Ukraine's economy and cryptocurrencies: analysis

The Impact of Cryptocurrencies on Ukraine's Economy: An Analysis of How Cryptocurrencies Affect the Local Economy

The digital asset market has slowly started to recover after the collapse in 2022, when the global capitalization of cryptocurrencies fell from a peak of over $3 trillion to $0.9 trillion.

By the end of the first half of 2023, the cryptocurrency market capitalization had already reached $1.17 trillion, demonstrating a growth of 30.3%. Despite the ongoing macroeconomic uncertainty, the sector is booming. And in general, the overall trend of crypto-economic indicators continued to show positive momentum last year.

Cryptocurrency market in Ukraine

Ukraine has been a leader in international crypto ratings for the past several years and is among the top 5 countries in terms of the use and distribution of digital assets. According to the analytical company Chainalysis, our country ranks fifth in the world in this indicator. We will remind, in 2022 Ukraine took the third place in the rating of cryptocurrency adoption, behind Vietnam and the Philippines.

Global cryptocurrency adoption ranking in 2023 (Chainalysis Global Crypto Adoption Index study):

Overall Index Ranking	Country (Region)
1	India (Asia, Oceania)
2	Nigeria (Africa)
3	Vietnam (Asia, Oceania)
4	United States of America (North America)
5	Ukraine (Eastern Europe)
6	Philippines (Asia, Oceania)
7	Indonesia (Asia, Oceania)
8	Pakistan (Asia, Oceania)
9	Brazil (Latin America)
10	Thailand (Asia, Oceania)

As you can see, Ukraine is the only European country to make it into the top ten.

According to a study conducted by Triple-A, by 2023, every tenth Ukrainian has digital assets (10.3% of the country’s population, about 3.7 million people). Based on the fact that the total number of cryptocurrency owners in Europe at the beginning of this year is 31 million, Ukraine holds a share of 12% of the pan-European market of digital asset owners.

It is obvious that in recent years, our country has actively gained a strong position in the virtual money market. Cryptocurrencies in Ukraine are becoming an integral part of political and economic processes in our state and in the lives of its citizens.

What are the reasons for such rapid development and the growing influence of digital assets on the economy of our country?

Cryptocurrency market and Ukraine. Conditions for the development of the segment of virtual currencies

The growth of the market for the use of cryptocurrencies in developing countries is the basic trend of the global market of virtual coins in recent years. The leap in the development of the cryptocurrency industry in Ukraine is largely due to the military aggression of Russia. Paradoxically, the war has strengthened the Ukrainian crypto market.

Experts emphasize the following factors that have significantly influenced the development of the digital assets segment and strengthened the economic impact of cryptocurrencies in our country:

Activation of investments into virtual coins. War is always a period of crisis, forcing people to look for ways to preserve personal savings. The population is looking for ways to invest money in assets that are minimally exposed to the risks of inflation. Cryptocurrency investments in Ukraine have become the safest method of saving money after cash dollars and euros.

Receiving financial aid in digital assets. As a result of an initiative of the Ministry of Digital Transformation, Ukraine began to accumulate financial aid in crypto to support refugees and the army, regularly receiving receipts amounting to the equivalent of tens of millions of US dollars.

Secure movement of money. The issue of cross-border movement of capital has also become acute. The relocation of millions of Ukrainian refugees has triggered the need for fast and secure money transfers abroad. Men who remained to work in their homeland were looking for optimal ways to send money to their loved ones who had gone abroad.

The NBU restrictions on individual accounts and transactions during the martial law period contributed significantly to the growing popularity of virtual assets.

Thus, the needs of society played the role of a trigger for the formation of current trends in the Ukrainian market, putting economic development and cryptocurrencies on the same scale.

In addition to the above-mentioned factors, the popularization of virtual assets is also facilitated by a high level of digitalization, active implementation of innovations in Ukrainian finance, and a large number of IT specialists working both in the country and abroad.

Cryptocurrency regulation in Ukraine

According to analysts, the shadow turnover of the crypto market in Ukraine is about UAH 1 billion per day. According to a study by the analytical group Ukraine Economic Outlook, due to the lack of state regulation of the sector, Ukraine has lost more than $52.8 billion from 2016 to 2022. In this amount, experts took into account the potential profit for the population from investments in digital assets, the income from mining operations, and the issuance of stablecoins within the country. According to their assessment, $48.8 billion of the losses were attributed to the direct income of the population and businesses (direct impact of cryptocurrencies on Ukraine’s GDP), and $4 billion were lost in tax revenues.

Government actions

In November 2023, a bill on the peculiarities of taxation of virtual assets was registered in the Verkhovna Rada. The adoption of this document will be the final stage of the process of legalization of cryptocurrencies in Ukraine. According to it, only positive financial results from the use of virtual assets will be subject to taxation. The discussed tax rates are 19.5% (18% on income plus 1.5% military tax), without VAT.

The government is aware of the importance of regulating the circulation of cryptocurrencies, and the market expects this law to turn the state economy around. Some experts believe that our country has all the prerequisites to become a global crypto hub, a comfortable country for large companies to invest and develop innovations in technology. The blockchain industry, if brought out of the shadows, will serve as a powerful driver of the development of the digital economy of Ukraine and will bring billions of dollars of income to the population and the state in the near future.

Taxes on cryptocurrencies are already included in the National Revenue Strategy of Ukraine for 2024-2030. And what’s interesting. If everything goes according to plan and the law comes into force this year, Ukraine will be the first country in Europe to implement regulation of virtual assets in accordance with MiCA regulations.

Benefits of cryptocurrency reform in Ukraine

Cryptocurrencies and economic reforms in our country go hand in hand. What benefits will our economy gain from the legalization of digital assets?

Less dependence on the centralized banking systеm. Cryptocurrency, due to its decentralized nature, will be able to reduce the risks of volatility and crises in the financial systеm. Cryptocurrencies and financial stability will exist in an inseparable relationship.

Increased international trade. Transactions with digital assets can have a great impact on the entire economic systеm by simplifying the procedure, and reducing the time and cost of cross-border transactions.

Increased foreign investment. The current legal framework and attractive tax scheme will encourage international companies to invest in business in our country.

Filling the budget. It will be due to tax deductions on transactions with digital assets. Also, specialized startups, which currently have to register their business outside of Ukraine, will be able to work and pay taxes in their home country.

Technological development. Legalization will facilitate the improvement of technologies such as blockchain, and the Ukrainian economy will move towards digitalization at an accelerated pace. New opportunities will be opened for the creation of innovative startups that will be able to compete openly with foreign IT companies in the international market.

Forecasts and trends

According to a survey conducted by the Binance exchange, more than 84% of the platform’s users believe that cryptocurrencies are necessary for the development of the Ukrainian economy, while 43% believe that state regulation will lead to positive changes.

The World Economic Forum predicts that blockchain will account for at least 18% of global GDP by 2025. With the potential to simplify and improve the way data is stored and processed, the technology is set to transform major sectors of the global economy in the near future.

Most of the world’s leading economic futurologists predict that by 2030-2035, the capitalization of cryptocurrencies could account for up to 30% of the world’s total money supply.

In conclusion, cryptocurrencies have and will continue to have a significant impact on economic processes in our country. This year we will witness the implementation of the Law on Virtual Assets, and we will be able to assess to what extent the regulation of cryptocurrencies will meet the expectations of analysts and investors.

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