The backbone of a new-generation NSSMC team has emerged that will be the driving force behind success—Chairman
An exclusive interview with Ruslan Magomedov, Chairman of the National Securities and Stock Market Commission (NSSMC)
(Part 3)
By Mariia Boltryk, Dmytro Koshovyi
- The NSSMC is responsible for such a large part of the market as venture funds—an internal offshore zone for many of Ukrainian entrepreneurs through which they have become accustomed to structure and finance their businesses. Do you have any good or bad news for this market segment? Is the Commission satisfied with the situation in it?
- In general, this segment is called “joint investment institutions,” or JIIs. They have been and continue to be used absolutely legally by large businesses to optimize their income tax. There is one issue that the tax authorities are constantly criticizing us for, namely that asset management companies and investment funds would carry out transactions that did not involve joint investment money. What I am talking about: an investment fund must be filled with money through the sale of its shares or unit certificates, and it is precisely with this money that investment activities must be carried out and profits earned, which in this case are exempt from income tax as long as they are reinvested and not distributed. However, many abused this and reported their assets as JII assets, which actually were not. This issue has been relevant for many years.
What do we intend to do? We intend to change the reporting so that it is clear whether this is joint investment money or not. I don’t know if this is good news or bad news. Probably good because there are rumors that this tax exemption for JIIs is going to be abolished altogether: allegedly, this is what our international partners are demanding.
- In addition to taxation, even before the JII venture capital issue emerged, there were questions about the real ultimate beneficial owners because, especially in the beginning, they were hidden behind them. The President has recently ordered to check all structures to see if there are any sanctioned beneficiaries among them. Does the NSSMC currently see all actual beneficiaries of JIIs?
- The NSSMC is a role model in this regard. With the beginning of the full-scale war, it was the Commission that first instituted requirements for the disclosure of information about ultimate beneficial owners who are sanctioned persons or affiliated with the aggressor country in the corporate structures of professional participants.
An interdepartmental working group on sanctions has already been set up, of which I am a member. In one of its meetings we proposed that not only the National Bank but also other regulators that issue licenses require the disclosure of ultimate beneficial owners with more than 10% influence. For the purpose of understanding where Russians, sanctioned individuals, or hostile jurisdictions are involved, so that everything is transparent.
- A question now about the Commission review mentioned in the IMF program. Am I correct in understanding that its purpose is to understand the current capacity of the NSSMC to regulate this market and what needs to be improved in the organization of its work?
- This requirement in the IMF program has been the subject of numerous manipulations in the public sphere in Ukraine. The essence of the review, as specified in the IMF program, is not about the competence of the Chairman and the Commissioners, but rather their compliance with legislative requirements and the code of ethics that has already been approved. In other words, it is not about our qualification.
Regarding the recent update of the IMF Memorandum. There has also been a lot of speculation and incorrect information regarding the requirements for the NSSMC. Let’s set the record straight. In early January, our team and international partners agreed on the terms of reference and requirements for the experts who are to conduct this review. The only issue remaining was the financing of this process, which, according to the terms, was to be covered by our international partners. However, unfortunately, due to rapid changes in the global political landscape, international partners have been unable to find a solution for financing. As a result, the implementation of this structural benchmark has been postponed and the Commission is currently actively seeking sources of funding.
To sum up, we have done everything that has been required of us and submitted it to our partners. Yes, there are external factors, political and economic changes that could not have been foreseen. Despite everything, I am satisfied with many things that have happened during our transformation. I hope this will really give us the impetus we need to deliver results that will be felt on the market.
- What are the key stages of this transformation? As I understand it, the Commission has become smaller, but people are now more motivated?
The institutional capacity of the Commission has increased following the transformation. We have replaced everyone who needed to be replaced. New people have come in, some of them with extensive expertise, who have worked for many years in both the stock and commodity markets. Staff with less experience in the stock market have caught up very quickly, as they have a long background of working for government agencies and regulatory bodies. I believe that we have formed the backbone of a new-generation team that will be the driving force behind success. And we are confident that it will grow stronger as the Commission has been turning into a competitive employer.
- There is official data that the average salary in the central-level government agencies in December was almost UAH 80,000, and on average for the year, because December is not very indicative, it was about UAH 54,000. To calculate how much is actually received after all deductions, you need to subtract 18% personal income tax and military tax, which now already stands at 5%. The Ministry of Finance regularly publishes this data.
Now to the Commission. Before our transformation, the official rate of pay for a Chief Specialist used to be UAH 9,000, now it is around UAH 37,000. This is why previously it was problematic for us not just to retain but also to hire new people. We all know how the civil service works: you get a small salary, but it is supplemented with extra bonuses. But under this system, we couldn’t hire someone with good qualifications and expertise if they didn’t have years of service in the civil service, experience, and rank. It’s exactly this mechanism that we changed. So now the Commission’s doors are open to young, talented, and progressive people.
But, of course, there is no truth in what we have been accused of: that the Commission ostensibly pays exorbitant salaries. Limits are in place. The Commission’s budget has been moderate and remains what it was when approved.
- What is the current staffing level of the Commission?
- The maximum number of employees has not changed—575. The actual number of employees as of now is 275. We are currently in the process of recruiting new staff, where we are focusing on quality rather than quantity.
- May I ask your comment on the business trips reported by Mykhailo Tkach from Ukrainska Pravda?
- I have a positive attitude toward investigators; they point out shortcomings and help correct them. However, when a request comes from an unknown phone number asking about my employees’ business trips... We, with the owner of the number, are not acquainted; I do not know if this is a prank or some kind of provocation by the FSB. So yes, within a few hours, I am honestly telling you that I blocked the number. I do this with all contacts that are strange to me. Still, a few hours later, I became part of a sensational story, and a few days later, a whole series.
I don’t believe that anyone can respond to a request in three hours without knowing who it’s from and without preparing an answer. If this request had been made officially, it would have been answered, which is what actually happened later. So, when someone asks about some employee’s business trip, I want to ask, “What, are there no other problems in the country?”
However, as a result of this situation, the relevant departments of the Commission will now be checking each business trip more carefully. Even though in the cases mentioned no budget money was used. Responses to all official requests were provided.
On the other hand, we were accused of blatantly untrue things—that we had given permission to transfer funds abroad. The Commission does not have such powers; this is exclusively within the competence of the National Bank.
- So, you did have a conference in Krakow?
- I was away from Ukraine for three days: one day took a trip there, one day in Krakow, and one day for a trip back. I had meetings and a conference there. I can’t comprehend why the trip is being called a fake business trip.
- Could this be related to the struggle or debate over what agency should be the Regulator of the virtual asset market?
- I don’t know, but perhaps it might be.
- What are your arguments that only the NSSMC should be the Regulator?
We are not saying that it’s the NSSMC exclusively. We are saying that it is the Commission together with the National Bank. This is how it works in developed countries. In our opinion, all virtual assets linked to some kind of tangible asset, or asset-referenced tokens (ART), are regulated by us. If it is a money token, for which money is the underlying asset in some form, then it is regulated by the National Bank. This is how it works in all countries: in the European Union, there are two regulators—one financial and one banking.
As for the Commission, to comply with the Memorandum between Ukraine and the IMF, it prepared a presentation on this division of responsibilities. Our model is based on an analysis of EU experience under the MiCA standards and has been preliminarily presented to the IMF mission and at a meeting of the Financial Stability Council of Ukraine.
We are proposing the regulation based on MiCA (EU Regulation on markets in crypto-assets) because we are trying to join the European Union and are candidates for accession. This is not a story about us wanting to overregulate anyone or tighten the screws. We want honest businesses that work by the book to be protected from fraudsters. We don’t want a situation where someone issues legitimate virtual assets to raise funds for their business, while someone else takes advantage of the hype and discredits with more publicity the entire instrument. It’s the same as with the SCAM projects mentioned above: if someone has been robbed under the guise of investment, they will then steer clear even of real investments.
Regarding taxation: we came up with a matrix for taxing virtual assets at a meeting of the working group of the relevant Committee of the Verkhovna Rada. As regards us, we are in favor of an economically sound approach that will be comfortable for both business and the state. However, the final decision lies with the Members of Parliament, the relevant Committee of the Rada, and the Ministry of Finance.
In the end, I think that this draft law will definitely be adopted in the first reading in the near future, but when it is going to pass the second reading is still an open question.
- When people talk about virtual assets, most of them mean buying, say, bitcoins in the hope of getting rich. But do the state and the Commission have any additional goals for launching this market, such as creating Ukrainian virtual assets, for example? How likely is their coming into existence?
- Yes, they may well come into existence. It’s precisely on this that we have spent a lot of effort and time: we took the European MiCA regulation as a basis, obtained technical assistance from USAID and Ernst&Young, and as a result, submitted the draft law to the relevant committee of the Parliament as late as September 2023. For us, this is not an election campaign project, but thorough work to create a new industry in the country’s economy. Why this draft law has been lying motionless on the desks of MPs for over 1.5 years is a rhetorical question. But it looks like preparation for an election campaign.
Coming back to your question: I believe that the likelihood of Ukrainian virtual assets appearing is very high. They could, for example, grant the right to a share in a business, the right to receive dividends—that is, the ability to use these virtual assets for simple things.
I want to utilize the best aspects of the virtual asset market while bringing it into the proper condition within our jurisdiction. To help with creating Ukraine’s first simple white paper (a white paper is the foundation of a crypto project, containing technical information about the project and explaining its purpose) and with a placement of ART for a functioning enterprise in Ukraine, which will use this money to develop its business. Dividends then will be paid out not on shares, but on ART.
- But theoretically, much of what you are saying about ART and money tokens could be done with the help of standard derivative securities?
- Exactly so. This is the next step in the evolution of capital markets. Back in the day securities used to exist in the form of a document and then migrated to our smartphones. The most striking example of this is how it happened to OVDPs (domestic government bonds), where their essence and transactions with the bonds themselves have not changed. But smartphones and apps have appeared, where you just need to press a button via “Diia” instead of filling out dozens of papers. The same holds true for virtual assets: businesses will be using ICOs (Initial Coin Offerings) rather than IPOs (Initial Public Offerings) to attract investment, i.e., modern technologies such as Blockchain. It is convenient and serves the needs of the day.
