Cryptocurrency Landscape in Central Asia

The economic development of Central Asian countries can be characterized as diverse, with varying levels of economic growth and challenges. Kazakhstan, for example, has embarked on ambitious infrastructure development programs, particularly in the transport sector, and is aiming to become a hub for trade, commerce and finance with its Astana International Financial Center (AIFC). Its neighbors, especially Uzbekistan and Kyrgyzstan are also making efforts to upgrade their economic and financial systems.

Economic growth in the region is expected to strengthen, with Central Asia projected to grow by 4.8% in 2023, averaging 4.7% in 2024 and 2025. However, growth remains weak relative to pre-pandemic levels, and the region faces challenges such as high inflation, tighter financial conditions, and spillovers from the geopolitical situation on the continent.

Infrastructure development is crucial for the region's economic growth, as it can enhance growth, poverty eradication, climate change mitigation, and recovery from the impacts of the COVID-19. However, growing constraints on the use of public funds will require financing solutions and new funding sources to tackle the region's infrastructure investment gap. That is why some countries have turned their attention to cryptocurrencies and believe that the development of a crypto legal framework and a mild investing climate for crypto businesses might help to diversify their economies.

However, while cryptocurrency is legal in some countries, others have banned or restricted its use.

Kazakhstan

Kazakhstan was the very first in the region to legally recognize cryptocurrencies as a digital asset in July 2020. The country's aim to attract high-tech industry investments for economic growth has been a driving force behind its evolving regulatory framework for digital assets and cryptomining. The government's efforts to create a favourable ecosystem for foreign investments and secure independent regulation within the AIFC have positioned Kazakhstan as an emerging hub for crypto mining activities.

The development of regulatory framework has continued as of April 1, 2023, Law No. 193-VII on Digital Assets has come into force, establishing legal grounds for the issuance, placement, and circulation of digital assets in the country. This law introduces licensing rules for digital assets, cryptomining, and crypto exchanges, along with mechanisms for state oversight of this sector.

Under this legislation, digital asset exchanges must be licensed by the AIFC authorities and the issuance and circulation of unsecured digital assets in Kazakhstan is prohibited unless within the AIFC’s special legal regime. Additionally, digital mining is permitted only with a license, with specific requirements for mining pools and regulations on energy consumption by miners.

Uzbekistan

In Uzbekistan, the legal framework for cryptocurrencies has been evolving since the year 2021 to allow the use of digital assets under specific regulations. The National Agency for Project Management under the President of Uzbekistan (NAPU) is the authorized body regulating transactions with cryptocurrencies in the country.

The regulatory framework, established by the current country’s president Shavkat Mirziyoyev, requires cryptocurrency exchanges, mining pools, and custodians to be registered locally in Uzbekistan. Residents can only buy or sell crypto on local exchanges that verify user identities through a KYC process and store transaction data for five years. Crypto service providers are prohibited from facilitating trading with anonymous crypto assets, and the NAPU ensures compliance with anti-money laundering and counter-terrorism financing measures.

Furthermore, Uzbekistan has created a regulatory sandbox for cryptocurrency projects, allowing them to operate without a license for three years with favorable tax treatment. After this period, projects must either become fully regulated businesses or cease operations. The country aims to create a favorable ecosystem for crypto activities, including mining, by providing benefits such as tax exemptions and customs duty relief for pilot projects implemented under the special regulatory regime.

Kyrgyzstan

In 2022, the National Bank of Kyrgyzstan has published draft legislation defining cryptocurrency and its permissible uses in the country, aligning with recommendations from the Financial Action Task Force (FATF) to prevent money laundering and terrorism financing risks. The current legislation aims to mitigate risks associated with cryptocurrencies as interest in digital assets grows among Kyrgyz citizens and globally, first of all, as far as the country becomes to be one of the main crypto hubs in the post-Soviet space. Under the bill adopted, cryptocurrency is defined as a digital good representing value, stored and used electronically, but not recognized as a legal tender or a document of property rights. Virtual assets are distinguished as a different type of asset that can represent property rights. The legislation prohibits companies and individual entrepreneurs from accepting cryptocurrency for goods or services unless registered as crypto operators or miners. It also restricts entities from offering crypto brokerage services or issuing securities based on cryptocurrencies.

Crypto exchanges in Kyrgyzstan are required to register with and obtain licenses from the local financial markets regulator, maintain transaction records, and comply with anti-money laundering measures.

Tajikistan and Turkmenistan

In Tajikistan, the situation with cryptocurrencies is characterized by the emergence of major mining farms following China's ban on cryptocurrency mining. However, these mining farms face challenges such as power shortages and low-quality electricity supply due to issues with the country's power and internet infrastructure. The slow and controlled internet connection in Tajikistan, provided through a single switching center, contributes to unstable internet access, hindering crypto mining activities in the country.

In Tajikistan, just as in Russia or India, cryptocurrencies are not explicitly legal or illegal. While individuals can hold and trade cryptocurrencies, they cannot use them as a legal tender or currency for transactions. There are no specific laws or penalties related to cryptocurrency use in Tajikistan, but the lack of regulation does not equate to freedom from potential legal repercussions for fraudulent or illegal activities.

The National Bank of Tajikistan has issued a warning about the risks associated with cryptocurrencies, including the lack of consumer protections, volatility of the market, and potential use for illegal activities. However, major crypto exchanges operate in Tajikistan, and cryptocurrency is becoming more and more popular among citizens.

On the other hand, Turkmenistan, which also has no legal framework for cryptocurrencies, doesn’t show a high rate of crypto adoption. That could be due to a lot of reasons, including the county’s limited electricity supply, slow and fully controlled internet infrastructure, and lack of information about new financial technologies.

The future of cryptocurrencies and crypto businesses in Central Asia is promising, as the region has seen significant progress in recent years. Kazakhstan and Uzbekistan have legalized the use of digital assets, and both countries have been trying to regulate electricity prices to promote the mining of popular crypto assets. In Kazakhstan, more than a dozen crypto farms have already sprung up, and this move is expected to accelerate the use of cryptocurrencies in Central Asia. Uzbekistan has also announced a move to create a national cryptocurrency mining pool, with the primary goal of developing a business environment conducive to crypto mining.

However, challenges remain, such as high electricity tariffs in Uzbekistan and the need to address issues related to power shortages and internet connectivity in several countries in the region.