Cryptocurrency in Ukraine: Exploring Schrödinger's Cat
The Law "On Virtual Assets" was signed by the President of Ukraine on February 17, 2022. However, it is not yet in effect and will only come into force after the publication of a dozen regulatory acts and amendments to the Tax Code.
Currently, regulators are still trying to determine the interpretation of certain cryptocurrency terms. Therefore, it's hard to say whether cryptocurrency is considered a legal object of civil rights in Ukraine.
Let's not get into the details of who benefits from postponing this issue since the present situation is beyond our control.
Instead, let's focus on how regular crypto enthusiasts can handle the legal ambiguity of the situation in Ukraine, where the legal status of cryptocurrency is akin to that of Schrödinger's cat – it exists and doesn't exist at the same time.
How to use digital money without violating the Law-That-Does-Not-Exist? How to avoid getting in trouble with the tax authorities or cyber police? Despite the lack of clear regulations, it's important to be aware of the potential risks involved, especially for small traders.
There are a lot of practical questions:
- How do you divide cryptocurrency in a divorce settlement?
- Can you leave Bitcoin in an inheritance?
- Who can protect the interests of a cryptocurrency owner in the “world's most honest” Ukrainian court?
- Where can you find a crypto notary?
We all know a simple truth: who holds the keys, holds Bitcoin. But what if the owner of the keys changes for some reason? And this happens often since Ukraine is one of the top five countries with the highest adoption of cryptocurrency.
Cryptocurrency & divorce
One out of every fifteen people in Ukraine holds or trades crypto. One out of every twenty-five collects tokens through airdrops, faucets, or receives their salary in a "digital envelope". So it would be surprising if among all the couples who decided to divorce, not a single one owned any cryptocurrency.
There have already been cases in Ukrainian civil courts regarding the division of jointly acquired property in the form of digital money. But practically all decisions in these cases regarding crypto are unenforceable due to the anonymity of ownership. The court must accurately establish the fact of the existence of property in the form of virtual assets. When the parties' interests are opposed, this is almost impossible to do. Civil courts do not have the tools for this that criminal courts have (searches, seizures, wiretapping).
In simpler terms, if a husband refuses to provide the court with the address of his crypto wallet, on which, according to the wife's statement, the cryptocurrency is stored, the court will not accept a claim for its division.
So basically, it's like in the proverb: a man cannot give what he hasn't got. So what do you do in this case?
We can only offer one piece of advice: guys, figure it out on your own in this case. There are no options other than a voluntary agreement between the parties.
We suggest trading together but on different accounts, so that it doesn't come to a divorce. Because you can pump your nervous system so much on a bear market that you won't want to deal with everyday problems or rivals.
The exception to the rule is deputies who have declared their crypto assets. In this situation, you can't avoid dividing them up – everything is documented.
Crypto inheritance
As they say, memento mori... Leaving behind apartments, cars, and country houses as inheritance is easy – they are all recorded in state registers and ownership rights are documented. Even with bank accounts, inheritance rights can be proven. But what about cryptocurrency?
Let's consider this issue from the perspective of someone who wants to inherit cryptocurrency. If a deceased uncle traded bitcoins on a cryptocurrency exchange, then there are several options for grieving nieces and nephews.
Option 1. A legal solution.
The rules for inheriting accounts on a cryptocurrency exchange are established by its owner. This could be a traditional transfer through a will or a special instruction to the exchange regarding actions to be taken in case of the account owner's death.
Theoretically, as it is prescribed on some European cryptocurrency platforms, the heir must pass five stages of confirmation of their right to the assets, including:
- Completing the KYC verification and registering on the exchange.
- Providing the exchange's legal team with a death certificate for the account holder and documents proving their family relationship.
- Presenting a copy of the document (passport or ID) that the deceased cryptocurrency owner used for KYC.
- Providing the email and phone number that were registered to the deceased's account.
- Providing a copy of the will (if any).
After submitting all the necessary documents, the lawyers of the exchange platform will review them and make a decision. However, if any of the documents are missing or incorrect, the inheritor's request may be denied. It's also important to note that all the documents must be translated into English and certified by a notary.
All these rules should, in theory, be included in the user agreement. But let's be honest, has anyone actually seen them?
Option 2. A technology-based solution.
For instance, a system of deferred transfers from one address to another could work. This would be possible if a person left instructions with the exchange that, if their account remained inactive for a specified period of time, any remaining funds should be transferred to a designated address.
However, that’s just a theory, and there are currently no known instances of it being successfully implemented in practice.
Option 3. ERC-4337
After the Ethereum upgrade on March 1, 2023, the concept of an abstract account was introduced. It allows users to designate friends, lawyers, or heirs who can "revive" access to a wallet or address if the owner loses their private keys or something happens to them.
According to developers, the ERC-4337 standard can be integrated into any L2 that uses the Ethereum Virtual Machine, such as BNB Smart Chain, Optimism, Arbitrum, Polygon, and Avalanche.
What about hardware wallets?
It is impossible to hack a cold storage wallet. If heirs find a Ledger Stax in the deceased's personal belongings, their only option is to hang it as a keychain on their keyring as a memory of their relative who did not come up with a way to pass on the seed phrase.
Therefore, this section of the article is dedicated to those who are considering how to safely leave the key to a crypto safe for their loved ones.
There are some less obvious options:
1. Getting a tattoo on your body, preferably in a place that few people see. But it's hard to imagine a place that would be hidden from a morgue worker. What if they too turn out to be a crypto enthusiast and understand what's going on? In that case, your heirs will have to share the money with the pathologist-trader. The chance is minimal, but it cannot be ruled out.
2. Include the seed phrase in a will. But what if the notary turns out to be a crypto enthusiast? After all, according to statistics (see above), one in ten people in Ukraine knows what a cold wallet is. Of course, you can still have faith in the professional integrity of all notaries. But we think that people who trust assets to a hardware wallet rather than a crypto exchange have seen a lot in life and don't blindly trust anyone.
3. Hide a piece of paper with the private key in a bank safe deposit box. In our opinion, this is the safest option. The only risk is that your heirs may not be able to put two and two together and understand how the strange flash drive on the late uncle's desk is related to the piece of paper with a set of incomprehensible words and numbers in the steel box.
But that will be a shortcoming of whoever didn't explain to their relatives what "to the moon" is and how they intended to earn enough for a Lamborghini.
What about taxes?
Regarding taxes, it's pretty straightforward:
- The Personal Income Tax (PIT) rate varies between 0 to 18% depending on the category of the heir.
- There's a military tax of 1.5%.
The only issue is determining the value of the inherited cryptocurrency, given its high volatility. It's unclear when the price should be taken into account: at the time of writing the will, at the time of death, or at the time of tax payment
Unfortunately, there's no established practice in Ukraine yet, but it's likely that tax authorities will calculate taxes based on the maximum values.
The government holds cryptocurrency, and there are inheritance taxes on digital assets (similar to a regular property), but crypto owners still do not have legal rights.
If you manage to go through the entire process of inheriting cryptocurrency, you could write a practical guide. We’d be happy to publish it on our website.
