CRYPTOCURRENCY AND TAJIKISTAN: Last and least, or the majority?

On the scale of global crypto adoption and regulation Tajikistan is among the last and the least if compared to its closer or immediate neighbors. For instance, by adoption, Pakistan and Ukraine are in the world’s top 5 countries. In some sources, by regulation, Tajikistan scores profile of a ‘hostile’ country. Against this stance, countries like Estonia, Georgia, Kazakhstan, Uzbekistan and Kyrgyzstan have adopted a different approach: from being among ‘global leaders’ to being pragmatic.

But if to take a closer look, currently, crypto is neither legally banned nor legally restricted in Tajikistan. Strictly speaking, it is not legal either, a position which creates a grey area and which most of the counties in the world have accepted as fact.

The “new” Internet

Crypto is spreading and, as it usually happens, the majority will have been late to realize how profoundly it impacted society. It is claimed to be the WEB 3.0. First, the Internet moved information between people, then it moved commerce and now it is destined to be a space for movement of value.  And crypto is changing the Internet itself. With the advent of Bitcoin came its byproduct (perhaps more important that Bitcoin itself), the Blockchain, which points now in the direction of the development of what may become an invariable attribute of any system of advanced society: decentralization.

Regulation: where do we start

The path of “least resistance” in regulating the crypo is mining – at least for countries like Tajikistan where electricity is relatively cheap and which is a next-door neighbor of China from where most miners now seek to relocate their mining hardware amid the increasing ban on crypto. To date, however, mining is not legally defined in Tajikistan.

While first crypto enthusiasts and maximalists have started to mine them since close to a decade ago, only recently certain countries saw in this an opportunity or the need to give mining a legal definition. Thus, in Kazakhstan “digital mining is a computing process carried out by computer and power generation capacities according to specified algorithms for encrypting and processing data which secure verification of completeness of data blocks on the blockchain” (Law on Informatization).    

Kyrgyzstan Tax Code defines mining as a computing process run by software and hardware tools to secure the functioning of a distributed ledger of blocks of transactions by updating it with information on transactions completed between the users. Mining may result in the creation of a “virtual asset” in the hands of a miner, as a reward for maintaining the ledger.    

In Uzbekistan (Presidential Decrees 3832 and 3926), mining is defined as an activity of “maintaining a distributed platform and creating new blocks which may be rewarded in the form of new units and commissions expressed in different cryptocurrencies.”  

What is crypto in legal terms?

Because cryptocurrency has in it a refence to the word “currency”, it is often called the currency. However, legally speaking, in Tajik law, it is not. There are two key terms with which Tajik law operates in this regard: “national currency” and “currency”. The former is Tajikistan Somoni, a legal tender in Tajikistan. The latter is defined as “national currency of a foreign state”. It now becomes obvious that crypto currency is not the currency in Tajikistan (El Salvador where Bitcoin is a legal tender along with USD, although being interesting exclusion here, is still a special case).

Digital money as such is not defined except that it is only possible to transact with it through National Bank of Tajikistan (NBT) or other licensed credit institution. Fantom Foundation once announced of its plans to help Tajikistan create its national digital currency (CBDC), but that news was then repudiated by NBT. (CBDC is a government-controlled crypto intended to replace the fiat currency and be pegged to/mirror the value of the currency of a particular state).

It may be interesting to note here that in 2018 EU Directive 843 defined “virtual currencies” as “a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically.

Crypto cannot be said to be a commodity, because it is always a tangible asset (strangely enough, we find the definition of it only in the Tajikistan Tax Code).

Is crypto securities? In Tajikistan law, securities is a document certifying certain property rights which can be exercised or transferred upon its presentation or through a proof of their recording in a register (including computerized one) of the person issuing them in its own name and liable for the underling obligations. This definition sounds much wider and capable of encompassing the crypto. Thus, crypto may also be said to certify certain rights which can be transferred through proof of their record in a computerized register.  A closest sibling to securities would be a “digital token”. But the second part of the securities definition causes problems if applied to crypto in its classic form (e.g. Bitcoin): crypto is not issued by a person who controls the register, for no person controls it, nor is there legally enforceable liability arising from such crypto.

Is crypto a cryptographic product? Cryptocurrency has reference in its name to “crypto” because of the underlying cryptography that enables its peer-to-peer exchange. In Tajikistan law on Cryptography, “cryptographic products” are products intended for technical protection of confidential information from unauthorized access. So, cryptocurrency may be said to be a cryptographic product (although its function cannot be limited to just protection of information from accessing it by third parties). If it is a cryptographic product then it falls within the scope of the Tajikistan Law on Cryptography, which seems to adopt the following approach: everything which is not explicitly excluded from its ambit falls within it. Obviously, crypto is not explicitly excluded from the scope of the law. Two consequences thus may follow: the need for certification of the cryptography product and the need for licensing of the cryptographic activity itself. At its core, crypto is a software program and while legally, software may be subject to certification, it may not go through certification, either because it does not appear on the list issued by the certification authority (such product would need to be identified with refence to ТНВЭД, a locally adapted HS standards), or because certification authority does not have means to certify specific product. With respect to licensing, a cryptographic activity needs to be carried out or on-sold by someone located in Tajikistan. From this standpoint, crypto may practically escape the certification requirements and, although partially a product of cryptographic activity, such activity would not be in Tajikistan (many would argue that such activity would be in no one’s land, for part of that work is carried out on the Blockchain, quite a distinct “space” in itself). 

Intuitively, we understand that crypto is some form of an intangible asset. Legally though intangible asset includes “software”, e.g., for intellectual property protection purposes only. Viewed from this angel, crypto, by its nature, is an open-source platform and thus the issue of protection of the software (the underling code) seems redundant. In anyway, the definition of the software as it exists now does not legalize crypto (nor adds clarity to what crypto is, let alone protects it).   

Crypto appears to be the asset of a new class. Attempts to capture it with traditional concepts and classifications raise more questions than find answers even in the most advanced economies. Our neighbors have attempted to introduced new terminology: “digital token” and “digital asset” (Kazakhstan), “virtual asset” (Kyrgyzstan), or “crypto asset” (Uzbekistan). These terms are not accompanied with definitions (except that crypto is the product of mining). At least they are legally recognized as something new and therefore legalized, even though with varying degrees. Tajikistan currently has no legal terminology and definition for crypto (nor for mining).

A target on several fronts

The main feature of crypto, and the biggest concern for anti-money laundering regulations (AML), is the possibility for parties to transact anonymously. With the latter comes the risk: appealing opportunity to transfer illicit funds. And “funds” here are defined broadly enough to capture crypto: “assets of any kind, whether tangible or intangible…” (Tajikistan AML Law). Tajikistan is associated with FATF through EAG (Eurasian group on combating money laundering and financing of terrorism) and is not directly bound by it. In 2019 FATF sought to expand the application of AML procedures to virtual assets: these include registration requirements, customer identification (KYC) and transaction monitoring. At the moment, virtual assets providers (e.g. crypto exchanges) are not on the list of persons bound by AML procedures in Tajikistan. This does not mean that such processes may not apply to individuals in Tajikistan since they may be subject to such procedures should they wish to access foreign crypto-exchanges (many of which are complying with AML procedures). But it may also mean that individuals in Tajikistan are, in the meantime, outside the local AML procedures otherwise applicable to them in their interaction with local banks and other credit institutions.

Since exchange control is intended to regulate capital outflow there are two major terms we need to understand: “currency valuables” and “capital” or “capital transactions”. For the purposes of Tajikistan Exchange Control and Regulation Law, currency valuables include: foreign currency, securities and payment instruments expressed in foreign currency; and Tajik Somoni including securities and payment instruments expressed in it if they are transacted in between residents and non-residents or between non-residents. If, as we saw previously, crypto is not a currency (neither foreign nor local), it cannot be a currency valuable, either.  From this it follows that currency transactions should not include any transaction involving crypto, because currency transactions involve currency only.  “Capital”, for exchange control purposes, is anything which can be represented in currency (foreign or local) and capital transactions in this sense involve movement of money out of the country in the form of direct or portfolio investments into securities and derivatives, or creation of a debt on the side of the resident (through receiving foreign loans). The control over capital transactions should therefore not be applicable since crypto is not represented in any currency which is not a legal tender. The law provides that capital transactions may further be defined by international standards. For now, there is no officially expressed and united view on this issue.  

Taxing the unknown

There are essentially two tings one can tax when it comes to crypto: mining operations and trading crypto. In countries where mining is legalized, taxation operates as higher rate of electricity tariffs (Kazakhstan, Kyrgyzstan), because mining is considered a technological process and not something which of itself adds value. On top of this, some countries (Kyrgyzstan) introduced special mining tax as a percentage of amount of electricity consumed in mining (essentially, the electricity bill becomes the tax base). Other counties (Kazakhstan) tax crypto when it is realized and as gain in a currency that is legal tender, or fiat money (Kazakhstan). Some countries exempt from taxation crypto trading by individuals and tax only profits of crypto-trading companies and distributed dividends (Georgia).     

In Tajikistan, the question of taxation of mining will remain rhetorical until crypto-mining is legalized. With respect to trading in general, legally trading is possible in securities and other financial instruments and only by a licensed broker. Again, we see that if trading in crypto is not explicitly legalized, it is not prohibited either, because one cannot prohibit what legally does not exist (defined). Traditionally, income is taxed where it is sourced (or deemed to have arisen) which means that it should arise either in Tajikistan or (and) outside it. Tajikistan Tax Code basically speaks about any income when it comes to taxation and even speaks of the possibility to tax illegal income. But, are crypto gains as such arise in any particular country? It would only be possible to speak of gains if they are realized in legal tender (lawful currency). And if it is not illegal to receive gains in crypto (and so far, it seems so), then it is not possible to speak about taxation of such ‘illegal” income, because it is not illegal.

With this array of questions, it seems that the answers will only start coming when Tajikistan start recognizing the reality of crypto and decides how to approach it and finds its own spot in this new space.