Between Prohibition and Development: How Central Asia Regulates Cryptocurrencies

Central Asia sits at the intersection of several economic and cultural spaces. The region’s countries—Kazakhstan, Kyrgyzstan, Uzbekistan, Tajikistan and Turkmenistan—are influenced by developments in China, Europe and, of course, the post-Soviet space. This also concerns cryptocurrency regulation.

As the industry grows, governments have been crafting regulatory norms for the market. Some seek to create a legal framework for legalization; others have taken a prohibitive path — outright banning the use of Bitcoin as a means of payment and imposing penalties for mining.

Kazakhstan

In 2020, Kazakhstan’s President Kassym-Jomart Tokayev approved a bill titled “On Amendments and Additions to Certain Legislative Acts of the Republic of Kazakhstan on Issues of Regulating Digital Technologies.” Among the many sectors it covers, the document also addresses cryptocurrencies.

According to the document, digital assets are recognised as property and cannot function as a means of payment. They are divided into two types — secured and unsecured.

Cryptocurrencies were classified as the second type. Their issuance and circulation within Kazakhstan are prohibited “except where provided by law.”

“More than eight months have passed since the law was adopted, and provisions allowing the issuance and circulation of unsecured digital assets have yet to be defined,” said ForkLog lawyer and tax expert Aydar Masatbayev.

According to Madi Saken, the association’s senior coordinator for legislative work at the Blockchain and Data Center Industry Association in Kazakhstan, such an exception could be the Astana International Financial Centre (AIFC), where a special legal regime applies.

Last year it was reported that with the support of Japanese investors, a cryptocurrency exchange was to be launched at the AIFC. However, ForkLog was told by the Centre that the Japanese investors “have not returned with a registration answer.” At the same time, representatives said that a regulated investment AIFC platform for digital assets, QuantDART, has recently gone live.

Minister of Digital Development, Innovation and Aerospace Industry Bagdat Musin said the ministry plans to to create an institute of cryptocurrency exchanges based on the AIFC. He added that Kazakhstan intends to transfer 1% of the global crypto turnover to its exchanges.

Under this proposal, cryptocurrencies mined in Kazakhstan would be traded on local platforms, where each transaction would be taxed, the minister noted.

Taxation of crypto assets in Kazakhstan raises questions due to the general absence of provisions in the republic’s tax legislation that expressly contain the term “digital asset,” Masatbayev says.

“As the tax legislation of Kazakhstan will rely on accounting standards, the digital asset, by virtue of its recognition as property, will be treated as inventory, in accordance with international accounting standards,” he noted.

Increase in value earned by a Kazakh legal entity and tax resident abroad will be exempt from VAT “by virtue of the territorial nature” of this tax, explains the lawyer.

For individuals who are tax residents of Kazakhstan, the taxation issue is complicated by the fact that “when determining their tax obligations, they cannot rely on International Financial Reporting Standards, and tax legislation does not contain provisions to determine property income,” Masatbayev noted.

“Because Kazakhstan’s tax law will rely on accounting standards, the digital asset, by virtue of its recognition as property, will be treated as inventory under international accounting standards,” he added.

Mining in Kazakhstan is not banned. The law recognises miners’ ownership of the mined cryptocurrencies.

This provision could hinder “the development of extensive mining fields” for the extraction of unsecured cryptocurrencies, says the lawyer.

According to President Kassym-Jomart Tokayev, Kazakhstan accounts for around 6% of global mining. This is corroborated by data from the Cambridge Centre for Alternative Finance.

According to a statement by Minister Musin, there are already 17 mining farms, mining cryptocurrencies worth an amount equivalent to $18-28 million per month. He added that six mining data centres with a total load of 300 MW are being built.

In 2020, authorities said that mining farms had already brought Kazakhstan investments of 82 billion tenge (over $190 million at the rate at the time of writing).

President Kassym-Jomart Tokayev tasked the government to increase mining investments to 500 billion tenge ($1.18 billion) by 2025.

Kyrgyzstan

As of March 2021, regulation of cryptocurrencies in Kyrgyzstan has been introduced only in the taxation of mining.

In June 2020, Kyrgyzstan’s parliament passed in the third reading a bill “On Amendments to the Tax Code.” It sets a 15% tax for miners.

As ForkLog explained to the National Bank of Kyrgyzstan, the taxable base comprises “the amounts charged for electricity consumed in mining.” In August, the Ministry of Economy presented the tax reporting form.

The law also introduced the concept of a “virtual asset” and defined it as a digital expression of value. But the legal status of cryptocurrencies is not defined, and regulation is absent, the Central Bank said.

President Sadyr Japarov, by a separate decree, ordered the government and the National Bank to develop bills regulating the turnover of cryptocurrencies “to create a legal basis for their circulation, protect consumers’ rights and reduce risks.”

In December the National Bank announced preparation of legal documents for regulation of cryptocurrencies, and in January published two bills.

The first document “On the Circulation of Cryptocurrencies” introduces terms “cryptocurrency”, “cryptowallet”, “cryptocurrency exchange operator” and others.

According to it, cryptocurrency is regarded as a type of virtual asset, a digital expression of value. It is not a monetary instrument, currency or means of payment, nor does it certify property or non-property rights.

Ownership of cryptocurrency is acquired from the moment of its creation, and also upon entering into and carrying out a deal with it.

A cryptocurrency transaction is defined as its purchase and sale for the national currency—the som.

Legal entities and individual entrepreneurs are prohibited from making any cryptocurrency deals. The exception comprises market participants — exchange operators and miners. In addition, the bill regards individuals who conduct operations with cryptocurrencies for their own purposes as market participants.

They have the right to:

• choose a counterparty among cryptocurrency market participants for cryptocurrency operations;
• open and use bank accounts to conduct cryptocurrency operations;
• set prices for cryptocurrencies at which operations are conducted;
• protect personal data and rights to cryptocurrencies.

Crypto exchange operators will be required to obtain a license from the National Bank of Kyrgyzstan. The latter is named as the regulator of cryptocurrency turnover and will maintain a register of exchange operators.

The second bill “On Amendments to Certain Legislative Acts in the Field of Virtual Assets” envisages a number of amendments to regulate cryptocurrencies.

It introduces the concept of a “virtual asset,” including cryptocurrencies and other tokens, into the Civil Code as an object of civil rights.

In the Tax Code, it is proposed to introduce taxation of services of cryptocurrency exchange operators, analogously to exchange offices, based on a mandatory patent.

In a statement to ForkLog, regulators said the bills are designed to create a legal framework for regulating cryptocurrencies, protect consumers’ rights, comply with FATF recommendations and reduce risks associated with cryptocurrency turnover.

Uzbekistan

As early as 2018, President Shavkat Mirziyoyev signed a decree envisaging the deployment of blockchain in public governance and touching on cryptocurrency regulation.

That same year, a decree on regulating and licensing cryptocurrency exchanges came into force, and in 2019 the National Agency for Project Management under the president of Uzbekistan (NAPU), the regulator of cryptoasset turnover in the country, approved amendments to the licensing procedure.

Under the adopted regulation, activities in the turnover of cryptocurrencies are subject to mandatory licensing by NAPU.

At the same time, residents of Uzbekistan may conduct exchanges only for sales of cryptocurrencies and tokens, and cryptocurrencies themselves are prohibited from being used as a means of payment or settlement.

“This, at the same time, is linked to the low financial literacy of the population in the new field of cryptoassets,” said ForkLog’s NAPU representative Askar Zakirov.

For non-residents there are no bans.

In early 2020, the first licensed cryptocurrency exchange, Uznex, was launched. It remains the only such platform in the country.

NAPU then announced plans to create a regulatory sandbox and a mining-pool to consolidate domestic and foreign miners at the national level.

Since 2019, local miners have been required to pay for electricity under a triple tariff.

So far, activity in crypto mining in Uzbekistan is not regulated. Regulation is to be defined in a draft regulatory act currently being prepared by NAPU.

In addition to mining, the draft will outline types of platforms, service providers, advertising requirements and other procedures related to the turnover of cryptocurrencies.

What exactly will be in the bill has not yet been disclosed by NAPU.

“The draft is currently at the stage of coordination with ministries and agencies. After that, it will be uploaded to the portal for public discussion, where everyone can view it and submit proposals or comments,” Zakirov said.

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Little is known about legislative initiatives concerning regulation of the cryptocurrency market in Turkmenistan and Tajikistan.

According to Chainalysis analysts’ report, both states were among countries with very low cryptocurrency activity.

One of Tajikistan’s latest statements regarding cryptocurrencies was made in 2018. Then the regulator linked the use of crypto assets to money laundering and financing of terrorism, and stressed that they are not legal means of exchange or store of value or settlement unit.

Although the legal regime for cryptocurrencies in Tajikistan is not regulated, authorities require miners to pay taxes.

“Those who tried to investigate unusual cryptocurrency turnover cases in Tajikistan would reach out to the National Bank for explanations and guidance, but returned empty-handed,” local media report.

We contacted the central banks of Tajikistan and Turkmenistan for clarification, but as of publication we had not received a response.

Thus, while in some Central Asian countries regulatory frameworks for cryptocurrencies are being laid out and plans to attract through mining millions of dollars are being announced, in others cryptocurrencies have not yet even received definitions and are treated by authorities as tools for fraudsters and terrorists.

Nevertheless, the industry grows and develops daily, which means that the move of cryptocurrencies out of the grey zone in each country is only a matter of time.

Author: Alina Saganiskaya.

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