Legal protection of transactions with cryptocurrencies: illusory or real?

Rally with price jumps for cryptocurrencies, especially Bitcoin, is observed even by those citizens who are far from systematic investing. In moments of crazy growth of crypto-currencies, both professionals and novice investors mentally dream of investing their savings in crypto, hoping to immediately become rich.

In the global investment press, it is customary to consider cryptocurrency as a popular and attractive investment tool, however, it is necessary to remember that, in addition to investment attractiveness, legal protection and the absence of restrictions on the civil circulation of the specified investment object are also important.

In other words, it is important to know whether state institutions in Ukraine recognize transactions with cryptocurrency, whether it is currently possible for an investor to receive effective legal protection in the event that the other party does not comply with its contractual obligations regarding such assets, or whether law enforcement agencies are able to protect investors from illegal encroachments on their property .

Taking into account the prescription of the first part of Article 19 of the Constitution of Ukraine, the direct absence of a legal ban on the use of cryptocurrency and its legal uncertainty gives investors, on the one hand, some freedom in its civil circulation, and, on the other hand, the absence of a clear legal protection algorithm.

The position of state institutions regarding the legal status of the raised issue is quite cautious. Thus, in the joint statement of financial regulators regarding the status of cryptocurrencies in Ukraine dated November 30, 2017,  the National Bank of Ukraine, the National Commission for Securities and the Stock Market and the National Commission, which carries out regulation in the field of financial services markets, are convinced that the complex legal nature of cryptocurrencies does not make it possible to recognize them either as cash, or as currency and means of payment of another country, or as currency value, or as electronic money, or as securities, or as a monetary surrogate.

The aforementioned statement states that any activity related to the purchase, sale, exchange and conversion of cryptocurrencies carries a large number of risks, which individuals and legal entities should be aware of before conducting transactions with cryptocurrencies. Everyone who plans to invest their own funds in cryptocurrencies should be aware that they carry out such transactions at their own risk.

Regulators consider the following to be the main risks of operations with cryptocurrencies:

– the possibility of losing funds due to theft, for example, as a result of cyber attacks on cryptocurrency exchange platforms or user infrastructure;

– lack of guarantees regarding the return of invested funds in cryptocurrencies, since savings held in cryptocurrencies are not guaranteed by the Individual Deposit Guarantee Fund, because such savings are not considered bank deposits;

– the possibility of fraud. Savings in cryptocurrencies can be used to build financial pyramids, which, in connection with the types of risk described above, can lead to investors losing their money in a fairly short period of time. In the case of a similar situation with funds in national or foreign currency, the only available form of legal protection may be criminal proceedings. However, due to the uncertain status of cryptocurrencies, state institutions for the protection of consumer rights in Ukraine will not have legal grounds to help both investors and users;

– the difficulty of using conventional methods of assessing the market value of assets in cryptocurrencies;

– significant price fluctuations of cryptocurrencies and related risks – speculative and unsettled levels of commissions for transactions in cryptocurrencies;

– lack of infrastructure. Cryptocurrencies are not generally accepted in trade and service networks; nor are they legal tender and currency – all of which means that merchants are not legally obligated to accept cryptocurrencies as means of payment.

What happens in practice?

There is quite a bit of judicial practice regarding the protection of rights related to crypto currency. Having analyzed the existing one, it can be concluded that the courts have different views on this issue and due to the lack of a legal definition of the legal nature of cryptocurrency, they may refuse legal protection.

– The court recognized crypto-currency as a virtual thing and refused legal protection based on this reason. Thus, by the decision of the Darnytskyi District Court dated 03/24/2016 in case 753/599/16-ts (https://reyestr.court.gov.ua/Review/56686444), supported by the Court of Appeal of the city of Kyiv, the plaintiff was refused to satisfy the claim about demanding Bitcoin from the defendant as payment for the work performed. The court motivated its decision by the fact that cryptocurrency belongs to virtual and digital products and is not an object of the material world, has no individual characteristics, its circulation procedure is not regulated by regulations, and therefore it cannot be the object of judicial protection.

– The court recognized that the parties have a legal relationship regarding the purchase and sale of cryptocurrency. The Eastern Commercial Court of Appeal by resolution dated 02.12.2020. in case 922/95/20  actually recognized the validity of a public electronic contract regarding the purchase of cryptocurrency and confirmed the legality of the fulfillment of obligations under it. In its decision, the court recognized the legal nature of cryptocurrency as title signs. The resolution can be read at:   https://reyestr.court.gov.ua/Review/93327784 .

– The bank delayed the transfer of funds from the plaintiff’s account opened on the crypto exchange to its own card account in a foreign currency due to the legal uncertainty of the cryptocurrency status. The plaintiff appealed to the Pechersk District Court of the city of Kyiv with a lawsuit against JSC CB “Privatbank” for the protection of consumer rights and the recovery of monetary funds in the form of a penalty for the delay in making the relevant transfer by the Bank. By the decision of July 23, 2020, supported by the decision of the Kyiv Court of Appeals in case No. 757/46845/19-ts, the   court partially satisfied the mentioned lawsuit, collected a penalty from the Bank and recognized that financial transactions can be stopped by banks exclusively on the basis of Art. 17 of the Law of Ukraine “On prevention and countermeasures against the legalization (laundering) of proceeds obtained through crime, the financing of terrorism and the financing of the proliferation of weapons of mass destruction” . In addition, the court established that the operations of buying and selling cryptocurrencies do not belong to arbitrage operations on the FOREX market and recognized cryptocurrency as a digital (virtual) currency and, in fact, confirmed the legality of operations with it in the form of concluding public electronic contracts posted on the website of the crypto exchange. You can familiarize yourself with the decision by calling:  https://reyestr.court.gov.ua/Review/95524461 .

– Crypto exchanges block crypto-assets on electronic wallets at the request of law enforcement officers. Having read the decision of the Odesa District Administrative Court dated December 24, 2020. in case 420/7905/20, it can be concluded that the inspectors of the cyber police department of the National Police of Ukraine understand what cryptocurrency is and what operational actions should be taken in case of its theft. In accordance with the content of the mentioned decision, the inspector of the department of countering cybercrimes in the Odesa region of the cyber police department of the National Police of Ukraine in the form of a written appeal to the crypto exchange asked to block the withdrawal of cryptocurrency from electronic wallets in connection with the investigation of an incident with the theft of this cryptocurrency from other persons and the existence of grounds to believe , that the stolen cryptocurrency was transferred to the corresponding electronic wallets, which must be blocked. As a result of a properly prepared appeal, the stock exchange satisfied him, the respective e-wallets have been blocked. You can familiarize yourself with the decision by calling: https://reyestr.court.gov.ua/Review/93786356.

Therefore, the small case law, the lack of an unambiguous position on the legal status of cryptocurrencies and the lack of a position of the Supreme Court on this issue do not give grounds for asserting that there is a possibility of legal protection of cryptocurrency investments on the territory of Ukraine.

Therefore, when making a decision on choosing the next investment object, it is important to remember that in our country today, not everything is so “smooth” with the legal protection of investments in cryptocurrencies.