This country-specific Q&A provides an overview to Fintech law in Ukraine. It will cover open banking, regulation of data, cryptocurrencies, blockchain, AI and insurtech.
What are the sources of payments law in your jurisdiction?
The main legal act for regulation of payments in Ukraine is the Law of Ukraine «On payment systems and transfer of money in Ukraine». This area is also regulated by other Ukrainian laws, in particular: the Law of Ukraine «On financial services and governmental regulation of financial services markets», the Law of Ukraine «On electronic trustworthy services» and the Decree of the Cabinet of Ministers of Ukraine «On currency regulations and currency control system» that will be replaced by the Law of Ukraine «On currency and currency transactions» as of 07/02/2019.
The payments are subject to regulation by the National Bank of Ukraine and, therefore, this area is regulated by the various regulations of the NBU.
It should be noted, that the draft law No. 7270 is currently under consideration of the Ukrainian Parliament, that provides significant amendments to the Law of Ukraine «On payment systems and transfer of money in Ukraine» and, among other things, allows to open current accounts and issue e-money to the non-banking financial institutions.
Can payment services be provided by non-banking institutions, and, if so, on what conditions?
The payment services can be provided by both the bank and non-banking institutions.
The legislation of Ukraine sets out that the money transfers in Ukraine may be effected through domestic and international payment systems.
The legislation of Ukraine states the following participants of the payment system: the payment agency (the legal entity that determines the rules for operation of payment system), the participant of the payment system (that provides money transfer services according to the contract with the payment agency), the settlement bank and payment system operators(the legal entities that effect processing, clearing, acquiring and other technical services related to the money transfer organization).
With respect to the said participants the exclusive functions of the banks include opening accounts for the participants of the payment system (the settlement bank), issue of electronic payment instruments (payment cards) and issue of e-money. The other functions of the payment system may be effected by non-banking institutions.
A bank and also a non-banking financial institution licensed by the National Bank of Ukraine to transfer money without opening accounts may be the participants of the payment system in Ukraine.
The rules of the payment system operation shall be approved by the National Bank of Ukraine. All participants of the payment system shall be registered in the Register of payment systems.
What are the most popular payment methods and payment instruments in your jurisdiction?
As of the beginning of 2018 the positive tendency of non-cash payment growth and expansion of payment infrastructure still remains. Based on the results of 2017, the share of non-cash payments in Ukraine with the use of payment cards has increased to 39.3% (increase by 3.8% from the beginning of 2017). In general, this rate has increased more than three times as much for the last five years.
In general, in 2017 the Ukrainians made over 3 billion transactions with the use of the payment cards issued by the Ukrainian banks for the amount of UAH 2 125 billion (USD 75 billion).
Based on the results of 2017 the structure of the non-cash payments in Ukraine has divided in the following way:
- money transfers between payment cards: in terms of volume – 26.4% and in terms of quantity – 6.1%;
- payments online: in terms of volume – 38.8% and in terms of quantity – 41.0%;
- payment in retail network: in terms of volume – 31.9% and in terms of quantity – 50.6%;
- transactions in ATM: in terms of volume – 2.9% and in terms of quantity – 2.3%;
As of the beginning of 2018 the quantity of the payment cards was 59.9 million pcs, 34.9 of them are active.
The quantity of the active magnetic stripe and micro-chip payment cards is 7.4 million pcs. At the same time there is a general decrease of the payment cards with the magnetic stripe card exclusively. Also there is an increase of using the contactless payment cards – by 37.8% for the year (from 2 million to 2.7 million pcs).
The payment systems that use their own e-money are not very popular in Ukraine. In particular, the operation of WebMoney payment system in Ukraine was prohibited based on the entry into the sanction list in connection with the military aggression of the Russian Federation.
In 2018 Android Pay and Apple Pay payment systems have started officially operating in Ukraine.
What is the status of open banking in your jurisdiction (i.e. access to banks’ transaction data and push-payment functionality by third party service providers)? Is it mandated by law, if so to which entities, and what is state of implementation in practice?
As of the date of preparation of this material the Ukrainian legislation does not provide making banking transactions by the unauthorized services providers and their access to the bank secrecy. Authentification and verification of the client shall be performed exclusively by an employee of the bank. The financial monitoring shall be conducted by the bank either. Thus, the principles of the open banking may not be used in Ukraine yet.
The Law of Ukraine «On electronic trustworthy services» comes into force as of 07/11/2018 and this law provides the opportunity to use the outside services for electronic authentification of a client.
In addition, the draft law of amendments to the Law of Ukraine «On payment systems and transfer of money in Ukraine» is currently under consideration of the Ukrainian Parliament. As envisaged by the amendments, it is proposed to allow payment transactions to be made by third-party service providers.
In general, the amendments being currently developed are aimed at adaptation of payment services regulation in Ukraine in accordance with Directive (EU) 2015/2366 (Directive PSD2).
How does the regulation of data in your jurisdiction impact on the provision of financial services to consumers and businesses?
Despite the lack of open data in the payment industry, it is possible to conduct activity of a digital bank in Ukraine as a sub-brand of an institutional commercial bank. At the same time the digital services B2C may be provided within the handy web-platform with performing the back-office functions based on the model of a traditional bank. There are examples of a successful business dealing by the similar fintech start-up in Ukraine.
What are regulators in your jurisdiction doing to encourage innovation in the financial sector? Are there any initiatives such as sandboxes, or special regulatory conditions for fintechs?
The National Bank of Ukraine has announced the creation of the regulatory sandboxes for development of the fintech start-ups. Though as of the date of preparation of this material the sandboxes have not been created yet.
In general, for the last years the National Bank of Ukraine has been actively implementing the reforms of financing activities regulation thereby the currency legislation has been liberalized and the positive changes to the payment regulation and financing monitoring have been implemented. The National Bank of Ukraine is open for the collaboration with fintech companies and ready to assist them in the implementation of their ideas.
Do you foresee any imminent risks to the growth of the fintech market in your jurisdiction?
The implementation of BEPS, CRS standards, the exchange of information according to the FATCA and implementation of the FATF principles significantly complicate the compliance procedures passed by the companies when they open bank accounts and start cooperating with the banking institutions. However, it is not a local problem of the Ukrainian jurisdiction, it is rather a global trend that influences, among other things, the fintech industry.
What tax incentives exist in your jurisdiction to encourage fintech investment?
There are no special tax benefits for fintech companies in Ukraine. Nevertheless the tax rate for running individual business in this jurisdiction is one the lowest in the world.
In particular, having chosen the simplified tax system and in case of obtainment of the annual revenue that does not exceed UAH 5 mln. (appr. USD 180 K) an individual entrepreneur may run a business with respect to taxation of profit at the rate of 5% (for VAT non-payers).
Many Ukrainian IT-startuppers run their business according to individual entrepreneurial contracts based on the simplified tax system.
Which areas of fintech are attracting investment in your jurisdiction, and at what level (Series A, Series B etc)?
The amount of investment in Ukrainian startups is up sharply on last year. Local tech firms have raised $265 million over the last year. Most of them are private venture investments.
Ukraine’s tech companies have conducted a record-breaking number of successful ICOs. There were 19 successful ICOs from Ukraine that resulted in companies raising about $99.3 million. The three most successful at it were TaaS ($7.5 million), DMarket ($10.5 million) and Rentberry ($30 million).
This has proved Ukraine is one of the world leaders in crypto-economy development, adopting the new technologies at the same time as more developed countries.
If a fintech entrepreneur was looking for a jurisdiction in which to begin operations, why would it choose yours?
Ukrainian jurisdiction is attractive for running fintech business due to the low tax rates for individual entrepreneurs, the extended fintech community and its own school of blockchain developers. A wide ecosystem fintech is available in Ukraine that allows to find the required qualified specialists easily and implement the most innovative fintech solutions.
Access to talent/immigration
Access to talent is often cited as a key issue for FinTechs – are there any immigration rules in your jurisdiction which would help or hinder that access, whether in force now or imminently? For instance, are quotas systems/immigration caps in place in your jurisdiction and how are they determined?
There are no specific immigration rules and allowances in Ukraine that would allow to facilitate employment in the fintech industry.
According to the Labour Code of Ukraine, the employment relationship in Ukraine is established by an employment agreement between an employer and an employee.
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’. 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.
If there are gaps in access to talent, are regulators looking to fill these and if so how? How much impact does the fintech industry have on influencing immigration policy in your jurisdiction?
Ukraine has its own software development schools, on particular, for the fintech industry, as well as a significant number of accelerators, incubators and boot camps. Thus, at the present moment the fintech in Ukraine does not experience a significant shortage of human resources of low and middle levels and does not need the support of regulators.
At the same time, the great number of the professionals of the senior level often agree to move to another jurisdiction where much higher incomes are available (first of all in the USA). This outflow of the highly-qualified professionals is recognised by the regulators, however, no unified and sufficient measures are not currently taken on the governmental level.
What protections can a fintech use in your jurisdiction to protect its intellectual property?
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.
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.
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).
Creptocurrencues and blockchain
How are cryptocurrencies treated under the regulatory framework in your jurisdiction?
As of the date of the preparation of this material the legal regulation for cryptocurrencies on the level of law does not exist.
The use of cryptocurrencies is not prohibited. 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.
Ministry of Economy of Ukraine has recently announced the Concepts of the state policy in the field of virtual assets, where the main regulation initiatives on cryptocurrencies and smart-contracts are suggested to be adopted.
How are initial coin offerings treated in your jurisdiction? Do you foresee any change in this over the next 12-24 months?
The Initial Coin Offering (ІСО) is not regulated by the law.
Taking into account the large part of ICO with elements of fraud, the reputation of this type of financing is extremely low, and therefore lobbying for such amendments to the legislation is not timely. In addition, several criminal proceedings have been initiated based on the fraud with respect to ICO.
Therefore, the regulatory legal acts to stimulate ICO are not expected in Ukraine within the next 12-24 months. Nevertheless, the ICO fundraising is considered by the government as an activity to be regulated up promptly and legalized.
Are you aware of any live blockchain projects (beyond proof of concept) in your jurisdiction and if so in what areas?
Ukraine belongs to the leading countries with respect to implementation of blockchain projects, in particular in the public sector. At the present moment the public auction for the sale of seized property and the national land cadaster operate based on the technology of the blockchain. The public register of immovable property will be re-programmed to the blockchain in the near future.
To what extent are you aware of artificial intelligence already being used in the financial sector in your jurisdiction, and do you think regulation will impede or encourage its further use?
At the present time there is no widespread use of artificial intelligence technology in the financial sector of Ukraine. In case of extension of this technology we may be confident that the use of such technology will be supported by the National Bank of Ukraine.
Insurtech is generally thought to be developing but some way behind other areas of fintech such as payments. Is there much insurtech business in your jurisdiction and if so what form does it generally take?
Insurtech in Ukraine is presented by the number of companies that generally offer platforms that join insurance agents and their clients with the purpose of selling ordinary certificates of insurance (for instance, automobile liability insurance certificates).
Are there any areas of fintech that are particularly strong in your jurisdiction?
The most developed area of fintech in Ukraine is predictably the field of payments presented by dozens of various payment services providers. In the nearest future the number of the similar companies may increase significantly due to the forthcoming amendments to the legislation.
In addition, Ukraine has a strong area of solutions development on the blockchain platforms, which are bought both by the government and business entities.
Fintech vs incumbent
What is the status of collaboration vs disruption in your jurisdiction as between fintechs and incumbent financial institutions?
The National Bank of Ukraine and the Ministry of Justice of Ukraine are the most loyal towards the implementation of the finfech solutions. The remaining governmental authorities that regulate the financial sector are more cautious with respect to groundbreaking technology, however, they are actively studying the possibility of its implementation either.
To what extent are the banks and other incumbent financial institutions in your jurisdiction carrying out their own fintech development / innovation programmes?
For the current year the competitions among fintech-startups have been implemented by a number of the Ukrainian banks for selection, development and further implementation of the most innovative solutions as a part of a bank. The implementation of the above mentioned projects is expected in the nearest future.
Are there any strong examples of disruption through fintech in your jurisdiction?
The implementation of a digital online bank in Ukraine that has drastically changed the existing approaches of commercial banks to card business is the most significant breakthrough. For the first time in the banking business of Ukraine, the receipt of a card was effected by way of filling in the request in a mobile application, and the card received through Mobile application mail is currently one of the most functional among other alternatives. In addition, the said online-bank was one of the first in the jurisdiction who implemented technologies of Android Pay and Apple Pay.
Due to the innovation technologies and customer-oriented approach the bank succeed in attracting more than 500 K clients in a short time.