Bitcoin mining and DeFi in Uzbekistan: regulator on forthcoming legislation

In 2022, Uzbekistan’s authorities stepped up efforts to develop the country’s cryptocurrency market and enacted a number of laws, notably defining the framework for the issuance and circulation of digital assets.

The regulatory body for the sector is the National Agency for Prospective Projects (NAPP). It licenses the activities of profile companies and issues permit documents.

In an interview with ForkLog, the First Deputy Director of NAPP Vyacheslav Pak spoke about the agency’s forthcoming legislative initiatives, including those concerning mining and attracting investment through tokens.

ForkLog (FL): Hello, Vyacheslav. Since April 2022 your agency has been responsible for Uzbekistan’s crypto market. What profiles of specialists make up NAPP, and what projects are you currently working on?

Vyacheslav Pak: Hello! First of all, it should be noted that the core baseline requirements for regulating the crypto market in Uzbekistan were laid down in 2018 by a decree of the head of state, on the basis of which the crypto sphere began to develop.

Today the agency’s staff numbers 45, including IT specialists, lawyers, internationally recognised experts in anti-money laundering and counter-terrorism financing, and people who know technically how crypto assets are structured.

Currently agency specialists are drafting regulations on the registration of miners and the rules for mining pools. We also assist entrepreneurs wishing to issue tokens to attract investment to their projects.

Among legal initiatives I would highlight the following:

• codification at the legislative level of the existing licensing regime for providers of services in the turnover of crypto assets and inclusion of mining in licensing procedures;
• reconsideration of conditions for mining, including expanding the list of permitted types of alternative energy sources;
• introduction of special norms of administrative and criminal liability for illegal turnover of crypto assets.

FL: Which authorities does NAPP interact with?

Vyacheslav Pak: The Agency works closely with the Central Bank, law enforcement agencies and other ministries and departments of Uzbekistan in carrying out its tasks.

In particular, together with the Central Bank we identify suspicious bank transactions allegedly linked to illicit crypto-asset turnover, study sources of funds, analyse P2P transfers conducted through payment organisations.

We collaborate with the Department for Combating Economic Crimes at the General Prosecutor’s Office, which is Uzbekistan’s financial intelligence unit. With its specialists the Agency conducts training sessions to explain the Recommendations of the Financial Action Task Force (FATF) and the requirements of national anti-money laundering and counter-terrorism financing laws, communicating risks and typologies of criminal asset laundering.

Jointly with the cyber security divisions of the Ministry of Internal Affairs, there are activities to identify and stamp out illegal service providers.

FL: NAPP oversees the special regulatory sandbox regime. How many crypto projects are currently registered there?

Vyacheslav Pak: Currently the Agency has registered three participants in the special regulatory regime for crypto-asset turnover.

Specifically, LLC “Unified Integrator Uzinfocom” is implementing a pilot project to deploy NFT-certificates based on distributed ledger technology for domain names in the .UZ zone, and JSC CapitalBank and JSC Ravnak Bank, in partnership with the crypto exchange Uznex, are preparing pilot projects “CryptoCard”.

FL: Why is the pilot projects period limited to three years?

Vyacheslav Pak: We consider this period to be sufficient to thoroughly study the technologies and mechanisms of innovative use of crypto assets and to decide on the necessity of amendments to the legislation and development of the corresponding regulatory acts. 

Additionally, in setting this period we also carefully studied the experience of foreign countries in using the potential of regulatory sandboxes.

FL: How many licensed crypto exchanges and exchange shops are currently operating in Uzbekistan? Are there applications from major trading platforms?

Vyacheslav Pak: Currently the country has licenses issued for one crypto exchange and nine crypto shops.

During 2022-2023 we held talks with representatives of Binance, Huobi, Bybit and several other companies about establishing entities in Uzbekistan and obtaining licenses.

FL: Is there statistics on the number of Uzbek citizens using cryptocurrencies? What share of world crypto turnover does the country account for?

Vyacheslav Pak: According to open data as of May 2023, Uzbekistan ranks 53rd among countries in crypto adoption. They are owned by nearly half a million citizens.

The share of crypto assets in Uzbekistan amounts to 1.42% of the total population. 

Alongside this, according to international firms, Uzbekistan is among the top four CIS countries by crypto asset turnover.

As of 2022, the number of active users from Uzbekistan on various trading platforms is estimated to reach up to 50,000, with a weekly total turnover ranging from $25 million to $180 million.

FL: Uzbekistan has recently undertaken substantial legislative work to regulate the crypto market. Could you briefly outline the main provisions?

Vyacheslav Pak: We classify market participants as miners and providers of services in the turnover of crypto assets. These include crypto exchanges, mining pools, crypto depositories and crypto shops. 

Mining may be conducted only by legal entities using electricity produced by a solar photovoltaic plant. It also provides for cases of using electricity connected to the unified electricity system. To mine, a legal entity must register with the Agency.

Service providers can only be legal entities — residents of Uzbekistan — that have obtained the relevant license.

To date the Agency has developed and approved five specific regulatory acts regulating the crypto asset turnover:

• Regulation on the licensing of providers of services in the turnover of crypto assets;
• Rules for crypto-asset trading on an exchange;
• Rules for crypto shop activity;
• Regulation on the issuance, registration and circulation of crypto assets by Uzbek residents;
• Regulation on the registration of participants in the Special Regulatory Regime for crypto asset turnover.

Separately, note the Regulation establishing fees for activities in crypto asset turnover, and their payment and distribution, approved by a joint decree of the Agency, the Ministry of Finance and the Tax Committee.

Also issued an information notice on the accounting of crypto asset operations.

Earlier the Agency developed and approved the Rules on internal control to counter money laundering, financing of terrorism and the proliferation of weapons of mass destruction for those engaged in crypto asset turnover.

FL: Why are operations with anonymous crypto assets and their mining banned?

Vyacheslav Pak: Indeed Uzbekistan bans operations with anonymous crypto assets and their mining, as well as concealed mining.

Primarily this is because the main aim of issuing and distributing anonymous crypto assets is to minimise the possibilities of monitoring operations with them, which creates high risks of their use for illicit settlements and wrongdoing.

Given the lack of proven and workable mechanisms to identify operations with anonymous crypto assets at the moment, and taking into account FATF recommendations, a decision was made to limit operations with anonymous crypto assets on the territory of the country.

FL: The country also bans the issuance by residents of certain digital assets. Tell us more.

Vyacheslav Pak: In accordance with the Regulation cited above, residents of Uzbekistan are prohibited from issuing and registering crypto asset emissions by a crypto depository within the country for the following crypto assets:

• unsecured tokens, except for the cases of issuing utility tokens (access tokens, ticket tokens, token-vouchers and governance tokens);
• stablecoins.

Use of crypto assets in Uzbekistan as a means of payment or settlement is prohibited.

Therefore, since a stable token is considered a type of asset-backed token, its value pegged to the nominal value of national or foreign currency, their issuance is prohibited.

FL: Are there restrictions on NFT transactions?

Vyacheslav Pak: Uzbekistan does not ban the creation and sale of non-fungible tokens. Residents may conduct transactions exchanging NFTs for other crypto assets, including on foreign crypto exchanges.

At the same time, crypto assets obtained by residents through exchanging non-fungible tokens on foreign platforms must be traded through national service providers.

FL: You mentioned preparing regulation for mining. Has NAPP received registrations from mining pools? Is Uzbekistan considering opening a data centre funded by the state budget?

Vyacheslav Pak: The regime for mining pools is currently under development, so no licenses have been issued for this activity yet. The Agency has not received any applications for this license.

There are currently no plans to establish data centres for mining, including green-energy ones, funded by the state budget.

FL: Is there tax regulation in Uzbekistan for the crypto market? Can we estimate tax and other revenues (fees from licensed crypto companies) to the budget?

Vyacheslav Pak: Because there is no unified approach to taxing crypto asset turnover in current global practice, and foreign experience shows the measures are ineffective in this regard, a decision was taken to exempt crypto asset transactions from taxation.

Under current law, transactions by legal and natural persons related to crypto asset turnover, including by non-residents, are not taxable, and income derived from these operations is not included in the tax base.

At the same time Uzbekistan has implemented a mechanism for paying fees by service providers for activities in crypto asset turnover. The amounts of state duties for licenses have also been defined.

Since October 2022, more than 6 billion sums (over $494,000) in fees and duties have been collected. It is also worth noting that more than 50 new jobs have already been created in this field.

FL: Why is the revenue from crypto companies split between the state budget and NAPP treasury?

Vyacheslav Pak: According to the law, the amount of fees is distributed as follows:

• 80% — to the state budget;
• 20% — to the Agency’s treasury accounts.

This arrangement is a common practice, whereby part of the receipts is directed to the empowered body to support its operations.

FL: Are there separate bills to regulate NFT, DeFi, GameFi?

Vyacheslav Pak: Yes, the Agency is developing proposals to amend and supplement legislation in the crypto-asset turnover sphere. Specifically, we are working on effective mechanisms to regulate DeFi and GameFi.

FL: Tell us about the pilot project for issuing NFT certificates.

Vyacheslav Pak: During the pilot project, conducted within the regulatory sandbox, we test the system of issuing certificates for .UZ domain-name owners using non-fungible tokens through a Proof-of-Authority consensus algorithm.

NFTs generated during certificate creation will serve as proof of ownership of the domain name in the “.UZ” zone.

The project aims to strengthen protection and guarantee owners’ rights to their domain names, ensuring the accuracy and timeliness of information about their owners.

FL: At what stage is the national CBDC — the digital som?

Vyacheslav Pak: A government-formed working group, with representatives from the Agency, the Central Bank and other relevant ministries and agencies, is studying international experience in CBDC deployment and application using distributed ledger technology.

We will provide more detailed information following the completion of this work.

FL: How does NAPP counter cybercrime in the crypto sphere?

Vyacheslav Pak: The prevention of crypto asset misuse for illicit purposes and the reduction of their shadow turnover are in the agency’s special focus.

The Agency ensures strict compliance with AML laws and FATF Recommendations by all persons engaged in crypto asset turnover.

We regularly monitor internet resources and messaging apps for illicit crypto asset turnover and block them.

Work is under way to study suspicious projects with signs of financial pyramids and other illegal activities involving crypto assets. We promptly forward all information to law enforcement authorities and assist them in investigations.

In 2022, Agency staff identified and blocked more than 70 information resources offering Uzbek citizens crypto asset trading without the requisite licenses. Information on them was forwarded to competent authorities.

Also last year we received more than 50 requests from law enforcement agencies for Agency experts to participate in investigative activities concerning illicit crypto asset use.

In addition, we run initiatives to raise digital and financial literacy among the population.

FL: Is there any regulation on preventing circumvention of sanctions imposed on Russia due to its military aggression? Were there any recommendations issued to trading platforms on this topic?

Vyacheslav Pak: Service providers independently decide whether to establish or refuse business relations with entities from the Russian Federation, taking into account FATF measures on threats and risks arising from specific jurisdictions.

Interview conducted by Lena Jess.