Azerbaijan's Digital Currency Market: is progress available?

Growth of the virtual currencies market and the underlying blockchain technology has set regulators around the world an interesting and very difficult task: how to find a balance between the regulation of decentralized financial assets while avoiding a situation where this regulation will cause technological progress to stop. The Azerbaijani authorities are no exception. Now we will talk about how the digital currency market "lives" in this country.

In Azerbaijan there are no special regulations that would allow regulating digital cryptocurrencies. Of course, there are regulation acts that could potentially be applicable to virtual currencies, but the real problem is how to properly classify virtual currencies, since they have the characteristics of different types of assets (for example, a unit of account, a commodity or a security). The Azerbaijani authorities have been trying to solve this problem for the past 4-5 years.

The Law on Banking Activity of Azerbaijan refers money transfer activities (transfer services or the introduction of payment instruments) to licensed banking activities. In addition, the Law on Currency Regulation considers foreign currency exchange activities in Azerbaijan (i.e. doing business buying or selling foreign currency) as an additional licensed activity that only local banks, branches of foreign banks, some licensed post offices and organizations that have licenses for foreign currency exchange can engage in. Virtual currencies in the country have not yet been classified in any way, and therefore the above rules do not apply to them. And therefore, it is not necessary to talk about any activity in the field of cryptocurrencies and fintech blockchain projects in Azerbaijan yet.

The Constitution of Azerbaijan adopted at a national referendum, proclaims the manat as the only official currency of Azerbaijan and the only monetary unit recognized as legal tender on the territory of the country. The Civil Code, the cornerstone of commercial law, goes even further, requiring that contractual monetary obligations between residents be expressed only in manats.

As such, virtual currencies are not and are unlikely to become legal tender in Azerbaijan in the near future. In fact, recognizing them as such would most likely require the adoption of amendments to the Constitution. It is also unclear whether the powers of the Central Bank will be expanded and supplemented with the possibility of issuing a national digital currency. Until now, the Central Bank of Azerbaijan has not expressed any intention to engage in such activities and characterized its position on virtual money as conservative. In fact, the former first deputy chairman of the Central Bank, Alim Guliyev, indicated that the Central Bank does not intend to issue a state-supported cryptocurrency. In addition, in remarks made during the discussion of the State Budget for 2018 in parliament, former Chairman of the Central Bank Elman Rustamov described cryptocurrencies as a tool for investment, and not as an alternative means of payment. And although the rules of currency regulation in Azerbaijan allow residents and non-residents to transfer funds for the purpose of investing in securities (including those denominated in foreign currency), they do not describe virtual currencies as a way of investing in any way.

In January 2018, it was reported that a working group had been established in Azerbaijan to develop a draft law on the regulation of virtual currency trading. However, after 5 years, no progress has been made on this issue. Azerbaijani regulators continue to monitor the virtual currency space and evaluate the regulatory measures taken by other countries before issuing any specific regulations. The experience of countries with a common legal heritage with Azerbaijan is being closely monitored. It is quite possible that Azerbaijan will follow Russia's example and adopt legislation similar to the Russian Federal Law on Digital Financial Assets and Cryptocurrency.

Against the background of global growth in the digital currency market, the number of cryptocurrency users in Azerbaijan is still very small and amounts to about 1% of the population. A study conducted in 2021 showed that the number of cryptocurrency owners in Azerbaijan is slightly more than 98,000 people, which corresponds to 0.97% of the population. According to this indicator, Azerbaijan ranks sixth among all the member countries of the Commonwealth of Independent States. In the first place in the CIS is Russia with the number of users of 17.3 million people.

Experts note that such passivity of Azerbaijani residents is associated with a weak distribution of digital transactions services and an almost complete lack of interest in stock trading. The securities market, the investment market are not in demand in the country, and even the foreign exchange market in Azerbaijan is practically doesn't exist.

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