Cryptocurrency regulation in the Republic of Azerbaijan

In recent years, cryptocurrencies have emerged as a revolutionary force in the global financial landscape, transforming the way individuals and businesses conduct transactions. Powered by blockchain technology, these decentralized digital assets have gained widespread popularity.

As cryptocurrencies continue to evolve, governments and regulatory bodies worldwide are grappling with how to effectively manage this new frontier, balancing the need for innovation with the imperative to protect consumers and maintain financial stability. Research by the Law Library of Congress (USA) revealed that by the end of 2021, there were 9 jurisdictions with an absolute ban on cryptocurrencies and 42 with an implicit ban worldwide. Meanwhile, 103 jurisdictions apply tax laws, as well as anti-money laundering and counter-financing of terrorism (AML/CFT) laws, to this area.¹

The purpose of this research is to explore the current state of cryptocurrency regulation in Azerbaijan, analyzing the existing legal framework, identifying gaps and examining the potential for future regulatory developments.

Cryptocurrency is a digital or virtual form of money that uses cryptography for security. Unlike traditional currencies issued by governments, cryptocurrencies are decentralized and operate on a technology called blockchain. The most well-known cryptocurrency is Bitcoin, but there are thousands of others, each with unique features.

Before proceeding to the main part of the research it is essential to make sure that basic cryptocurrency terms are clear.

Blockchain is the underlying technology behind most cryptocurrencies. It is a decentralized and distributed ledger that records all transactions across a network of computers. Each transaction is added to a "block" and linked to the previous one, forming a "chain." This technology ensures transparency, security, and the immutability of transaction records, making it a fundamental aspect of cryptocurrency systems.

Token is a digital asset that is created and managed on a blockchain. Unlike coins like Bitcoin or Ethereum, which have their own blockchains, tokens are typically built on top of existing blockchains. Tokens can represent various assets, including real-world items, and can be used for different purposes, such as accessing services on a platform, voting in decentralized organizations, or participating in crowdfunding.

Mining is the process by which new cryptocurrency coins or tokens are created and added to circulation. It involves solving complex mathematical problems to validate transactions on the blockchain. Miners use powerful computers to perform this task, and as a reward for their work, they receive a certain amount of the cryptocurrency they are mining.

Stablecoin is a type of cryptocurrency that is designed to maintain a stable value relative to a reference asset, usually a fiat currency like the US dollar. Unlike other cryptocurrencies, which can be highly volatile, stablecoins aim to provide the benefits of digital currency while minimizing price fluctuations. This makes them useful for transactions, savings, and remittances.

Altcoins are all cryptocurrencies other than Bitcoin. The term "altcoin" is short for "alternative coin," and these coins often seek to improve upon Bitcoin’s technology or address its limitations. Popular altcoins include Ethereum, Litecoin and Ripple, each offering different features and use cases.

There is currently no direct regulation of cryptocurrency in Azerbaijan’s legislation. This means that there are no specific laws, decrees, or even orders directly governing this area. However, Bitcoin and altcoins cannot be used as a form of payment. It is forbidden to pay or accept payments in any other currency than manat, since it is the only legal form of payment in the country.

As in many jurisdictions where regulation of crypto transactions is still in its early stages, various laws can be applied to these transactions. In Azerbaijan, these laws include the "Law on Electronic Commerce" (in relation to mining and trading of cryptocurrencies) as well as the "Law on Currency Regulation" and "Law on Securities". In practice, the government does not prohibit individuals from purchasing cryptocurrencies.

The national legislation refers to cryptocurrencies only once and determines a specific related matter, which is specified as "Rules of margin Trading", approved by the Central Bank of Azerbaijan (CBA). Article 7.2 of this regulation reads:

Therefore, Azerbaijan’s approach to cryptocurrency remains fragmented and lacks a comprehensive legal framework. The existing references to cryptocurrencies are isolated and do not constitute a systematic regulatory approach. This indicates that while cryptocurrencies are acknowledged, they are not fully integrated into the legal and financial systems of the country.

According to the SME Law research, cryptocurrency taxes are not specifically regulated in Azerbaijan, but there are three main types of taxes that can be applied to cryptos.

The first one is the tax levied at the source of payment regulated by Article 125.1.5 of the Tax Code. It states that non-resident legal entities and natural persons registered as taxpayers are taxed at the source of payment at the rate of 10 percent on the incomes obtained from the performance of works or the provision of services and other incomes obtained from the Azerbaijani source. If the legislation treats crypto as a business (service), then article 125.1.5 covers non-resident's income as a result of payments made for the purchase of cryptos, and therefore, at the time of payment, tax is applied at the source of payment at the rate of 10 percent. This article does not apply if the legislation treats crypto as a commodity.

Article 125.1−1 also governs tax at the source of payment, and it can be applied whether cryptocurrency is treated as a commodity or a service. It specifies that when money is transferred from a resident’s account in Azerbaijan to a non-resident's electronic wallet, a 10 percent tax is levied on the transferred amount. If a resident sends money to a non-resident e-wallet to buy cryptocurrency, this tax applies. Therefore, if cryptocurrency is not treated as a commodity and no payment is made to a non-resident e-wallet, no source tax is applied when buying cryptocurrency. In all other scenarios, transactions are taxed at 10% under Articles 125.1.5 and 125−1.1 of the Tax Code.

The second possible type of tax is a tax on income from non-entrepreneurial activity. Article 99.3 of the Tax Code reads: ‘Income from non-entrepreneurial activities includes: … 99.3.8. any other income showing an increase in the initial value of the taxpayer’s assets (if any) — except wages;'. So, the positive difference between the purchase price and the sale price of cryptocurrency can be taxed at the rate of 14%. In this case, a person who receives profit from such transactions should be registered as a taxpayer and pay 14% profit tax until the 31st March of the following year according to article 101.2. This was reported by the State Tax Service⁴.

The last type of tax that can potentially be imposed is Value Added Tax (VAT): buying cryptocurrencies from abroad as e-commerce is considered taxable operations for VAT purposes according to article 169.3 of the Tax Code. Also, article 169.3 defines that payments to the non-residents who are not registered for VAT purposes by any person who are not registered for tax purposes in order to buy e-commerce services are taxed for VAT purposes. VAT should be calculated and deducted from the buyer’s account by local banks or a branch of foreign banks in the Republic of Azerbaijan that is performing the operation.⁵ In brief, buying cryptocurrencies can be taxed at the rate of 18%, since it is Azerbaijan’s VAT rate (Tax Code, art. 173).

To summarize, it is necessary for the legislator to clarify whether crypto is considered as a commodity or as a service at first. It affects the taxes to be applied. As a matter of fact, in many jurisdictions, fiscal authorities are often the first to recognize and cryptocurrency transactions. The reason for this is clear: taxation is a direct and significant revenue stream for governments, and as cryptocurrencies grow in popularity and value, ensuring they are taxed appropriately becomes a priority. This trend reflects a broader global pattern where governments initially focus on the fiscal aspects of cryptocurrency before moving on to comprehensive regulation.

As we mentioned before, it is prohibited to both pay and accept payments in cryptocurrency, since the only legal means of payment in the country is the Azerbaijani manat. While acquiring digital assets for investment purposes is technically allowed, it is not so simple to buy cryptos in Azerbaijan. One of the local banks, Leobank, offers the opportunity to invest in cryptocurrencies using its own application. Although in this case, we are not talking about selling real cryptos, but rather about buying derivatives⁶, such as mutual funds, similar to investments in gold and other precious metals.⁷

There are no local cryptocurrency exchanges, but residents can use international exchanges. Meanwhile, access to some of the most popular exchanges, ByBit and OKX, were restricted in Azerbaijan, referring to the Electronic Security Service under the Ministry of Digital Development and Transportation of Azerbaijan.

"According to the requirements of the legislation of the Republic of Azerbaijan, access to cryptocurrency exchanges OKX and ByBit is limited at the national level. The reason for this is the violation of the relevant requirements in the field of combating money laundering and financing of terrorism," the statement of service reads.⁸

Cryptocurrency mining is neither prohibited nor officially regulated by law in Azerbaijan: ‘everyone may, using freely his/her possibilities, abilities and property, engage individually or together with others in entrepreneurial activity or other kinds of economic activity not prohibited by the law' (Constitution of the Republic of Azerbaijan, art. 59, sec. 1). Also the Constitution states that everyone may perform actions not prohibited by law and no one may be forced to perform actions not prescribed by law (art. 71, sec. 9). Not a single law has been passed prohibiting cryptocurrency mining so far. Despite this, there are no large mining farms in the country.

The reason is that there weren’t any successful cases of importing the special ASIC⁹ processors (which are the best equipment for mining) in Azerbaijan, since customs service does not allow such hardware.¹⁰ It seems that Bitcoin and altcoins mining in Azerbaijan is conducted using video cards (GPUs), or even using PlayStation consoles, as it is difficult to be controlled by authorities.

The reliance on underground mining methods is a consequence of the lack of clear crypto regulation. Due to this, the government loses potential tax revenue from mining activities, and the economy misses out on the potential benefits of integrating cryptocurrency mining into the formal economic sector.

There is currently no law in Azerbaijan that regulates the virtual currency sector, and the existing legal framework in this area is underdeveloped, leaving individuals unprotected against potential scams and fraud. Efforts to study and develop relevant legislation are ongoing, but the lack of adequate security in the virtual currency field remains a significant issue. It is crucial to establish an international legal framework to protect citizens from crypto-related fraud. Countries should establish a new legal framework for the exchange of virtual currencies. Only then will it be possible to take a step towards legal regulation and ensure the safety of citizens' funds.¹¹

Another important issue is the legal status of cryptocurrency. There is no generally accepted definition of cryptocurrency. The Bank for International Settlements (BIS) treats it as an asset with a number of unique characteristics, and also calls them potential substitutes for money. According to the interpretation of the International Monetary Fund (IMF), cryptocurrencies are not currencies, but assets that are extremely risky to invest in.¹²

Based on the legislation of Azerbaijan, there are potentially 3 possible cryptocurrency statuses: crypto as a commodity, as a service, and as a security.¹³

Cryptocurrency as a commodity. According to the Tax Code (art. 13.2.8.), a commodity includes tangible or intangible assets, such as electricity, gas, and water. This list of goods is open. The broad definition of "goods" in the Code includes assets, implying that cryptocurrency can be considered a commodity. The transfer of ownership during crypto transactions aligns with the definition of goods in the Tax Code.

Cryptocurrency as a service. The Tax Code defines a service as an activity with materially expressed results, distinct from the provision of goods. Since cryptocurrency transactions involve the transfer of goods, they do not fit the definition of a service.

Cryptocurrency as a security. The Civil Code lists specific securities and requires them to be registered with the Central Bank of Azerbaijan. Since cryptocurrency is not explicitly included in this list and is not subject to such registration, it cannot currently be classified as a security under Azerbaijan’s law.

Considering the legal definitions provided in Azerbaijan’s Tax Code and Civil Code, the most suitable classification for cryptocurrency appears to be as a commodity. While cryptocurrency does not fit the definition of a service, and it does not meet the criteria to be classified as a security, treating it as a commodity provides a coherent approach within the current legal framework.

Absence of direct regulation doesn’t mean that there is no punishment for illegal operations. Several cases of fraud have been reported in Azerbaijan, in which criminals conducted transactions using cryptocurrency.

At the end of 2022, three crypto fraudsters were arrested. In 2021, Baku residents Gulara Abdullayeva, Khayal Yahyayev and Yegana Mamedova founded a company called "Insuccess" with an unspecified business line. Then they used the international financial fraudulent pyramid "OCOS" in the country and, through the company they created, organized its widespread distribution, carrying out PR on social media. Users have invested in the fraudulent scheme, expecting to make a profit. In total, 10 thousand citizens were deceived.¹⁴

In May 2023, press office of the MIA of Azerbaijan reported that a person suspected of fraud, who has stolen money from citizens' bank cards under the guise of buying and selling cryptocurrency on Telegram, has been detained. Elchin Novruzzade, a resident of the Saatli district, was detained as a suspect. It was established that he’s stolen funds from the bank cards of about 20 victims and transferred them to accounts in foreign countries.¹⁵

As for the latest cases, in July 2024 Baku resident Victoria Rzayeva was detained on suspicion of telephone fraud causing damage to citizens in the amount of over 55 thousand manats. The detainee admitted that she acted as a courier and took money from the addresses of citizens deceived by other accomplices in the crime, whom V. Rzayeva met on Telegram. The criminals called lonely citizens and asked for money allegedly for urgent assistance to their loved ones in trouble. Then she transferred money to crypto accounts of members of a criminal group located abroad.¹⁶

These cases illustrate that illegal activities involving bitcoin and other altcoins are not exempt from prosecution in Azerbaijan. The increasing use of cryptocurrency as a tool for fraudulent schemes highlights the need for stronger legal frameworks to protect citizens. The arrests and investigations in these cases indicate that law enforcement agencies are actively pursuing individuals who exploit cryptocurrency for illicit purposes. This situation emphasizes the urgent need for comprehensive legislation that regulates the use of cryptocurrencies to ensure the safety and security of citizens.

Taleh Kazimov, chairman of the Central Bank of Azerbaijan (CBA), has acknowledged that cryptocurrency trading already takes place in the country. In this regard, a decision will be made in 2025 to regulate this sphere of economy. It is not specified what exactly this decision will be.¹⁷

However, he emphasized that the CBA has no intention of issuing its own digital currency or investing in its development. The Central Bank investigates the experience of other countries all over the world. In fact, no national bank has been successful in this field.¹⁸

The discussion about creation of the digital manat has been going on for more than a year. Digital manat is going to be one of the central bank digital currencies (CBDC), which is a stablecoin, used as an alternative or supplement to the national currency. But there is a difference between CBDC and cryptocurrency. CBDCs are regulated and issued by the central bank, while cryptocurrencies are decentralized and unregulated.

The preparation of the digital manat concept began in 2022, but no significant steps have been taken yet. "The Central Bank of Azerbaijan has all the capabilities to implement the digital manat, but for now we are focused on modernizing and optimizing the national payment system, but then we will start implementing other innovations," the chairman of the CBA claimed in 2023.

In the same year, president of the Azerbaijan Banks Association (ABA) Zakir Nuriev also expressed his opinion on this issue. He recognized the increasing significance of digital currencies and cryptocurrencies, highlighting the need for advanced technologies. Azerbaijan is also making efforts to develop a digital manat, demonstrating the country’s dedication to being at the forefront of financial innovation.¹⁹

It’s also noteworthy that at the end of 2022, Binance, one of the world’s largest cryptocurrency exchanges, offered its assistance to Azerbaijan in regulating the national digital currency industry. According to Olga Goncharova, Binance’s Director of CIS Relations, central banks globally are increasingly focused on adapting legislation to accommodate cryptocurrencies, rather than simply imposing bans. She highlighted that effective regulation could attract foreign investment to regions that implement it²⁰. However, no official statements or further details about this potential collaboration have been released, and it remains unclear whether any cooperation has taken place.

To conclude, In Azerbaijan, the regulation of cryptocurrencies remains largely undeveloped, with no specific laws or regulations directly governing their use. Although cryptocurrency cannot be used as a form of payment in the country, individuals are not prohibited from purchasing and holding these digital assets.

Azerbaijan’s approach to cryptocurrency taxation is similarly fragmented. While there are potential tax implications under the current Tax Code, there is no clear guidance on how cryptocurrencies should be treated.

Cryptocurrency trading in Azerbaijan faces significant restrictions. While residents can access international exchanges, the country has blocked access to some popular platforms, citing concerns about compliance with AML and CFT laws. Additionally, the absence of local exchanges limits the ease with which residents can engage in cryptocurrency trading.

Cryptocurrency mining activities are neither prohibited nor officially regulated, leading to underground mining practices. The lack of clear regulation results in missed opportunities for the government to collect tax revenue and for the economy to benefit from integrating mining into the formal sector.

In conclusion, while Azerbaijan is aware of the growing significance of cryptocurrencies, the country’s legal and regulatory framework remains underdeveloped. A more comprehensive approach is needed to address the legal, financial, and security challenges posed by cryptocurrencies, ensuring that Azerbaijan can effectively manage this emerging aspect of the global economy.