The State of Crypto Adoption in Azerbaijan
Source: Envato
Azerbaijan appears to be taking a cautious approach to cryptocurrency adoption. The country's Central Bank is actively researching the area, trying to find a balance between embracing innovation and maintaining financial stability.
While the Central Bank has begun issuing licenses to companies for cryptocurrency operations, the use of cryptocurrencies as a payment method in Azerbaijan is not yet allowed.
Currently, Azerbaijani citizens can own cryptocurrencies and use them for international online purchases, but there are no local regulations or systems in place for widespread use.
The government seems more focused on developing a digital currency system rather than fully embracing cryptocurrencies. This cautious stance is likely due to concerns about potential risks associated with cryptocurrencies, such as their use in fraud or money laundering.
As a result, some central banks do not support the expansion of cryptocurrency circulation. Therefore, it is necessary to conduct a comprehensive study and evaluation of both the creation and use of blockchain technology and cryptocurrencies, after which a decision in this area should be made.
The economic expert Vugar Bayramov suggests that the Central Bank's position on cryptocurrencies remains conservative and is likely to stay that way shortly. This indicates that while Azerbaijan is not completely closing the door on cryptocurrencies, it's not rushing to fully adopt them either.
However, given the global trends mentioned on Statista, we can infer that Azerbaijan's cryptocurrency market is likely still in its early stages.
The global projection of 1.76% user penetration in 2024 suggests that adoption rates are generally low, and Azerbaijan, with its cautious approach, may be below this average.
Crypto Law in Azerbaijan
Source: Envato
The current state of cryptocurrency regulation in Azerbaijan can be characterized as largely unregulated, with some indirect references in existing legislation.
Azerbaijan does not have a comprehensive legal framework specifically addressing cryptocurrencies or blockchain technology.
There are no direct regulatory acts, laws, or decrees that explicitly govern cryptocurrency activities. However, this lack of specific regulation does not imply that cryptocurrency operations are illegal in Azerbaijan.
The concept of cryptocurrency is marginally acknowledged in Azerbaijani legislation.
The "Regulations on margin trading" approved by the Central Bank of Azerbaijan refers to cryptocurrency as a "digital currency" in the context of defining contract for difference (CFD) trading limits.
This mention, while limited, indicates some level of recognition of cryptocurrencies.
Cryptocurrency activities, including bitcoin mining, are not explicitly prohibited by Azerbaijani law. The Constitution of Azerbaijan guarantees the right to free entrepreneurship, allowing individuals to engage in economic activities not prohibited by law.
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
This principle, combined with the absence of specific prohibitions, suggests that cryptocurrency operations exist in a legal grey area – neither explicitly permitted nor forbidden.
Existing laws such as the Law on E-commerce, the Law on Currency Regulation, the Law on the Securities Market, and relevant sections of the Civil Code may have some applicability to cryptocurrency activities.
However, these laws were not designed with cryptocurrencies in mind and their application to such activities remains uncertain.
From a tax perspective, revenue from cryptocurrency trading or selling is generally considered taxable. The tax authorities have indicated that such activities might be classified as e-commerce transactions for taxation purposes, rather than as illegal income.
Regarding international transactions, payments from Azerbaijani bank accounts to foreign entities related to cryptocurrency operations appear to be allowed under the rules for conducting operations in foreign currency.
Taxation of Cryptocurrency in Azerbaijan
Azerbaijan treats cryptocurrency revenue as taxable income. The country's tax authorities have stated that profits from buying and selling cryptocurrencies are subject to taxation.
For individuals, this means that if someone buys cryptocurrency and later sells it at a higher price, the profit they make is considered income and needs to be taxed.
This would fall under personal income tax rules in Azerbaijan, which use a progressive system. Income up to 2,500 AZN per month (about $1,500) is taxed at 14%, while any amount over that is taxed at 25%.
For companies, profits from cryptocurrency trading would be subject to the corporate profit tax, which is currently set at 20% in Azerbaijan.
The country also has specific rules for cryptocurrency transactions involving foreign entities.
Income from cryptocurrency transactions will be taxed. For legal entities, this means paying corporate profit tax, and for individuals, it means paying personal income tax. If someone buys cryptocurrency and later sells it at a higher price, that profit must be reported as income and taxed accordingly
When Azerbaijani residents buy cryptocurrencies from abroad, it's treated as e-commerce and subject to Value Added Tax (VAT). Local banks handling these transactions are responsible for calculating and deducting the VAT.
Additionally, when Azerbaijani residents transfer money to a non-resident's electronic wallet, the bank handling the transfer must deduct a 10% Withholding Tax from the amount being sent.
It's worth noting that anyone making profits from cryptocurrency transactions is expected to register as a taxpayer and pay a 14% profit tax.
Government Regulations and Policies
Source: Envato
The Central Bank chairman, Elman Rustamov, expressed concerns about cryptocurrencies in December 2017, saying they weren't recognized as legitimate payment methods and were risky for investors. He called for comprehensive regulations.
But the creation of a new association called the "Center for the Study and Development of Cryptocurrency Markets and Blockchain Technologies" is a sign of growing interest.
This group aims to educate people, propose regulations, and offer advice about cryptocurrencies and blockchain. They also want to help implement blockchain in business and banking, and support projects funded through initial coin offerings (ICOs).
By implementing new financial technologies in the market, they believe they can boost the cashless economy and extend digital services, making them transparent and available for citizens.
Furthermore, Azerbaijan has started discussing how to integrate blockchain technologies into its economy. The country has even begun talks with Binance, a major cryptocurrency exchange.
These discussions involved the Center for Analysis and Coordination of the 4th Industrial Revolution (4SIM), which is part of the Ministry of Economy. They talked about working together with universities and others involved in the crypto ecosystem.
Challenges to Crypto Adoption
Source: Envato
Here are the challenges to crypto adoption in Azerbaijan:
Regulatory Uncertainty
The government has not yet established a clear legal framework for cryptocurrencies, which creates a risky environment for investors and businesses. This lack of regulation can lead to issues such as fraud, money laundering, and other illicit activities.
Financial Infrastructure
The existing financial infrastructure in Azerbaijan is not fully equipped to support cryptocurrency transactions. Traditional banks and financial institutions may be hesitant to integrate with crypto platforms due to concerns over security and compliance.
Government Stance
We observe that the Azerbaijani government has shown interest in blockchain technology but remains cautious about cryptocurrencies. The Central Bank of Azerbaijan has expressed concerns about the risks associated with digital currencies, which can influence public perception and adoption.
Potential Benefits of Crypto Adoption
Source: Envato
Cryptocurrency adoption in Azerbaijan holds significant potential benefits across various sectors. Here are some key areas where crypto could make a substantial impact:
Economic Growth and Innovation
Adopting cryptocurrencies can stimulate economic growth by attracting foreign investments and fostering innovation.
Blockchain technology, which underpins cryptocurrencies, can be used to enhance various sectors such as finance, supply chain management, and e-government services.
Azerbaijan has already shown interest in integrating blockchain for digital transformation.
Efficiency and Transparency
Cryptocurrencies and blockchain technology can improve the efficiency and transparency of financial transactions.
By reducing the need for intermediaries, transactions can be faster and cheaper. Blockchain’s immutable ledger can also enhance transparency and reduce corruption, which is beneficial for both the public and private sectors.
Remittances
Azerbaijan receives a significant amount of remittances from its diaspora. Cryptocurrencies can offer a faster and cheaper way to send money across borders compared to traditional banking systems. This can increase the amount of money that reaches families and communities, boosting local economies.
Investment Opportunities
Cryptocurrencies can open up new investment opportunities for Azerbaijani citizens. By diversifying investment portfolios, individuals can potentially achieve higher returns. Additionally, the crypto market can attract international investors looking for new opportunities in emerging markets.
Conclusion
Azerbaijan's stance on cryptocurrencies is still cautious, despite growing interest in blockchain technology.
While the government hasn't banned crypto, it also hasn't fully embraced it, leaving a legal gray area. The Central Bank is studying the technology and has started issuing licenses to cryptocurrency businesses, but widespread use is still limited.
Despite the challenges, crypto adoption in Azerbaijan could bring benefits like economic growth, increased efficiency, and more investment opportunities.
However, the government needs to address regulatory uncertainty and develop a clearer legal framework to fully unlock the potential of cryptocurrencies in the country.
