Uzbekistan
The Current Status of Crypto Adoption in Uzbekistan
Source: Freepik
Uzbekistan is a leading adopter of cryptocurrency in the Central Asian region, ranking position 33 globally. Its residents own a total of 512,300 digital assets as of 2023, making up 1.46% of the population. Such high adoption is supported by a robust regulatory framework that oversees the operations of Crypto Asset Service Providers (CASPs), including crypto exchanges, stores, depositories, and mining pools.
The country's licensed CASPs have facilitated more than $1 billion in transactions to date as October 2024, and they have contributed more than $3.6 million to the country's treasury since 2022, KPMG reports. There are currently 15 licensed service providers, consisting of 2 crypto exchanges, 3 crypto depositories, and 10 crypto shops.
The growth reflects the government's commitment to mainstreaming cryptocurrency into the country's financial system, allowing CASPs seamless access to banking services for fiat transactions.
In the future, the cryptocurrency user base in Uzbekistan is predicted to be 1.42 million in 2025 with a penetration rate of 3.93%. Despite projected market revenue from an estimated $57.3 million in 2024 decreasing to $54.8 million in 2025, average revenue per user is set to be $40.5 in 2024. This indicates that the market is settling and has a stable user base.
The regulatory environment of Uzbekistan is favorable to crypto investors and businesses. All cryptocurrency transactions by licensed CASPs are exempt from taxation, and the income generated from such operations is not taxable. This is a step towards promoting more investment in the country's digital asset market while ensuring compliance with established regulations.
Overall, Uzbekistan's proactive cryptocurrency adoption and regulation policies have made it a Central Asian success story. With an educated user population, significant transaction volumes, and a friendly regulatory environment, the nation is well-positioned to further integrate digital assets into its financial landscape.
Crypto Law In Uzbekistan
Source: Freepik
Uzbekistan established a formal regulatory framework for cryptocurrency, and the National Agency of Perspective Projects (NAPP) serves as the central supervisor. NAPP, under the President's direct authority, determines policy, issues licenses, and oversees compliance within the crypto space. The country's regulatory approach has evolved over time, with tighter oversight of foreign crypto exchanges and attempts to boost local regulation.
Uzbekistan's crypto regulation is based on a series of legal documents intended to encourage innovation while maintaining strong control. The foundation of the regulations was laid in 2018 by Resolution No. RP-3832, which aimed to integrate digital assets into the economy. The resolution gave the legal basis for crypto transactions and opened the way for the later policies outlining the rules of exchanges' operation, service providers', and users'.
“In order to further improve the public administration system, create conditions for the introduction and development of the digital economy, improve the investment environment, as well as implement the Action Strategy in five priority areas for the development of the Republic of Uzbekistan in 2017 — 2021.” — Resolution No. RP-3832
According to its commitment to formalized regulation, Uzbekistan enacted Resolution No. RP-3926 in September 2018, and this specifically focused on the regulation of crypto exchanges. This regulation outlined the terms and conditions of opening and operating cryptocurrency trading platforms within the country in a manner that only sanctioned exchanges could provide their services. By placing such platforms within a formalized setup, the government sought to eliminate the risks involved in trading outside regulation, like fraud and unlawful financial activities.
Appreciative of fiscal stability, the government advanced its regulatory framework in 2021 with Resolution No. 3309, which enforced tough anti-money laundering (AML) regulations. The resolution put the crypto regulation of Uzbekistan in sync with the rest of the world, particularly with the Financial Action Task Force (FATF) regulations. These rules required CASPs to conduct thorough customer due diligence, monitor transactions for suspicious activity, and report any irregularities to the authorities. This step was crucial in checking criminal activity and making sure that Uzbekistan's crypto market would not serve as a hub for illicit activity.
“The Republic of Uzbekistan is making significant efforts to identify, understand and assess its ML/TF risks and develop measures to mitigate them. The 2019 NRA findings related to ML/TF risks seem reasonable and well substantiated. However, there is the need for additional analysis of certain categories of ML/TF threats so as to more accurately reflect the country’s profile. The aims and objectives of competent authorities are largely consistent with national ML/TF risks. The country largely ensures that the findings and conclusions of the NRA are communicated to the private sector.” — FAFT
The regulatory framework also expanded in 2022 with Order No. 3380, which legalized the process of licensing CASPs. This directive meant that all persons involved in services related to cryptos were compelled to secure a license from the National Agency of Perspective Projects (NAPP) and thus guaranteed the government its determination to deny unregistered market players. At the same time, Order No. 3379, issued simultaneously, introduced a systemic approach to crypto asset trading, requiring a rigid system for buying, selling, and exchanging digital currencies on sanctioned platforms.
By 2023, the government directed its energies towards the emerging mining sector. In September, Order No. 3461 established a system of regulation to obtain mining permits, whereby all mining activity was coordinated with national energy consumption policies and sustainability objectives. Next was Order No. 3507 in March 2024, establishing the operating conditions for mining pools to control coordinated mining practices and discourage illegal or unauthorized mining.
It was perhaps one of the key regulatory changes in early 2024 with Law No. 899 that amended Uzbekistan's Criminal Code, Criminal Procedure Code, and Administrative Responsibility Code. The amendments included particular sanctions for a variety of crimes related to crypto, including operating an unlicensed CASP, making unauthorized crypto transactions, and mining digital assets without authorization. Depending on the severity of the crime, punishments range from administrative sanctions to incarceration, with greater punishment for colossal or syndicated crimes.
Taxation of Cryptocurrency in Uzbekistan
Source: Freepik
Uzbekistan's approach to taxation of cryptocurrency stands out among the world's regulators, as the state does not impose direct taxation on transactions involving virtual assets. Nevertheless, the government has still been able to collect significant tax income from the crypto market with the help of a systematic license regime and obligatory operational fees from intermediaries. This step, in addition to contributing to government budgets, ensures that only resourceful companies become part of Uzbekistan's organized crypto space.
Among the principal sources of revenue for the state from the industry is the monthly fixed fee payable by licensed providers of cryptocurrency services. Since October 2022, these charges have been leveled on exchanges as well as on trading platforms, with large volume players facing over $10,000 monthly and smaller operators loosely referred to as "crypto shops" being charged in the vicinity of $500.
“Licensed crypto companies deposited over 3.5 billion Uzbekistani som (over $310,000) into the national budget of Uzbekistan in 2022 alone. Most importantly, 80% of such payments directly go to state funds, and 20% go to NAPP funds to cover sectoral management and development.” — NAPP reports
The imposition of government fees in lieu of direct taxation forms a part of its broader policy of favoring an organized yet competitive crypto landscape. As per Uzbekistan's current laws, entities and organizations dealing in cryptocurrencies are exempted from the common tax, though they are offshore-based. Exemption is even granted to cryptocurrency mining since miners who become registered with the government are exempted from taxes, further supporting the country's pro-crypto stance.
Yet despite all these regulatory enticements, the government continues to exert stringent regulation on crypto operations. Resolution No. 3388, enacted into law in September 2022, put its official seal on the imposition of fees on crypto operators, with only financially sound players being granted permission to continue operations. In addition, Order No. 3395 in October 2022 issued special business regulations for crypto stores, stipulating the terms for firms engaged in trading in and selling of virtual currencies. These measures indicate Uzbekistan's drive to align industrial growth with strict compliance measures.
While Uzbekistan has avoided direct taxation of cryptocurrencies, its licensing and fee-based system has proved successful in raising revenue without sacrificing control. The evolving model suggests the government will continue to tweak its policies, perhaps introducing new fiscal charges for crypto businesses as the sector matures. Currently, Uzbekistan stands as a lone exception where cryptocurrency operations add to state treasuries without levying direct taxes on users or businesses.
Factors Driving Crypto Adoption in Uzbekistan
Source: Freepik
Uzbekistan has been rapidly adopting cryptocurrencies, driven by a combination of economic, technological, and regulatory factors. The following key drivers of crypto adoption in Uzbekistan:
Government Support and Regulation
Uzbekistan established the National Agency of Prospective Projects (NAPP) in 2022 to regulate cryptocurrencies. The government also legalized crypto trading and mining, provided they fulfill licensing requirements. Thus, the government has been actively regulating cryptocurrencies, making the environment favorable to adoption.
Remittances and Cross-Border Payments
In 2024, remittances accounted for 29.8% of Uzbekistan's GDP. Crypto transactions have significantly lower fees than traditional remittance services, making them attractive to migrant workers and their families. Cryptocurrencies offer a less expensive and faster alternative for remittances, which are extremely significant for Uzbekistan's economy.
Tech-Savvy Youth Population
Over 60% of Uzbekistan's population is under 30, and internet penetration is growing rapidly, reaching 76.6% in 2023. This demographic is more open to looking at digital assets.
Inflation and Currency Stability
Uzbekistan's inflation rate was 12.23% in Sep 2022, and the national currency has experienced volatility. Stablecoins like USDT and USDC offer a stable alternative for savings and transactions. Cryptocurrencies serve as a hedge against inflation and currency devaluation, which are concerns in Uzbekistan.
Challenges Facing Crypto Adoption in Uzbekistan
Source: Freepik
While Uzbekistan has made huge strides in embracing cryptocurrencies, several issues still hold it back from widespread adoption:
Lack of Public Awareness
Only a few percentage of the Uzbekistan population have basic knowledge about cryptocurrencies, limiting adoption in the broader public. There is limited public awareness of cryptocurrencies, their benefits, and risks among most individuals in Uzbekistan.
Limited Merchant Acceptance
The percentage of merchants and businesses that accept cryptocurrency as payment is still extremely low. Only a small fraction of companies in Uzbekistan accept cryptocurrencies as a payment method, thus making it challenging for users to utilize their digital assets in ordinary transactions.
Infrastructure and Internet Accessibility
Internet services and technology are not readily available in rural areas, slowing down the adoption of crypto. Internet penetration is 76.6% in the nation as a whole, but much lower in rural areas.
Energy Concerns of Crypto Mining
Crypto mining is extremely energy-intensive, and the power system of Uzbekistan is under pressure to supply both household and industrial requirements. While the cost of energy is low in Uzbekistan, the environmental concerns of crypto mining are increasingly a problem.
Potential Benefits of Crypto Adoption
Source: Freepik
Cryptocurrency adoption in Uzbekistan has numerous possible benefits, particularly for a transforming and digitizing economy. The potential benefits of crypto adoption in Uzbekistan are as follows:
Financial Inclusion
As over 33 million of the population of Uzbekistan remains unbanked. Crypto wallets and DeFi systems have the capability to offer access to loans, savings, and other financial products, bridging the gap for the erstwhile excluded.
Reduced Transaction Costs
Traditional remittance transactions average 6-7% per transaction in charges, while crypto payments can be below 1%. For Uzbekistan alone, which has $8.1 billion in remittances for 2022, crypto would save millions of dollars as transaction fees are likely to be lower compared to classical banking and remittance channels.
Speedier Cross-Border Payments
Cross-border bank transfers can take 3-5 business days, while crypto transactions take typically minutes to hours. This is particularly helpful in Uzbekistan, where remittances reached $16.9 billion in 2022. Cryptocurrencies, therefore, allow for almost immediate cross-border payments, eliminating the lag of traditional banking systems.
Hedge Against Inflation
Uzbekistan's inflation rate was 12.23% in 2022, and the local currency, Uzbekistani som, has been unstable. Stablecoins like USDT and USDC, which are pegged to the US dollar, are a safe store of value in such a scenario.
Conclusion
The strategy of Uzbekistan to regulate and tax cryptocurrency is balancing innovation encouragement with strict regulation. By establishing the National Agency of Perspective Projects (NAPP) as the central regulator, the state ensured that all activities connected to cryptocurrencies are regulated under a formalized legal framework. Notably, foreign CASP restrictions, licensing requirements, and anti-money laundering measures are a sign that Uzbekistan aims to suppress illicit activity while welcoming compliant actors.
Fiscally, Uzbekistan has taken a unique route by exempting digital asset transactions from direct taxation. This approach not only safeguards state interests but also filters out frivolous players, with only financially healthy businesses thriving in the market.
