Starting from 2022, Kyrgyzstan develops and introduces new laws and instruments that regulate blockchain technologies and cryptocurrencies. Let’s see their rules in our country.

The theme of cryptocurrencies and blockchain technologies is becoming more popular in the world. Kyrgyzstan was not bypassed by it, as well. Despite the fact that the country’s National Bank urges to be more cautious with this kind of investment, and the legislation does not recognise cryptocurrency as the legal tender, this market is developing in the country.

Until recently, the state was interested mainly in miners, but only in terms of taxation. In 2020, the Tax Code set the 15 per cent rate as the mining tax. But in August 2022, the law “On virtual assets” became effective in Kyrgyzstan, it defined clearer rules of the game at the cryptocurrency market, and also defined obligations and requirements to its participants.

A range of documents regarding regulation of the cryptocurrency market is still pending. 

According to Daniil Vartanov, specialist in cryptocurrency and blockchain technologies, development of blockchain technologies in Kyrgyzstan is now limited either to currency speculations or the so-called state blockchain that works under government rules.

“These are the two areas where blockchain does not add any innovation because the so-called cryptocurrency trading is no different from currency speculation in the Forex market, and state blockchain is actually an oxymoron, as these two words are mutually exclusive. Because blockchain tends to remove any intermediary, or the central figure,” Vartanov said.

According to him, blockchain is a technology of decentralisation and, first of all, it should help in situations when the state functions poorly, where there is no access to bank financial services, etc.

“Blockchain tends to change everything, so that the poorest village or the poorest person has access to what nationals of the most developed countries have. But it does not happen here. It turns to be just trading or state blockchain. It plays no role here,” Vartanov said.

However, according to Elena Chigibaeva, co-founder of WeinCrypto DAO, crypto enthusiast, the current situation is just a stage of development. According to her, the country develops a favourable environment for development of innovations with the use of blockchain technologies and cryptocurrencies.

She compares the cryptocurrency situation in Kyrgyzstan with the IT market in 2016:

Back then, the law “On High Technology Park” became effective and many IT specialists started to come out of the shadows of freelancing, single and “party” forms to big companies and the industry. The blockchain and cryptocurrency system is yet to develop in Kyrgyzstan with miners, cryptocurrency exchanges, blockchain communities, cryptocurrency traders, crypto enthusiasts, start-up creators in Web3, and others emerging.

Law “On virtual assets.” What is it for?

In fact, this is a basic document specifying the concept of a virtual asset and rules of its circulation. According to it, a virtual asset is a set of data in electronic digital form that has its value.  It can be either an independent object of civil law, or the means to certify property and non-property rights.

However, the virtual asset is not a legal tender in the territory of Kyrgyzstan. In other words, no transactions in cryptocurrency are allowed in the country.

Besides, the instrument regulates mining, issue and initial placement of virtual assets, as well as the activity of legal entities that provide services related to virtual assets.

According to the law, any person or legal entity may carry out activities related to virtual assets, as well as possess, use and dispose of virtual assets, including exchange them to other types of virtual assets, as well as purchase or sell them.

Legal entities may also issue and place their own virtual assets in the territory of Kyrgyzstan and abroad.

However, when carrying out activity in the field of virtual assets, market participants must report on transactions with virtual assets they have made.

There are special rules for miners too – they have to register, have their own hardware, active virtual wallet, and the power supply system of adequate quality in the premises. They also have to pay at the increased electricity rate.

According to Elena Chigibaeva, this law is not restricting,  but generally supporting the development of blockchain as technology and ecosystem.

“The instrument has determined general frameworks, country’s policy, main cryptocurrency market participants, and also specified basic regulatory standards. It has determined regulatory standards of mining, digital asset emission, and provision of services to exchange virtual assets. It also specifies the principles of virtual asset promotion in the territory of the Kyrgyz Republic,” she said in the interview to CABAR.asia.

However, there is another side to the story. According to Daniil Vartanov, specialist in blockchain technology, the law focuses on exchange operations and their legalisation. It’s not bad, according to him, because it has made them get out of the “grey zone.” On the other hand, the law contains the phrase that it is forbidden in Kyrgyzstan to sold goods and services directly in exchange for cryptocurrency.

“It literally pulls the rug from under our future because it makes as much sense as the fact that we would have been banned from sending messages via internet 30 years ago and Kyrgyz Post Service would have been the monopolist of communication of people. The same is here, when the National Bank tries to retain its monopoly of the currency used by citizens. All opportunities that blockchain technologies can offer are provided by means of cryptocurrencies, and this is how the state makes us engage in trading and state blockchain. This is very bad,” the expert said.

New rules 

In addition to the existing law “On virtual assets”, the government also adopted a range of instruments in September, which set rules for cryptocurrency market players. In particular, for cryptocurrency exchanges. 

The requirements include, but not limited to, being the open joint-stock company and carry out operations as the public company, and also to register with the Single State Register of cryptocurrency exchanges of the Kyrgyz Republic.

Besides, now investment funds may invest in cryptocurrencies, but the share of such investments should not exceed 20 per cent of net assets of the fund.

The procedure of service provision related to virtual assets is also pending. The procedure was developed by the National Bank. Draft initiators offer to set minimum requirements to commercial banks that provide services related to virtual assets. The rules of service provision are outlined for banks and bank agents, and any activity related to circulation of virtual assets must be licensed.

According to the instrument, banks are obliged to receive the permit for this kind of activity from the National Bank of the Kyrgyz Republic after submission of a package of documents and with the prepared internal mechanisms for this activity. Moreover, the bank may provide the following list of services related to virtual assets:

• Transfer of virtual assets;
• Storage, management and control of virtual assets;
• Provision of financial services related to the initial placement and (or) sale of the issuer’s virtual assets.

Bet on blockchain?

According to the research of the Centre for Political and Legal Studies, the number of owners of crypto assets in Kyrgyzstan will be steadily increasing and the state must create favourable conditions both for the investment activity, and for attraction of investors and developers of new technologies.

“Given the properly chosen strategy, our country has chances not to lag far behind in the race of new technologies and not to make mistakes that can result in the growing outflow of capital to other countries, including closest neighbours,” according to the experts of the Centre.

They noted that Kyrgyzstan has chosen a reasonable and justified strategy to deal with the cryptocurrency market.

“We should be consistently keeping to the principle of regulating instead of forbidding. It applies both to mining, and to crypto asset turnover. Moreover, conditions for crypto asset turnover and work of investors and start-up developers in this sphere must be at least not less favourable than that in our neighbouring countries,” according to the report.

According to the experts of the Centre, open and clear policy of Kyrgyzstan regarding cryptocurrencies can become favourable for attracting investors and making payment operations related to cryptocurrency. However, paying attention to the people’s financial literacy is equally important. 

Daniil Vartanov shares the same opinion,

Vartanov also said that national universities already have all necessary disciplines to understand blockchain technologies – mathematics and cryptography.

“Even world universities that provide blockchain-related education provide only one month-long online courses. There is no need in five-year-long education,” he said.

Despite high volatility and other risks of cryptocurrency, a range of countries have a positive attitude towards the circulation of virtual assets and investments to blockchain technologies. For example, Switzerland, Singapore, Lichtenstein, Germany and other countries create transparent and maximum favourable conditions for that.

In October 2022, Coincub, the cryptocurrency exchange aggregator, published the ranking of the most cryptocurrency-friendly countries in the world. Germany topped the list. Experts called the country as the most favourable for doing crypto business as it has progressive tax law.

The country has zero tax on Bitcoin and Ethereum sale if these assets have been retained for more than a year. Moreover, Germany has many Bitcoin investors and nodes.

Switzerland, Australia, UAE and Singapore are also among the world top 5 countries that are friendly to cryptocurrency.