Let us introduce you to the second edition of The International Comparative Legal Guide which is dedicated to the Fintech topic and contains an overview of common issues in fintech laws and regulations in 44 jurisdictions.
Overview of the Ukrainian chapter is written by Sergii Papernyk, Head of Banking & Finance and FinTech, who provided corporate counsel and international practitioners with a comprehensive overview of artificial intelligence in fintech, the regulation of cryptocurrency as a type of financial technology, and fintech and private equity.
1. The Fintech Landscape
Please describe the types of fintech businesses that are active in your jurisdiction and any notable fintech innovation trends of the past year within particular sub-sectors (e.g. payments, asset management, peer-to-peer lending or investment, insurance and blockchain applications).
In Ukraine, Fintech is beginning to take off with more than 60 firms at different stages of maturity. Along with the financial crisis of 2008-9, the first players among the Fintech startups started to appear in Ukraine. For the most part, these early Fintech initiatives focused on the area of payments and money transfers. However, the majority of Fintechs (58%) have been launched since 2015.
According to the result of survey among Fintech companies, the “Hot Topics” for 2018 are: digital banking, automation, biometric identification, Machine Learning, AI, forecasting and modeling, smart contracts, Chatbots, blockchain, Big Data, digitization of all registries, ICO, IT security, cybersecurity and payment security.
Among the notable innovation trends in 2017 can be named the launch of the first digital bank in Ukraine – Monobank, which provides payment services, microlending and deposits for individuals via mobile application.
Are there any types of fintech business that are at present prohibited or restricted in your jurisdiction (for example cryptocurrency-based businesses)?
There are no legislative prohibitions on providing any popular Fintech activities. However, according to the law of Ukraine, such activities as an emission of payment cards, opening an account and emission of “electronic money” can be realized by banks only.
2. Funding For Fintech
Broadly, what types of funding are available for new and growing businesses in your jurisdiction (covering both equity and debt)?
In Ukraine, the most convenient types of funding of Fintech startups are private equity investment and banks or investors loans. The stock exchange marketplace is poorly developed.
Are there any special incentive schemes for investment in tech/fintech businesses, or in small/medium-sized businesses more generally, in your jurisdiction, e.g. tax incentive schemes for enterprise investment or venture capital investment?
There are no special tax incentives for investment in tech/Fintech business in Ukraine. Nevertheless, Ukraine is highly attractive for investment due to the simplified tax regime, with the profit tax rate in the amount of 5% per year. In this case, as well the entrepreneur is no Value Added Tax payer.
In brief, what conditions need to be satisfied for a business to IPO in your jurisdiction?
Currently, the law provides for the requirements to IPO as to the company’s equity amount (min. UAH 400,000,000), net income from sales (min. UAH 400,000,000), free float of shares (min. 10%), number of shareholders (min.200), corporate governance structure, mandatory financial audit etc. Please note, that the given requirements are about to be changed due to the ongoing legal reforms.
Have there been any notable exits (sale of business or IPO) by the founders of fintech businesses in your jurisdiction?
3. Fintech Regulation
Please briefly describe the regulatory framework(s) for fintech businesses operating in your jurisdiction, and the type of fintech activities that are regulated.
The main regulatory acts in the sphere of regulation of Fintech are the Civil Code of Ukraine, the Law of Ukraine “On Payment Systems and Money Transfer”, the Regulation on Electronic Money in Ukraine, approved by the National Bank of Ukraine (NBU) in Resolution No. 481 of 04.11.2010, Regulations on the Procedure for Registration of Payment Systems, participants of payment systems and operators of payment infrastructure services (NBU Resolution No. 43 of 04.02.2014).
The legal and regulatory environment to support Fintech and other start-ups is improving. The most important changes introduced recently by the Ukrainian legislation are: authorization to sign an invoice and/or contract with an electronic signature; Ukrainian IT companies can use the simplified taxation; the liberalization on repatriation of dividends (to USD 5,000,000 per legal entity per year); active advocating for the adoption of EU directives, in particular PSD2; the recent approval of the law on electronic identification and trust services for electronic transactions in the internal market (“Electronic Trust Services Law”).
Every company which is going to render financial services must receive the special license from the National Financial Services Commission. For services with foreign currency as well the company will be required to obtain the license from NBU.
Only banks can emit payment cards, “electronic money” and open accounts. There is a proper regulation concerning electronic signature and it can be used in financial services. The legal possibility to use such identification as Bank ID and Mobile ID is expected to be adopted soon. As well, the new Law on payment systems with regulation close to PSD2 is awaited up to the end of 2018.
The usage of cryptocurrencies is not prohibited, however, is not regulated by any legal act. According to the mutual letter issued by the NBU and the National Financial Services Commission on 30.11.2017, cryptocurrencies cannot be considered as money, currency, electronic money and securities.
Are financial regulators and policy-makers in your jurisdiction receptive to fintech innovation and technology-driven new entrants to regulated financial services markets, and if so how is this manifested?
Fintech development was actively supported through recent initiatives undertaken by the National Bank of Ukraine in 2017. The NBU approved the Comprehensive Program of the Ukrainian Financial Sector Development (Resolution No. 391 dated 18 June 2017) which includes such initiatives as a Cashless 2020 Strategy, a possibility to use the Bank ID system for remote identification, new rules to facilitate the licensing of payment service providers.
What, if any, regulatory hurdles must fintech businesses (or financial services businesses offering fintech products and services) which are established outside your jurisdiction overcome in order to access new customers in your jurisdiction?
According to Ukrainian legislation, every payment system to be used on Ukrainian market must be placed in State register of payments systems.
4. Other Regulatory Regimes / Non-Financial Regulation
Does your jurisdiction regulate the collection/use/transmission of personal data, and if yes, what is the legal basis for such regulation and how does this apply to fintech businesses operating in your jurisdiction?
The issues regarding personal data are regulated by the Law of Ukraine “On personal data protection”.
The Law requires the database owner to obtain consent of the individual for the processing of his or her personal data, including collection, use and distribution of such personal data. The personal data can not be distributed without data’s owner.
The authority responsible for personal data control is Ukrainian Parliament Commissioner for Human Rights. The owner of personal data informs the Commissioner about the processing of personal data, which constitutes a special risk for the rights and freedoms of the subjects of personal data.
Do your data privacy laws apply to organisations established outside of your jurisdiction? Do your data privacy laws restrict international transfers of data?
According to the Law, the transfer of personal data to foreign subjects of relations related to personal data is carried out only if the appropriate state provides adequate protection of personal data. The member states of the European Economic Area, as well as the States which have signed the Convention for the Protection of Individuals with regard to Automatic Processing of Personal Data, are recognized to provide an adequate level of protection of personal data.
Please briefly describe the sanctions that apply for failing to comply with your data privacy laws.
Ukrainian legislation provides for administrative and criminal liability for violation of personal data law. Being not in compliance with the law on the protection of personal data can be considered as an administrative violation with a fine of up to UAH 17,000 (about USD 600). Illegal collecting, saving, use and spreading of personal data with no consent of the owner could be a subject of crime with the imprisonment up to 5 years.
Does your jurisdiction have cyber security laws or regulations that may apply to fintech businesses operating in your jurisdiction?
Cybersecurity in Ukraine is mostly viewed through the prism of state defense and security. Therefore, applicable legislation is mostly focused on cyber security in state sector and includes Law of Ukraine “On Data Protection in Information and Telecommunication Systems”, Law of Ukraine “On Information”, Law of Ukraine “On State Secrets”, Law of Ukraine “On National Security of Ukraine”, Law of Ukraine “On State Service of Special Connection and Information Protection”. As for cyber security in private sector the above legislative acts establish only separate basics addressing mostly matters of state security and defense.
However, the new Law of Ukraine “On basic principles of cybersecurity” will become effective on the May 2018. The Law stipulates a special regulation for the telecommunication infrastructure and for the points crucial for cybersecurity. This legislative act entrusts the National Bank of Ukraine to be one of the state authorities responsible for cybersecurity control. Therefore, new regulative acts of NBU concerning cybersecurity in the financial sphere (and Fintech) are expected.
Please describe any AML and other financial crime requirements that may apply to fintech businesses in your jurisdiction.
The relevant AML law is the Law of Ukraine on Prevention and Counteraction to Legalisation (Laundering) of the Proceeds of Crime or Terrorist Financing”. According to the Law, the AML regulators in Ukraine are: NBU, State Committee for Financial Monitoring of Ukraine and National Securities and Stock Market Commission.
The subject of primary financial monitoring shall proceed with the classification of its clients taking into account risk criteria. Financial operations / customers are the subject to financial monitoring / due diligence if the transaction amount is more than UAH150,000 (approx. USD5,550).
The requirements for verification of customer identification information for individuals are: name, date of birth, personal identity document details, residential (registration) address and actual address, taxpayer identification number and source of funds. For legal entities: the full name, registration address, information about management and controllers of the company, shareholder structure, registration number and bank account details. Beneficial owners need to be known in all cases, but the level of requirements for identification depends on the type of transaction and risk involved.
Are there any other regulatory regimes that may apply to fintech businesses operating in your jurisdiction?
5. Accessing Talent
In broad terms, what is the legal framework around the hiring and dismissal of staff in your jurisdiction? Are there any particularly onerous requirements or restrictions that are frequently encountered by businesses?
According to the Labour Code of Ukraine, the employment relationship in Ukraine is established by an employment agreement between an employer and an employee. The employment agreement contains the terms of employment, including the title of the position, a description of the work to be performed by the employee, an obligation for the employee to observe internal labour rules, an obligation for the employer to ensure adequate working conditions, and the salary amount for performance of employment duties.
In general, most agreements are concluded for an indefinite term. Even though Ukrainian labour law enables an employer to conclude fixed-term employment agreements, these agreements should be concluded only with those employees whose work is by nature of a limited duration. It is also possible to enter into an employment agreement ‘until the completion of agreed-upon work’.
Concluding the agreement, the employer must enter the relevant record in the employee’s labour book. The probationary period cannot exceed one month for blue-collar workers or three months for other employees. Considering the complexity involved in dismissing employees under Ukrainian law, employers frequently use the probationary period as a legal and practical way to ascertain the suitability of a candidate for the position.
In Ukraine the employer is a tax agent, obliged to pay payroll taxes on behalf of his employee (18%).
Presuming the complexity involved in tax regime of employment, many companies in Ukraine use the entrepreneur contracts instead of the labour agreements. In such a case the employee acts as a private entrepreneur contracting with the company for some scope of a job. As well this framework allows using the simplified tax regime with no VAT and with the tax rate 5% of entrepreneur’s income.
What, if any, mandatory employment benefits must be provided to staff?
The length of a working week is restricted to 40 hours. The minimum salary for full time employee is UAH 3723 (approx. USD140). An employee has a right for an annual minimum 24 calendar days’ vacation. There are no any additional mandatory employment benefits provided.
What, if any, hurdles must businesses overcome to bring employees from outside your jurisdiction into your jurisdiction? Is there a special route for obtaining permission for individuals who wish to work for fintech businesses?
Non – residents have the same rights to work in Ukraine as any Ukrainian has. However, non – residents have to provide certain documentation before starting to work in Ukraine. The first one is the work permit. Because Ukraine does not belong to the EU, the work permit is mandatory for both EU and Non – EU citizens. After obtaining a work permit, the non – resident can apply for a residence permit, which is the second mandatory document required for employment.
Please briefly describe how innovations and inventions are protected in your jurisdiction.
Ukrainian law protects such kinds of intellectual property as: literature and artistic products, computer programs, data compilations (data bases), performances, phonograms, videograms, broadcastings, scientific discoveries, inventions, utility models, industrial designs, integrated circuits designs, rationalization proposals, plant breeds; animal breeds, commercial (firm) names, trademarks (signs for goods and services), geographical designations, commercial secrets. As of today, the IP law of Ukraine does not separately protect source code, however, these products can be protected as copyright.
The new Law on Intellectual property rights is expected up to the end of 2018.
Please briefly describe how ownership of IP operates in your jurisdiction.
Ukraine has ratified the core international and European treaties and convention-systems on IP right: Paris Convention, Berne Convention, WIPO Copyright treaty, Patent Cooperation Treaty, Madrid system, Hague system, TRIPs Agreement, etc. Also, Ukraine has 6 laws relating to intellectual property rights in order to protect inventions, industrial designs, trademarks, industrial equipment and author’s copyright against any fraud. There is not yet any law against transgressions or counterfeiting on trademarks.
Products and methods (processes) can be patented in Ukraine as inventions or utility models respectively. A utility model must be new and capable of being applied industrially. atents for inventions and utility models are registered by the Ministry of Economic Development and Trade of Ukraine through the State Enterprise Ukrainian Institute of Intellectual Property. A patent or other IP right can be enforced by its owner or by a licensee with the right to prohibit the use of the right under the terms of the licence. A patent for an invention is protected for 20 years.
Trade mark can be registered with the Ministry of Economic Development and Trade of Ukraine, unless registration would be against public order or principles of humanism and morality, and unless one of the grounds to refuse registration applies. A person that uses an unregistered trade mark does not have the right to prohibit others from using that trade mark without his or her consent. But that person can file objections to someone else’s registration application for that trade mark, and seek invalidation of the registration certificate in court. A trade mark is protected for ten years. The protection can be renewed indefinitely for ten years at a time.
Designs as well can be registered by the Ministry of Economic Development and Trade of Ukraine. . An industrial design is protected for ten years. The owner of an unregistered design may be entitled to claim damages in the event of an unauthorised disclosure, particularly where such disclosure constitutes unfair competition. In addition, the law recognises an enforceable right of a previous, good-faith user of a design that is subsequently registered by another person to continue using that design free of charge.
Copyright is a set of rights of an individual with regards to a work of art, literature or science. Ukraine has an obligation under the Ukraine-EU Association Agreement to introduce such a requirement in relation to photographs and software. Copyright covers only the expression of ideas and concepts. The Association Agreement requires Ukrainian law to recognise that the employer exclusively owns proprietary rights to any software created by an employee during the performance of their duties or as a result of following the instructions of the employer (unless the employment contract says otherwise). Protection of Copyright is awarded from the moment of creation of the work and does not require registration or other formalities. Copyright can be registered with the Ministry of Economic Development and Trade of Ukraine. Proprietary rights are protected for 70 years after the death of the author (some exceptions apply).
In order to protect or enforce IP rights in your jurisdiction, do you need to own local/national rights or are you able to enforce other rights (for example, do any treaties or multi-jurisdictional rights apply)?
The company needs to have the local Ukrainian registration of IP rights to ensure its protection.
How do you exploit/monetise IP in your jurisdiction and are there any particular rules or restrictions regarding such exploitation/monetisation?
For purpose of monetisation of IP Ukrainian business uses license agreements. License agreements are not subject to compulsory registration and they enter into force on the date of execution thereof. Meantime, in case the Licensor or Licensee would like to avoid any risks which may arise with regard to such an agreement, the license agreement may be recorded with the Ukrainian Patent Office.