About the launch of the virtual assets market, MiCA and new financial instruments in Ukraine: an interview with Ruslan Magomedov, the Сhairman.

«When Ukraine wins, large amounts of investment will come here. We have to prepare for this», says Ruslan Magomedov, Сhairman. How exactly is the NSSMC preparing for the influx of investors after the victory? When will the market of virtual assets in Ukraine become operational? But is the capital market really a mirror of the country’s economy? Read about this and other things in the FinTech Insider interview.

• The stock market is the heart of the economy, as we can see on the example of the USA. When, in your opinion, will the full launch of the stock market in Ukraine, which will accumulate public funds, take place?

We understand that when Ukraine wins, large amounts of investment will come here. Some of them will be direct investments, the other part will go through banking mechanisms, but we cannot do without the capital market. After all, many Western investors are not only used to this market, it is a familiar tool for them. And in order for it to be interesting and as convenient as possible, we have to prepare for this moment, using the present time for this.

But everyone should understand that the capital market is a mirror of the country’s economy, it cannot exist separately, so we expect the simultaneous recovery of the economy and the development of the market. The most important thing is that various liquid instruments appear on the market. Then the capital market will fulfill its main role – the redistribution of capital in the economy. Then both the funds of the population and the funds of pension funds and other investors can and will accumulate on the capital market.

• Before the full-scale war in Ukraine, investments in the American stock market through fintech applications began to gain popularity. How do you rate this trend?

There really was such a trend. To be more precise, it is the request of investors for capital market instruments. Frankly speaking, this is not a very good sign for the country, as there is an outflow of capital. But not always (depending on the work model of Ukrainian brokers). For example, when foreign securities were issued in Ukraine, the shares were traded in the country, and settlements were made in hryvnias within the Ukrainian capital market.

Returning to the question, the main thing that I saw in this process is the emergence of a class of investors in securities. The birth of investment culture is education and popularization of the market. Due to this, a layer of the population of investors is created, who will also invest in domestic securities in the future, creating liquidity in the market of Ukraine.

• In continuation of the previous question: there is an opinion that only qualified investors can have access to the stock market. Isn’t this a limitation of rights? How will it be organized in Ukraine when, after all, the stock market is fully operational?

No. This is not about restricting rights, but on the contrary, about protecting investors. The question needs a broad answer, but I will try to answer in a few sentences.
This model has been working around the world for many years, and we introduced it not so long ago. With the adoption of a law that already has a clear interpretation (Law of Ukraine on Capital Markets, Article 6).

Everyone should understand that capital market instruments have different risk and different liquidity, on the one hand. On the other hand, there are different investors who have different market experience and different fortunes. Therefore, the system is built so that qualified investors, having experience and not recent fortunes, could enter riskier instruments, being aware of all possible risks. And vice versa with the unqualified, to whom more attention is paid in the requirements for the broker’s work with such.

• In Europe, crowd-investment platforms for financing SMEs are becoming popular. And Ukraine does not even have a law on crowdfunding. Does the NSSMC not plan to undertake the mission of creating this foundation?

Yes, this is a very interesting segment. And for the implementation of European implementation, the NSSMC, together with the NBU, will develop a bill based on the European directive.

• The market of cryptocurrencies and virtual assets is a very dynamic segment. There is a hypothesis that when the regulatory rules in Ukraine are fully operational, we can claim the lion’s share of the market in Europe. The law was adopted last year, but now it needs to be synchronized with European legislation (MiCA). What do you think, when will full-fledged regulation work and can Ukraine really become a leader in Europe?

Ukraine is already the leader of this industry in the world. For example, we ranked third out of 146 countries in the Global Crypto Asset Usage Index. This is evidenced by the research data of the analytical blockchain company Chainalysis.

Law 3637, which was passed last year, did not go into effect because the necessary changes had to be made to the Tax and Civil Codes that would trigger the law.
Currently, the NSSMC, together with international colleagues, is developing amendments to the main law, namely the implementation of the norms of the MiCA regulation. We have already developed several main articles, as well as the concept of taxation of the virtual asset market. Our findings are presented for public discussion for market participants, public sector stakeholders and all interested structures. For this purpose, we have created a platform – the Advisory Board.

As for the terms, it is difficult to say here. We hope that our amendments to the law will soon be introduced in the Verkhovna Rada of Ukraine. At the same time, amendments will be made to the Tax Code and the Civil Code.

• By the way, how do you rate MiCA? The EU is not the first jurisdiction to issue regulations regulating the crypto market. How is this law different?

We have chosen the path of European integration, like all of Ukraine. Therefore, we are working on the implementation of the MiCA regulation. The document was developed by the most influential specialists of global importance, who gathered the best expertise and practice of the virtual assets market that existed throughout Europe. There is already an absorption of errors and corrections, which are put on paper by EU experts. As a future member of the EU, we also take all these aspects into account.

• How do you evaluate joint work with the National Bank in the framework of the implementation of the law? Who will be responsible for monitoring? After all, in fact, it overlaps with classic financial services.

The legislation clearly stipulates that the state regulation of the virtual assets market is carried out by the state in the form of the NSSMC and the NBU. We are talking about comprehensive measures to organize, control, and supervise the virtual assets market, regulate the rules of operation of service providers related to the turnover of virtual assets, as well as measures to prevent and counter abuse and violations in the virtual assets market.

Together with our colleagues from the NBU, we are working fruitfully at all stages of developing amendments to the relevant law. We receive quality expertise and consultations from them.
If we talk about the areas of responsibility of the regulators, then first of all, we must get a definition of the concept of virtual assets and the scope of its application in the legislative plane.

However, in MiCA there is a clear division of powers of the regulators. First of all, this is the regulation of Electronic money tokens (EMTs), which will be fully supervised by the NBU.

• The TOP news last year was the collapse of FTX, which caused several more bankruptcies in the market. Should we expect a further domino effect? How can users protect themselves from the bankruptcy of crypto exchanges and other market players?

The FTX case is directly related to licensing requirements. This showed everyone that there were affiliated parties and the capital requirements were not met.

So we aim to prescribe the rules for most of the work processes in the virtual asset market. In this way, we will bring out of the gray zone what is there now. First, it is business development. When there are clear rules and an understanding of how to build a business, it becomes attractive for investment. Secondly, it is the payment of taxes.

• Is the NSSMC interested in the arrival of international players, in particular crypto exchanges, to the Ukrainian market and how do you plan to protect end users?

We are already seeing interest from exchanges that want to build their work in Ukraine, taking into account our potential. There are also many interested parties who will build various business models in their commercial interests.

In order to provide the entire necessary set of services to the end user, there must be several licenses that the exchange must obtain. MiCA has understanding and requirements for all types of licenses and licensees. We are talking about 10 services:

• storage and administration of virtual assets on behalf of third parties;
• functioning of the trading platform for virtual assets;
• exchange of virtual assets for cash;
• exchange of virtual assets for other virtual assets;
• fulfillment of orders for virtual assets on behalf of third parties;
• placement of virtual assets;
• providing services for the transfer of virtual assets on behalf of third parties;
• receiving and transferring orders for virtual assets on behalf of third parties;
• providing advice on virtual assets;
• activities for managing a portfolio of virtual assets.

However, now we are talking about regulating activities on the territory of Ukraine, where everything will be as licensed and understandable as possible. But this does not mean that such legalization is the maximum protection. We should all understand that virtual assets carry increased risk in terms of investments or transactions related to them.

• In continuation of the previous question. How, protecting users, prevent market regulation and maintain a balance between innovation and regulation? Do you plan to focus on the experience of a specific country in this matter?

As I have already mentioned, taking into account the European integration process in Ukraine, we are actively working on the development of a specific law and implementing the MiCA regulation in order to comply with the best European practices. This is our reference point and we are moving in this direction.

• What will the NSSMC work on in the coming months?

In addition to the launch of the virtual asset market, the NSSMC has a number of projects and reforms that it started last year and will continue in 2023. It:

Securitization

The NSSMC has launched a new direction and it is a fairly well-coordinated funding mechanism. We believe that mortgages are what will help rebuild our country. That is why we are working on such a financial instrument as securitization, so that the mortgage will work exactly as in all developed countries. For banks, this will be another effective additional tool, not only domestic government bonds market and local loan bonds, but also mortgage securities.

Preparations for the launch of this direction began a long time ago, but just now, during the war, the demand for such a mechanism increased. The NSSMC is actively working in this direction, for this, legislative initiatives and restructuring of rating agency institutes are necessary. And speaking of new buildings (primary market), it is necessary to develop transparent financial work of the developers themselves, and we are working on this. We collect the necessary expertise from market specialists and work with specialized bodies.
We recently approved and published the Concept for the introduction of the legal framework for covered bonds and securitization in Ukraine.

Investment accounts

The practice of citizens accumulating savings on personal accounts is widespread in Western countries, in particular, the USA, Canada, Britain, the EU, etc. Ukraine also has all the possibilities for launching such a financial instrument.

We are actively working in this direction as well.It is about the fact that Ukrainians will have the opportunity to open a personal account – medium-term (up to 3 years) or long-term (up to 7 years) to invest their own savings.

The key feature of such a financial instrument is tax advantages. Subject to compliance with all requirements for the functioning of such an account (validity period, not exceeding the deposit amount limit, withdrawal no earlier than the established period), the citizen is exempt from taxation of the profit received from operations on these accounts.

For our economy, this is also additional funds from citizens. After all, funds on individual accounts will actively work, investing through intermediaries in reliable instruments of the capital market. At the first stage, these can be: municipal, corporate bonds, shares traded on the stock exchange, bank certificates of deposit, open investment funds.

At the beginning of October 2022, draft law No. 8111 was registered in the Verkhovna Rada, which is designed to introduce personal investment accounts in Ukraine. We generally support the proposed text of the document, but on the condition that its individual norms are refined.

Pension reform

We are one of the key stakeholders of the pension reform. And its effective implementation is important for us, because it is the key to activating the capital market. The role of the NSSMC is important, because our task is to develop the infrastructure and supervision of the financial component, which includes the accumulation and proper storage of citizens’ money. If we speak in more detail, it is the establishment of requirements for market providers, the composition of assets, and the information disclosure system.

We believe that not only the adoption of the relevant law (2683), but also the practical implementation of its provisions is important. It is about building a proper system capable of timely responding to possible potential risks in advance. It takes a certain amount of time to build such a system, and it must be operational before the first deposit is paid.

The NSSMC actively works as part of working groups in its area of responsibility, joins all processes of introducing this reform together with other stakeholders.

If we talk about the terms, then the executors should take full responsibility for the process of proper planning and determining the optimal terms of deployment of this system. The period of martial law can be used to establish the necessary regulatory framework so that after victory the system can be built up and implemented without undue delay. However, all important stages of system deployment must be understood.

Reform of the NSSMC itself. Law 5865

There is a lot of criticism and debate surrounding this law. Our position is simple: the law is conceptually correct and necessary if we want to work according to European rules and IOSCO principles. However, we understand that there is a war in the country, the economic situation is difficult, and the requirements laid down in the law are too high to implement right now.
We are in favor of the adoption of this law, but with some postponements of the articles of the law, subject to the occurrence of three options. Which of these will be the first in time:

• 2029,
• Membership in the EU,
• achievement of the economy of Ukraine of 300 billion US dollars.

However, our clear position is that the implementation of the IOSCO principles requires reform of the regulator itself. We believe that some articles of the law should be implemented as a matter of priority – these are financial independence and the absence of public service. These two points are interrelated. This is about salaries, employment flexibility, the structure of the body itself, automation and digitization of all processes. In two or three years, we will be able to carry out an internal reform of the regulator itself. And the most important thing is the cancellation of the adjustment of regulatory legal acts so that the regulator can quickly respond to all the needs of the development and development of the market.

Source: Fintech Insider