From ban to veto: how Bitcoin regulation unfolded in the post-Soviet space in 2021

In 2021, a number of post-Soviet states enacted laws regulating the cryptocurrency market, while continuing to study central bank digital currencies.

The Chinese ban on mining triggered a migration of miners. Among the destinations were Russia and Kazakhstan, which required an operational response from the authorities.

We examine the main changes in cryptocurrency regulation across 15 countries and one autonomous republic.

Russia

The Digital Financial Assets Act

From 1 January 2021, the Digital Financial Assets Act (DFA) came into force. The Act defines DFAs (tokens and stablecoins) as a right to a monetary claim or an instrument for exercising rights in securities. Digital currencies (for example Bitcoin) are recognised as property. The document does not expressly prohibit the issuance and exchange of cryptocurrencies, nor does it introduce administrative or criminal liability for such operations, but they cannot be used to pay for goods and services.

A limit on DFA purchases by individuals who are not qualified investors is set at 600,000 rubles per year. It does not apply to non-qualified investor-legal entities.

Tax regime

In February the State Duma, in the first reading, approved a bill on taxing cryptocurrency operations. For the purposes of the bill, cryptocurrencies are treated as property, and the income from operations with them is taxed as corporate profit tax or personal income tax.

Tax reporting is required if annual inflows or outflows exceed the equivalent of 600,000 rubles. The amount of the transaction is calculated based on the asset’s market price. Penalties apply for violations of the bill. Mere ownership of cryptocurrencies does not entail tax consequences for citizens, provided they do not engage in any transactions with them.

The current edition allows the tax authorities to request from banks information on individuals’ cryptocurrency operations who are not individual entrepreneurs.

The second reading, planned for autumn, did not take place. DFA taxation is being discussed separately by the central bank.

Mining status

Mining is not currently prohibited in Russia, but there is no clear regulation. In 2021 the initiative to recognise mining as entrepreneurial activity was backed by the Ministry of Economic Development and the Ministry of Energy.

Power providers want to prohibit miners from consuming electricity at reduced rates. For now, regions have had to secure such rate-adjustments through courts.

Their own bill on mining regulation and its taxation is being prepared by the LDPR faction. Among other provisions, legislators propose issuing permits for connecting energy-intensive equipment and bringing violators to criminal liability.

Central Bank decisions

In July the Bank of Russia recommended exchanges not to trade securities whose payments depend on cryptocurrency prices. Asset managers were advised not to include such assets in the composition of mutual funds.

In September the central bank defined criteria by which banks can identify cards and electronic wallets used by crypto exchanges when transferring by individuals.

If at least two signs from this list are present, transactions are deemed suspicious. In that case the bank can block the individual’s operations and even terminate the bank account contract.

Separately, the Bank of Russia began developing a payment-blocking mechanism aimed at Bitcoin exchanges and exchangers. There was also discussion of introducing administrative and criminal liability for cryptocurrency use.

Against this backdrop, Rosfintro detects a need to regulate exchangers as entry points to the official financial system. In line with the FATF standards, they could be classified as anti-money-laundering entities obliged to perform customer identification, or their activity could be banned altogether. This discussion is expected to conclude in 2022.

From 1 October 2021, operations related to the turnover of digital currencies and digital rights were officially classified as suspicious and banks were tasked with their close monitoring.

Although in May deputies discussed recognising Bitcoin as a contractual payment instrument, by year-end the Bank of Russia had significantly hardened its rhetoric on cryptocurrencies. In December it emerged that authorities are not ruling out a complete ban on ownership and purchase of them.

Sources close to the central bank said that, due to financial-stability risks, regulators intend to prohibit investments in digital currencies. Depending on which reports you read, the move may not affect owners of assets acquired previously, or Russia may face a “total retreat” from all cryptocurrencies. The central bank promised to publish a special report explaining its position later.

Digital Ruble

Throughout 2021, authorities actively discussed a digital ruble. The central bank announced readiness of a prototype platform in December.

Testing will begin in the first quarter of 2022 on the basis of 12 banks. The central bank plans to gradually widen participation and the types of operations available. It is known that the digital ruble can be exchanged for foreign currency and used by non-residents. The fee for transactions with the asset is still under discussion.

The launch of a domestic CBDC will require changes to several laws and codes. In particular, it is planned to codify the central bank’s rights to organise the asset’s circulation and to legalise it as a payment instrument. The latter is necessary so that the digital ruble does not touch on the proposed ban on the use of stablecoins.

Commercial banks are also developing their own digital assets. In January, Sberbank submitted to the Bank of Russia an application for registering a blockchain platform with a subsequent issue of a stablecoin pegged to the ruble; developers expected to complete the procedure by the end of 2021, but regulator approval never came.

Law enforcement agencies

Public discussion continues on expanding the powers of the FSB to allow the agency to file requests to cryptocurrency issuers and Bitcoin exchanges in the framework of anti-corruption investigations.

The mechanism for confiscation of digital assets as criminal property is being developed by the General Prosecutor’s Office. The Investigative CommitteeRecommended adopting rules that would allow seizing assets to be held on a special state account until trial.

Rules for officials

Since 1 April, Russian state employees holding certain positions have been prohibited from owning digital assets issued abroad.

In 2021, officials began filing disclosures of the cryptocurrencies and tokens owned by them, their spouses, and minor children.

Ukraine

Law on Virtual Assets

On 8 September Ukraine passed the Law on Virtual Assets (VA). The document treats VAs as intangible property, dividing them into secured and unsecured. It does not recognise cryptocurrencies as a means of payment, but permits acquiring operations.

The law was due to take effect after amendments to the Tax Code, but on 5 October President Volodymyr Zelenskiy returned it for reconsideration.

Initially regulation proposals suggested dividing oversight between the National Bank, the National Securities and Stock Market Commission (NSSMC) and the newly created authority; until that body’s functions were formed, the Ministry of Digital Transformation would perform them.

The head of state criticised the proposed creation of a new body, arguing it would entail substantial budget costs. He proposed placing regulation of the virtual-asset turnover under the NSSMC’s remit.

Authors updated the document naming the NSSMC and the central bank as regulators. The Committee on Digital Transformation recommended passing the law, but it was never considered in plenary sessions.

The current text grants market participants the right to:

• to judicially seek protection;
• to open bank accounts for settlements on VA operations;
• to independently determine the value of assets in the course of transactions.

According to the document, exchanges and exchangers must obtain a special permit valid for one year, and users are subject to a mandatory KYC procedure.

Trading platforms under Russian jurisdiction or with Russian citizens among their beneficiaries are prohibited.

The DFA mining scope is not covered by the law — in line with FATF recommendations, it is not subject to licensing. This issue will be addressed in a dedicated bill on taxation of VA operations.

Mining is not currently prohibited in Ukraine, provided it does not involve unauthorised connections to the power grid.

Tax regime

In September, MPs were circulated a bill on taxation of profits from VA operations. In the current version it taxes the service provider’s profits at 5%. For individuals there is a 5% tax and an additional 1.5% military levy. VA transactions are exempt from VAT, except for the sale of equipment or hardware wallets.

Digital hryvnia

In June the Verkhovna Rada adopted the Law on Payment Services, enabling the National Bank of Ukraine (NBU) to issue its own digital currency.

The document distinguishes electronic money from a CBDC, recognising the latter as a lawful means of payment.

A full rollout of the e-hryvnia is not expected before the end of 2022. After that, the regulatory framework will be prepared.

Indicatively, in 2023 there will be a competitive selection of a technology provider for a test release of the e-hryvnia.

Other initiatives

Attention was also paid to the market and private financial institutions. In July the Ukrainian mobile bank monobank announced plans to issue bitcoin cards enabling clients to buy and sell the first cryptocurrency. The project was sent for approval to the National Bank of Ukraine but did not receive clearance.

Belarus

Regulation of the crypto market

In March the Committee on State Control, the National Bank and the government of Belarus proposed clarifying legislation concerning transactions with digital assets to prevent money laundering, financing of terrorism and other criminal activity.

The supervision of Bitcoin exchanges is proposed to be placed under the administration of the High Technologies Park, where crypto trading conditions have operated since March 2018.

Mining

The Ministry of Energy of Belarus began studying the prospects for mining, and in autumn allocated miners to a separate tariff group.

Kazakhstan

Mining

After China’s mining ban, Kazakhstan became one of the main destinations for mining equipment, leading to a rise in grey miners. In response, authorities introduced an additional charge of 1 tenge per kWh of electricity used for mining. The new rules took effect on 1 January 2022.

In addition, the government proposed limiting the consumption of mining data-centres in case of electricity shortages and creating a registry of farms. Issues around further regulation of the sector and enforcement against violators are under the president’s scrutiny.

Cryptocurrency mining is not prohibited in Kazakhstan, but miners must inform authorities of their activity to continue operating without restrictions.

Pilot launch of Bitcoin exchanges

In May the Working Group on the Development of the Crypto Industry and Blockchain Technologies proposed to Kazakhstan’s parliament to pilot Bitcoin exchanges at the Astana International Financial Centre (AIFC).

During 2022 trading platforms will operate in test mode, after which necessary legislative changes will be introduced into national law and into AIFC acts.

At the end of October, the financial centre approved limits on retail purchases of cryptocurrencies through exchanges hosted there. The total limit will be $1,000 per month. For investors with confirmed income, the limit rises to $100,000 per year.

In November the Senate of Kazakhstan included cryptocurrency exchanges and trading platforms among subjects of financial monitoring to combat money laundering and the financing of terrorism.

Digital tenge

The National Bank of Kazakhstan began studying the possibility of issuing a digital tenge as an additional form of money. The asset would become a legal means of payment, a unit of account, and a store of value.

The first platform tests were completed in December. The regulator examined various uses for the asset, including issuance, purchases and transfers. A decision on the digitisation of the tenge is expected in 2022.

Kyrgyzstan

Regulation of Bitcoin exchanges

In February the National Bank of Kyrgyzstan announced plans to license cryptocurrency exchange operators.

In August the State Regulatory and Supervisory Service for Financial Markets developed a draft regulation on the activities of cryptocurrency exchanges. It sets out the status, functions, rights and obligations of trading platforms, and requires their mandatory registration in the Unified State Register.

The draft also provides for exchange liability in countering terrorism financing and money laundering.

Mining

From 2021–2025 the country has established elevated electricity tariffs for miners.

Uzbekistan

Regulation of crypto turnover

In November the National Agency for Project Management under the President of Uzbekistan allowed trading in digital currencies. Residents will be able to buy, sell and exchange crypto assets on licensed exchanges for the national currency. Non-residents may trade in foreign currency.

The document also provides for legal entities to issue tokens and list them on exchanges. Unbacked tokens may not be listed. Using digital currencies as a means of payment within the country remains prohibited.

Partnership with China

In the same month, the company Red Date Technology, behind the state-backed Chinese Blockchain Service Network (BSN) platform, announced expansion into Uzbekistan.

Under the agreement, local blockchain developers will be able to use BSN, which connects networks such as Ethereum, Algorand, Polkadot, Tezos, Quorum, Corda and others. The initiative addresses key interoperability and cost issues.

Tajikistan

Mining

In February Tajik authorities ordered miners identified in raids to pay income tax.

The legal framework for cryptocurrencies in the country is not regulated. However, tax authorities explained that “any entrepreneur must first obtain a license or permit to engage in a particular activity, registering as a taxpayer.”

Blockchain

In April the non-profit Fantom Foundation entered into an agreement with the Ministry of Industry and New Technologies to use its blockchain solutions for e-government infrastructure.

In September the NGO announced a partnership with Tajikistan’s oldest bank Orient Bank to develop a national digital currency. Later, the National Bank denied the information and plans to issue a CBDC.

Georgia

Digital Lari

The National Bank of Georgia is examining the possibility of issuing a digital lari, which would gain the status of a legal means of payment. The regulator believes the asset could compete with cryptocurrencies in some services but would not be a speculative store of value.

A pilot programme for CBDC implementation is planned for 2022, initially for retail use.

Autonomous Republic of Abkhazia

Mining

In March, Abkhazian lawmakers amended the Administrative Offences Code to impose fines and prison terms for electricity use for cryptocurrency mining. Repeated violations may lead to confiscation of equipment.

To address the problem more comprehensively, representatives of “Chernomorenergo” proposed seizing illegally installed transformers. The initiative was supported by the prime minister.

Until 31 March 2022 Abkhazia maintains a ban on mining and import of equipment for mining. For this period access to mining-pool sites and some VPN services is restricted.

At the same time authorities are negotiating with Russia on electricity supplies to mining data-centres, the construction of which is being discussed. In the future they may be subject to a special tariff.

Estonia

Licensing of crypto businesses

In January the Estonian Ministry of Finance presented a draft law tightening requirements on cryptocurrency firms.

If approved, providers will have to reapply for a licence and pay a state fee. Oversight of their activities will move from the Financial Intelligence Unit to the Financial Supervisory Authority.

The Ministry also discussed suspending new licences until the new regulation comes into force.

The Estonian government has not yet backed the idea of legalising cryptocurrencies, despite calls from major players in the industry, including Coinbase. Among the reasons are their use in ransomware attacks.

In October, Estonia’s head of the Money Laundering Information Bureau (RAB), Matis Maeker, proposed revoking all previously issued cryptocurrency licences.

Maeker argued for increasing the minimum required share or equity capital for digital-asset traders to 350,000 euros, noting that firms should actually hold these funds in cash or high-value, low-risk, liquid securities. He said owners should be compelled to invest client funds actually deployed.

Later, the department said it did not intend automatically to revoke licences already issued.

Armenia

Regulation of the crypto market

In March Armenia’s representatives in the Eurasian Economic Union, along with other member states, failed to reach a consensus on whether to harmonise cryptocurrency regulation across their territories.

Cryptocurrencies are listed in the law on confiscation of illegal property among assets subject to seizure, but their definition in the Civil Code remains unaddressed. One candidate for the Central Bank of Armenia’s Council drew attention to this and recommended legally fixing the term, including for tax purposes.

Moldova

Taxes

The National Bank of Moldova maintains that Bitcoin and other virtual currencies have no real backing and therefore cannot be recognised as a means of payment. To date, the turnover of cryptocurrencies and their taxation within the country are not regulated.

The State Revenue Service stressed that individuals are obliged to declare all income, including from financial and investment activities in the country or abroad. Cryptocurrency may be a capital asset, and in that case a 12% personal income tax applies.

The Ministry of Finance has not provided clarifications on mining taxation.

Latvia

Regulation of the crypto market

Cryptocurrencies in Latvia are not legal tender but may function as a medium of exchange. Capital gains tax applies to profits from crypto trades at 20%.

Bitcoin or any other virtual currency does not fall under acts managed by the Financial and Capital Market Commission. Therefore holders and related firms do not need to undergo special registration or licensing.

Lithuania

CBDC

In July 2020, the Bank of Lithuania issued the collectible digital currency LBCOIN on the NEM blockchain, becoming the first CBDC issuer in the world. This experience was used by the European Central Bank in studying the feasibility of a digital euro.

Blockchain

Since 2019 Lithuania has operated the LBChain regulatory blockchain sandbox, where fintech projects test their products and prototype DLT platforms.

ICO Guidelines

In June 2018 the Lithuanian Ministry of Finance issued guidelines on conducting ICOs, under which in certain cases cryptocurrencies may serve as a means of payment. Investors earning income from buying and selling virtual currencies pay a 15% income tax. Mining is not subject to VAT. The document is advisory and not a regulatory act.

According to the Bank of Lithuania’s 2020-2021 report, blockchain and crypto companies make up 5% of fintech firms in the country.

Azerbaijan

Digital manat

A draft law regulating the turnover of cryptocurrencies in Azerbaijan has not been adopted.

However, according to the Central Bank’s Strategy for 2021–2023, the republic plans to study international experience in issuing a CBDC to create a digital manat.

As part of the initiative, a platform will be created for cooperation with leading central banks and a conceptual approach to the architecture of the national digital currency will be defined.

Blockchain

With IBM’s involvement, Azerbaijan has developed a customer-identification system for banks based on the Hyperledger Fabric blockchain.

Turkmenistan

Regulation of the crypto market

Turkmenistan remains one of the most closed states. Official data on the economy is scarcely available. Information on the legal status of cryptocurrencies and blockchain is also unavailable.

Over-the-counter markets are weak. Virtual currencies can be bought only for US dollars, but since 2016 the government has restricted access to foreign currency for local companies and citizens.

Turkmenistan ranks 140th out of 157 in Chainalysis’s crypto-adoption index for 2021.

Mining

In the summer of 2021, police in Ashgabat conducted raids at sites selling currencies illegally. Local media reported that security forces were seeking cryptocurrency miners.

Conclusions

In 2021, some post-Soviet countries moved toward more sophisticated regulation of the cryptocurrency market and its sectors. Special focus was given to the issuance of national digital currencies, since, in the medium term, they could bolster public trust in state payments and make the financial sector competitive internationally.

Most central banks have adopted a negative stance toward cryptocurrencies for fear of losing control over the money supply. It is unlikely this trend will reverse in 2022.

Low electricity prices in many of the countries reviewed attracted miners who connected to power networks illegally and created safety risks. Lawmakers responded to this challenge.

Regulators have recognised digital assets as an integral part of the financial system and are unlikely to ignore their existence. Despite talk in some states of a total ban, the decentralised nature of cryptocurrencies assures network resilience under blocks. It will be all the more interesting to watch this standoff.