The world, including European and our other partner countries, is actively digitizing. The instrumental possibilities of digitalization level the borders for a truly unimpeded movement of capital. So it is certainly interesting to see how countries are digitally converging and whether Ukraine is keeping up with this trend.
Emergent financial environment
The Global Digital Compact (GDC) was adopted by the United Nations on September 22, 2024, as part of the “Pact for the Future” at the Summit of the Future. The main messages of the GDC are international regulation of artificial intelligence, digital divide and cybersecurity. The standard message that “technology should benefit everyone” is supplemented by the commitment of governments to form a “global AI science panel and launch an international discussion on AI governance within the UN.”
Digitalization determines the changes in modern human existence. It is both a prerequisite and a consequence of information technology transformations. Society, people and the economy are changing. The introduction of digital technologies has become a widespread phenomenon. It is no longer an option, but a necessity. Digital inclusion is expanding and deepening. Financial literacy is increasingly understood as digital literacy.
The financial sector uses and constantly develops digital technologies. The technological online services of banks and other institutions demonstrate the level of penetration of digital technologies in finance. Money circulation is regularly replenished with various financial instruments: fiat money and its substitutes.
To estimate the speed of change, let's recall that the new financial picture of the world emerged not so long ago (in 2016 or so) with the emergence of decentralized finance (DeFi) markets, including cryptocurrencies such as BTC and others. Although they still remain purely private initiatives, crypto markets have quickly become the monetary focus of global financial digitalization. And now, investment and payment transactions with cryptocurrencies have become an independent financial services sector and include peer2peer, B2B, B2C deals, etc.
However, the flip side of the personal freedom granted by the crypto world is the risk of financial speculation. Money circulation has become fragmented, impulsive and uncontrollable. The risks of its destabilization, as well as financial systems in general, are growing faster and faster. Electronic private cryptocurrency wallets have already devalued certain tenets of macroeconomics, in particular, that wealth is created by labor.
The world's central banks, as the only money issuance centers, are concerned about the new format/structure of money circulation. Unsound liquidity and the volume of crypto markets have become a newly emerging problem in terms of both assessment and regulation. International financial organizations (IMF, WB, ECB), for their part, have expressed more than reserved positions on the legalization of crypto assets.
The need to modernize money circulation has raised the issue of preparing issues of digital national currencies (Central Bank Digital Currency, CBDC), a new form of sovereign digital money (CeFi). Pilot CBDC launch projects are being tested/implemented in many central banks, including Ukraine.
In fact, the CeFi and DeFi sectors are shaping the new architecture of monetary circulation in the near future.
Development of CeFi and DeFi segments in Ukraine. Institutional framework
In Ukraine, as would be expected, the National Bank (NBU) is the main provider of changes and institutional strengthening. A brief institutional history related to the digitalization of the domestic financial sector is as follows.
CeFi sector. The status of the central bank's digital currency, the e-hryvnia, is defined in the Law on Payment Services (Article 1, paragraph 96). A pilot project to launch the e-hryvnia in Ukraine was carried out in 2016–2018. The project results, conclusions and predictions are published in an analytical note on the NBU website.
The NBU Council (2020) assessed the prospects for improving the payment system and expressed reservations about the launch of the e-hryvnia.
However, the e-hryvnia project was extended until 2021. Subsequently, the question arose of the NBU's elaboration of three possible options for using the e-hryvnia. And at the end of 2022, the NBU presented a draft concept of the e-hryvnia to participants in the payment services and virtual asset markets.
In the NBU's new strategy Financial Fortress (2023), the group of tasks of the goal Modern Financial Services emphasizes the need for further digitalization of financial services, introduction of new technologies, spread of cashless payments and strengthening of cybersecurity. The importance of the following initiatives was emphasized:
- “financial market — digital fortress”;
- Power banking 2.0;
- restoration of infrastructure in the de-occupied territories;
- technological development of the financial market;
- sustainability, efficiency and customer focus of cash circulation;
- virtual assets and digital money of the NBU;
- clear regulation to ensure monetary sovereignty;
- digital financial services as part of a digital country.
The Ministry of Digital Transformation of Ukraine, together with the crypto community, presented the Virtual Assets project with reference to the foresight study Virtual Assets in Ukraine-2030.
DeFi sector. According to unofficial estimates, Ukraine ranks among the top five global crypto markets in terms of the activity of crypto traders and crypto wallet holders, outperforming the EU countries in this area.
That is why the DeFi sector in Ukraine is an integral part of the money circulation. But as a “wild area”, it is not yet regulated.
Europe and Ukraine: regulation of virtual assets
In April 2023, the European Parliament made a historic decision for the crypto asset market by approving new general rules for supervision and consumer protection of cryptocurrencies: Markets in Crypto assets (MiCA).
At the beginning of this document, it is stated that it “is part of a digital finance package” that includes:
- a new digital finance strategy for the EU financial sector;
- a proposal for a pilot market infrastructure regime for distributed ledger technology (DLT);
- a proposal for digital operational resilience;
- a proposal to clarify or amend certain related EU financial services rules.
The purpose of adopting the MiCA is to “ensure that the EU embraces the digital revolution and implements it with innovative European companies, making the benefits of digital finance available to European consumers and businesses.”
Further, the main provisions determine that the MiCA Regulation will be directly applicable to issuers of virtual assets, as well as to virtual asset service providers seeking to enter the EU market. The MiCA will also cover market abuse related to any type of transaction or service, including market manipulation and insider trading.
In Ukraine, the term “virtual assets” has been used recently and is defined by law as “a digital representation of value that can be traded digitally or transferred and can be used for payment or investment purposes.”
In other words, electronic money is defined as a type of asset. Subsequently, the draft law “On Virtual Assets” confirmed their understanding as an intangible good with a corresponding value and a set of data in electronic form. The inclusion in these definitions of the digital expression of value and the possibility of circulation in digital format for payment and investment purposes allows us to understand crypto assets as part of virtual assets.
In 2023, the Verkhovna Rada registered a new draft law No. 10225-1 on the circulation of virtual assets, which aims to improve the investment attractiveness of the state, create favorable conditions for the development of crypto markets and increase budget revenues through tax regulation of transactions with crypto assets.
This draft law contains additional innovations, including the following:
- defining the legal status of virtual assets;
- classification of digital assets and services in the field, which are adapted to the European standards for the regulation of cryptoassets (MiCA)
- adaptation of FATF recommendations on financial monitoring of the cryptoasset market;
- changes in tax conditions for businesses operating in the field of virtual assets (the tax rate for individuals will be: 5% for the first three years; 9% for the next five years; 18% after eight years).
Albeit gradually, Ukraine is also moving in the mainstream of global financial digitalization.
Expectations for the unification of virtual asset markets in the EU and Ukraine
The digital Bretton Woods, an analog of the revolutionary changes in the global financial system 80 years ago, is quite real. The international financial and payment systems will be rebuilt. They are already being rebuilt.
Digital assets — CBDCs (after testing) and private cryptocurrencies (after official legalization) — will become the predominant form of payment and reserve.
Private cryptocurrency markets will continue to be a financial trend in digitalization. However, their excessive speculative nature cannot remain uncontrollably self-reproducing. This is because money circulation, all its instruments and assets, must serve macroeconomic goals.
Thus, the digital financial present and future is both a strategic beacon and a set of tactical tasks. In fact, it is a constant choice of priorities and goals of civilization. It is a psychological, technological, investment and financial choice.
In fact, the difference in the means (tools) of labor and life distinguishes today's generations from their predecessors and shapes future social and economic relations. That is why not only the strategic goal of digitalization but also the tactical steps to achieve it are of such importance.
The new world and worldview will become mostly digital very soon. And digital inclusion will connect participants in different markets.
What lies ahead is conscious behavioral and financial digital freedom and “digitized” responsibility.