Legal Status of Cryptocurrencies: What the New Law Will Change in Azerbaijan

The legal status of cryptocurrencies in Azerbaijan may be established by the end of the year: the Central Bank has completed the preparation of a draft law on digital assets and submitted it for approval to government structures.

The new document is expected to remove the market from a long-standing gray area, where public interest in digital assets is growing, but there are still no unified rules for exchanges, exchange services, brokers, and other participants. The preparation of the draft law was announced by Fidan Tofidi, the director of the Department of Financial Technologies and Innovations at the Central Bank, at the event "Digital Financial Agenda of Azerbaijan."

According to her, the latest version of the document has already been sent to government bodies. If the approval process goes smoothly, the law could be adopted by the end of the current year. This will mark an important turning point for the market: cryptocurrency will cease to be an area where much is effectively allowed, but almost nothing is specified by special regulations.

How the Legal Regime of Cryptocurrencies Will Change

Cryptocurrencies have long gone beyond a narrow circle of enthusiasts. Today, millions of people use digital assets, and governments are increasingly opting for legal regulation rather than bans. This process is taking place in various jurisdictions, including Russia and Japan, where approaches differ, but the overall trend is the same: efforts are being made to make the market understandable for users, businesses, and regulators.

What is the Status of Cryptocurrency in Russia

In Russia, cryptocurrency is not prohibited, but it cannot be used as regular money within the country. The law "On Digital Financial Assets" introduced the concept of digital currency and established the main principle: it is permissible to own, buy, sell, and account for such assets, but it is not allowed to accept them as payment for goods, works, and services in the Russian market. The ruble remains the only legal means of payment.

Regulation is built on several blocks: the law on digital financial assets, the Tax Code, anti-money laundering rules, norms on the financial services market, and special amendments for 2024. The Bank of Russia, the Ministry of Finance, the Federal Tax Service, Rosfinmonitoring, and the government are involved in the process. The basic law has been in effect since January 1, 2021, the regime for certain international settlements through digital assets will be launched on September 1, 2024, and rules for mining will start to apply from November 1, 2024.

Mining in Russia is allowed, but with conditions. Companies and individual entrepreneurs must operate through a registry, while individuals can mine without registration as long as they comply with energy consumption limits. Income from cryptocurrency operations is subject to taxation: individuals declare profits and pay personal income tax on a progressive scale, while companies are subject to corporate tax. The result of the transaction is important for taxation: tax is calculated based on economic benefit, not just the transfer amount.

There is no single limit on the purchase of cryptocurrency for individuals and companies in the form of a fixed amount. There is also no closed list of coins that can be purchased legally: the issue usually lies not in the name of the asset but in compliance with tax, currency, and anti-money laundering requirements. For settlements with foreign partners, cryptocurrency can only be used within a special experimental regime and under the control of authorized participants. Violations may lead to tax reassessments, fines, penalties, blocking of suspicious transactions, and in cases of tax evasion or legalization of criminal proceeds, criminal liability.

How Other Countries Approach Cryptocurrency

In Japan, cryptocurrency is recognized as a crypto asset, and exchanges operate under a license and are supervised by the financial regulator. In the United States, a unified model has not yet been established: some issues are controlled by the SEC, CFTC, FinCEN, and IRS, while specific requirements depend on the state. The European Union has a common approach through MiCA, which introduces rules for token issuers and crypto service providers. In contrast, China has chosen a strict line: trading cryptocurrencies and operating crypto exchanges within the country is effectively banned, and mining has been pushed out by regulatory restrictions.

In Azerbaijan, there is currently no special law on virtual assets. However, they are not completely outside the legal framework either. A direct mention of cryptocurrency is included in the rules for margin trading approved by the Central Bank, where it is described as a digital currency when calculating leverage on contracts for price differences.

But such mention is clearly insufficient for a full-fledged system. Within the country, cryptocurrency cannot be used as a means of payment, as the only legal means of payment remains the manat. This is fiduciary money, the issuance and circulation of which is controlled by the state. At the same time, the purchase, storage, sale of digital assets, and mining are not directly prohibited.

In practice, citizens can operate through foreign cryptocurrency platforms on the internet: there is no criminal or administrative liability for such operations. However, the lack of clear rules makes the market unstable for both users and financial organizations, which do not understand where the boundaries of what is permissible lie.

Why Current Regulations Are Insufficient

Some issues are currently addressed by general laws: on electronic commerce, currency regulation, the securities market, as well as norms of the Civil Code. Civil law allows for the consideration of individual operations through existing categories, but this is insufficient for the dynamic crypto market.

The constitution guarantees the right to engage in any economic activity unless prohibited by law. Therefore, mining and operations with digital assets are considered permissible. However, without specific rules, large banks and investment companies prefer to stay away: the reputational risks are too high, and there are too many questions regarding transaction control.

Digital currency expert Elnur Guliyev believes that it is the lack of a clear regulatory framework that hinders serious players from entering this market. According to his assessment, legalization and the introduction of tracking operation standards, including the CARF system, would help reduce money laundering risks and bring the local market closer to international practices.

The main problem is that fiscal authorities do not have the technical tools for full monitoring of such operations. Cryptocurrency has not yet been officially legalized, and profits from it are classified only as income from non-entrepreneurial activities.

According to Elnur Guliyev, there are no local regulated crypto exchanges and exchange services in the country with which tax authorities could exchange data. Foreign platforms do not automatically provide information to Azerbaijani authorities, and disclosure of information is only possible by court order. Therefore, the state does not see either the real number of participants in the crypto market or the volumes of their income.

Taxes, Control, and Market Transparency

Separate tax mechanisms are already in place. Income from individuals' operations with digital assets is considered income from non-entrepreneurial activities. Tax is paid on profits, that is, on the difference between the purchase and sale price of the crypto asset.

Additionally, certain cross-border operations are subject to norms provided by the Tax Code, including value-added tax and withholding tax. However, the taxation of cryptocurrency income largely depends on voluntary declaration.

Official statistics on how many citizens of Azerbaijan have independently paid taxes on profits from cryptocurrencies are not available. Although relevant regulations have existed since 2017, a working mechanism for their implementation has not been established. The State Tax Service emphasizes the obligation to pay, but the procedure is effectively placed on the citizens themselves: individuals must declare their profits, after which a rate of 14% is applied.

The new law is expected to close this gap. It is anticipated that it will define the status of virtual assets, requirements for exchanges, brokers, trading platforms, and other market participants. Licensing, unified operational rules for operators, and state oversight of the segment are also expected.

For the regulator, not only legalization but also transparency is important. The Central Bank aims to create a control system for operations with digital assets, reduce risks of money laundering and tax evasion, and align national rules with international standards, including recommendations from the Organization for Economic Cooperation and Development regarding the exchange of information on crypto assets.

Fintech Infrastructure and Future Stablecoins

Simultaneously, a foundational document of an educational and informational nature is being prepared in the country. It is intended to serve as the basis for comprehensive regulation of cryptocurrencies and virtual assets. This was reported by Edgar Abdullayev, chairman of the Azerbaijan Fintech Association AzFina.

According to him, an initial approach to regulating stablecoins has already been formed in Azerbaijan, and further stages of work have been defined. The plan will be implemented gradually. In the longer term, a stablecoin under the control of the Central Bank may appear in the local market.

Such infrastructure is important not only for transactions. Bitcoin and other digital assets are built on blockchain, where cryptography protects records and confirms operations. However, for the financial system, one technology is not enough: a legal framework is needed to explain how to account for assets, how to conduct customer verification, and how a cryptocurrency operation differs from a regular bank transaction.

The Central Bank is already developing an environment for financial innovations. A regulatory sandbox is operating in Azerbaijan, where fintech companies can test new products, including solutions based on blockchain technologies. The Central Bank of Azerbaijan notes that interest in this platform continues to grow.

The Open Banking project is also ongoing. Fidan Tofidi reported that all banks in the country are connected to the platform, and the number of fintech companies is increasing. In the future, users will be able to manage accounts from different banks through a single application, and an open digital ecosystem will create space for new financial services.

The next step will be a new strategy for the digital development of the financial sector. The Central Bank has already assessed the digital maturity of banks, payment organizations, fintech companies, the insurance market, and the capital market. These results will form the basis of the digital transformation program, with particular attention to artificial intelligence, modern financial technologies, and clearer rules for digital assets.