service?
• Transferability: Is it intended to be freely transferable and traded on secondary markets?

If a virtual asset exhibits characteristics that align with any of the categories of securities (e.g., shares, bonds, derivatives, investment certificates, units in collective investment schemes, etc.) as defined in the Law on Capital Markets, then it will be classified as a "virtual asset that is a security" and fall under NCSSM's jurisdiction.

Which Tokens Are Considered Securities

Based on the above, the following types of tokens are generally considered "virtual assets that are securities":

• Security Tokens: Tokens that represent traditional securities like:
  • Shares: Representing equity ownership in a company.
  • Bonds: Representing debt obligations.
  • Units in Collective Investment Schemes: Tokens representing participation in funds.
  • Derivatives: Tokens whose value is derived from an underlying asset, index, or rate.
• Investment Tokens: Tokens that grant rights similar to traditional investment instruments, even if not directly mirroring shares or bonds. This includes tokens that provide:
  • A right to a share of future profits or revenues from an enterprise.
  • Voting rights or governance rights in a centralized entity.
  • A claim on assets or future cash flows of a project.
  • An expectation of profit solely from the efforts of the issuer or third parties.

Tokens generally NOT considered securities (unless they acquire security-like features):

• Utility Tokens: If their sole purpose is to provide access to a specific product or service within a network, without any expectation of profit from investment.
• Stablecoins: Under the Law "On Virtual Assets," stablecoins (which aim to maintain a stable value relative to a fiat currency or other asset) are regulated by the National Bank of Ukraine (NBU), rather than NCSSM as securities, provided they meet specific criteria.
• Payment Tokens / E-money Tokens: These are also regulated by the NBU under separate legislation.

Registration/Exemption Requirements for Token Issuers

If a virtual asset is classified as a "virtual asset that is a security," its issuance, offering, and trading are subject to the same strict regulations as traditional securities under the Law on Capital Markets and Organized Commodity Markets.

• Registration: Issuers of virtual assets that are securities must:
  • Register with the NCSSM.
  • Prepare and publish a prospectus (or an equivalent disclosure document) in accordance with capital markets law. This prospectus must provide comprehensive information about the issuer, the token, the underlying project, risks, and financial details.
  • Comply with ongoing disclosure obligations.
• No Specific Crypto Exemptions: Unlike some jurisdictions with specific token exemptions (e.g., for small offerings), if a token is determined to be a security in Ukraine, it must adhere to the full regulatory burden of securities law. Exemptions would only apply if they exist for traditional securities under specific conditions (e.g., private placements to qualified investors, small offerings below a certain threshold), which would then be extended to security tokens.

Issuers of other virtual assets (i.e., those not classified as securities) are subject to different requirements under the Law "On Virtual Assets," primarily related to AML/CFT compliance and potential licensing requirements for Virtual Asset Service Providers (VASPs).

Secondary Trading Rules

• For Virtual Assets that are Securities:
  • Secondary trading must occur on regulated stock exchanges or other organized trading systems authorized and supervised by the NCSSM.
  • These platforms must comply with all capital markets rules regarding transparency, market integrity, investor protection, pre- and post-trade disclosure, clearing, and settlement.
  • Trading participants (brokers, dealers) must also be licensed by the NCSSM.
• For Other Virtual Assets (non-securities):
  • Trading can occur on platforms operated by Virtual Asset Service Providers (VASPs) that are licensed by the Ministry of Digital Transformation (MDT).
  • These VASPs are subject to the Law "On Virtual Assets," including robust AML/CFT measures, operational requirements, and client protection rules, but not the specific trading rules for securities.

Enforcement Examples

As the Law "On Virtual Assets" only fully entered into force in April 2024, specific, publicly documented enforcement actions directly related to the classification of cryptocurrency tokens as securities under this new framework are still nascent.

However, the NCSSM, as the securities regulator, has a mandate to:

• Monitor the market: Identify offerings of virtual assets that resemble securities.
• Issue warnings: To entities engaging in unregistered offerings of what it deems security tokens.
• Take administrative actions: Such as imposing fines, ordering the cessation of activities, or referring cases for criminal investigation if violations of securities law are found (e.g., offering security tokens without a prospectus or proper registration).
• Cooperate with law enforcement: In cases of fraud or other serious violations involving virtual assets deemed securities.

While specific crypto-security enforcement cases are yet to become widely public, the NCSSM's established powers and experience in regulating traditional securities mean that similar enforcement mechanisms will be applied to virtual assets once classified as securities. Any entity issuing tokens that represent an investment contract or traditional security without following the capital markets law will be in violation.

Specific Legislation and Regulatory Guidance URLs

It's important to note that official government websites for Ukrainian legislation are primarily in Ukrainian. English translations may be unofficial or not immediately available.

1. Law of Ukraine "On Virtual Assets" (No. 2074-IX, dated February 17, 2022):

   • Official Text (Ukrainian): https://zakon.rada.gov.ua/laws/show/2074-20

2. Law of Ukraine "On Capital Markets and Organized Commodity Markets" (No. 3480-IV, dated February 23, 2006): This is the core securities law.

   • Official Text (Ukrainian): https://zakon.rada.gov.ua/laws/show/3480-15

3. National Commission on Securities and Stock Market (NCSSM) Website: This is where future regulatory guidance, decisions, and enforcement notices regarding security tokens would be published.

   • Website (Ukrainian/English sections): https://www.nssmc.gov.ua/

4. Ministry of Digital Transformation Website: Responsible for overall virtual asset policy and licensing of VASPs for non-security virtual assets.

   • Website (Ukrainian/English sections): https://thedigital.gov.ua/

5. National Bank of Ukraine (NBU) Website: Responsible for stablecoins and e-money tokens.

   • Website (Ukrainian/English sections): https://bank.gov.ua/

It is crucial for any project considering issuing tokens in Ukraine to obtain independent legal advice from local experts familiar with Ukrainian capital markets and virtual asset laws, as the regulatory landscape can be complex and evolving.