The rise of virtual currencies and the underlying technology in recent years have presented regulators around the world with an interesting challenge: striking a delicate balance between regulating this nascent phenomenon of decentralised currency, while avoiding overzealous regulation so as to not to stifle innovation. Azerbaijani regulators are no exception.

However, despite real concerns about fraud, money laundering and other illicit activities potentially involving the use of virtual currencies, to date there is no specific regulation of virtual currencies in Azerbaijan. There are, of course, regulations in place that would potentially be applicable to virtual currencies. However, the real challenge seems to be how to classify virtual currencies, as they possess the characteristics of various types of assets (e.g., a unit of account, a commodity or a security), thus eluding traditional regulatory definitions.

For this reason, any discussion on how virtual currencies ultimately will be regulated in Azerbaijan inevitably becomes an exercise in educated conjecture, taking into account the current understanding on the classification of virtual currencies and regulatory parameters. Depending on how virtual currencies are ultimately classified by the Azerbaijani regulators (as a unit of account, a commodity or a security), different regulations may potentially be applicable, as outlined below.


Generally, the Banking Law attributes the activity of monetary transmission (money transfer services or payment instruments) to be a licensable banking activity.2 Further, the Law on Currency Regulation regards foreign currency exchange activities (i.e., engaging in the business of buying or selling foreign currencies) as an additional licensable activity in Azerbaijan in which only local banks, branches of foreign banks or certain licensed post offices may engage.3

The Law on Currency Regulation defines foreign currencies as moneys in the form of banknotes, treasury notes and coins in circulation that are legal tender on the territory of a foreign state or group of states. Although unlikely, it is possible that virtual currencies will be classified as a foreign currency, especially if they are recognised as legal tender in a foreign country.4

Therefore, entities wishing to engage in the above-mentioned activities involving a virtual currency within Azerbaijan or, potentially, Azerbaijani residents, are likely to be prevented from doing so, unless the relevant licence has been obtained.

iii Anti-money laundering

When it comes to money laundering and terrorism financing, Azerbaijani law does not seem to make any material distinction between transactions carried out using a fiat currency or a virtual currency (although the latter is not specifically mentioned). For instance, any transactions involving funds received from or transferred to anonymous accounts located outside Azerbaijan or transactions where the parties cannot be accurately identified, or in cases where the submission of identification information about a customer or beneficiary is denied, as well as where identification information about a customer or beneficiary is discovered to be false, are required to be reported to the Financial Monitoring Service.5

The current anti-money laundering regime in Azerbaijan covers, among other regulated entities, monitoring subjects, the definition of which includes financial institutions, institutions engaged in money transmission services, investment companies, investment funds and investment fund managers.6 It is these monitoring subjects that have the obligation to report the foregoing transactions.

Given the potential for abuse of the anonymity present in transactions using virtual currencies and the possible implications for the enforcement of anti-money laundering legislation, this is an area where specific regulations are very likely to be enacted.

iv Tax

Given the broad definition of income under the Azerbaijani Tax Code, revenues generated by residents from trading virtual currencies are likely to be subject to taxation in Azerbaijan. Since no special regime for the taxation of capital gains exists in Azerbaijan, such revenues are likely to be subject to the progressive personal income tax (in relation to individuals not registered as entrepreneurs), a simplified tax (applicable to certain individual entrepreneurs and small enterprises) or corporate profit tax (applicable to enterprises with revenues exceeding a certain threshold). General taxation principles would apply to transactions using a virtual currency.7

It is not clear what the tax authorities' approach to enforcement would be given that, currently, the assessment of taxes on income received from abroad is largely dependent on self-declaration. However, there is a general, and rather vague, provision in the Law on Currency Regulation requiring residents of Azerbaijan to repatriate earned foreign currency reserves received from foreign economic activities, which are likely to include funds received from virtual currency trading once they are converted into fiat currency.8

Failure to comply with the repatriation rules may result in significant administrative fines (of up to 50 per cent of such foreign currency reserves)9 or, potentially, criminal liability for the management officials of the company where the funds exceed the equivalent of 20,000 Azerbaijani manats.10


The 1995 Azerbaijan Constitution, which was adopted in a nationwide referendum, proclaims the Azerbaijani manat as the official currency of Azerbaijan and the only monetary unit that is recognised as legal tender within the territory of Azerbaijan.11 The Constitution recognises the exclusive authority of the Central Bank of Azerbaijan to issue banknotes and mint coins.12

The Civil Code of the Republic of Azerbaijan, the cornerstone of commercial law in the country, goes even further by requiring that contractual monetary obligations between residents be denominated in Azerbaijani manats.13 Finally, wages in Azerbaijan also may only be paid in Azerbaijani manats.14

As such, virtual currencies are not, and are very unlikely to become, legal tender in Azerbaijan. In fact, recognising them as such would likely require amendments to the 1995 Constitution to be adopted in a nationwide referendum. It is not clear that the authority of the Central Bank of Azerbaijan to issue banknotes and mint coins would include minting electronic coins for a cryptocurrency protocol backed by the Central Bank.

So far, the Central Bank has not expressed any intention to engage in the minting of electronic coins, and has described its position regarding the virtual currency as conservative. In remarks made during discussions of the 2018 State Budget in the Azerbaijani Parliament, the Chair of the Central Bank, Mr Elman Rustamov, described cryptocurrencies as an instrument for investing rather than an alternative means of payment.15

vi Looking ahead

In January 2018, it was reported that a working group has been established in Azerbaijan to develop a draft law on the regulation of trade in virtual currencies.16 However, no progress seems to have been made to date. In all likelihood, and based on various public statements of local officials, Azerbaijani regulators are likely to continue to monitor17 the virtual currency space and assess regulatory measures adopted by other countries before any specific regulation is adopted.

Historically, the experience of those countries that share a common legal heritage with Azerbaijan, such as other (larger) CIS countries, is most closely studied. It so happens that the Ministry of Finance of the Russian Federation, after (reportedly) much discussion with the Russian Central Bank, recently released to the public a Draft Federal Law on Digital Financial Assets that attempts to regulate virtual currencies in Russia.18

Below we summarise the main tenets of the Draft Law, as it offers, in our view, a preview of possible avenues for the regulation of virtual currency in Azerbaijan.

i Scope of the law

Owing to the unique nature of virtual currencies, Russia has quite wisely opted to craft a separate law on the subject of virtual currencies, rather than adopt amendments to existing pieces of legislation, with blanket references to those other pieces of legislation, where necessary. The Draft Law provides a broad legal framework, while granting the right to promulgate more detailed secondary regulations to the Russian Central Bank.

The Draft Law purports to regulate relations arising out of the creation, issuance, storage and circulation of digital financial assets, as well as the exercise of rights and the performance of obligations under smart contracts.19

The Draft Law is expected to give a 90-day grace period, starting from the date of its official publication, before it will become effective.20

Usefully, and for the first time, the Draft Law provides detailed definitions for cryptocurrency-related terms, including for cryptocurrency, tokens, smart contracts, crypto exchanges and mining, and attempts to classify them. As mentioned before, providing detailed definitions is crucial in classifying virtual currencies and embedding the regulation thereof into the larger regulatory framework.

ii Trading digital financial assets and mining

Digital financial assets are defined in the Draft Law as property in electronic form, created using cryptographic means, including cryptocurrencies and tokens. The ownership of this property is evidenced by digital entries (records) in the register of digital transactions. The Draft Law further clarifies that digital financial assets are not a legal means of payment in the territory of the Russian Federation,21 which makes this approach to the regulation of virtual currencies rather compelling for Azerbaijan, given the similar restriction in the 1995 Constitution of the Republic of Azerbaijan.

The Draft Law expressly recognises the right of holders of digital financial assets to trade their digital financial assets for other digital financial assets, for fiat currency (Russian roubles or foreign currency) or for other property, through the intermediation of the operators of digital financial assets exchanges.22

Finally, the Draft Law, once adopted, will expressly legalise mining activities as entrepreneurial activities aimed at creating cryptocurrency, validation activities for the purposes of receiving compensation in the form of a cryptocurrency, or both.23

iii Exchanges and wallets

Operators of digital financial assets exchanges are defined under the Draft Law as legal entities established in Russian law that carry out transactions for the exchange of one type of digital financial asset for another, as well as the exchange of financial assets for fiat currency. The business of operators of digital financial assets exchanges may be carried out by professional participants in the securities markets or legal entities that are organisers of trade.24

Further, under the Draft Law, an electronic wallet – defined as a software and hardware tool that allows the storage of information about digital records and provides access thereto – may be opened by the operator of a digital financial assets exchange only after the relevant identification procedures for the wallet owner have been duly completed in accordance with the applicable Russian anti-money laundering legislation.25

Again, this approach to the regulation of virtual currency would fit rather neatly into the existing Azerbaijani legal framework. This is because there are similarly regulated entities in Azerbaijan operating under the Securities Market Law26 (such as, for instance, investment companies), the concept of electronic money wallets has already been introduced in relatively recent amendments to the Electronic Trading Law,27 and, finally, relevant identification procedures are already in place under the Law on the Prevention of the Legalization of Criminally Obtained Funds or Other Property and the Financing of Terrorism.28

iv Initial coin offerings

A large part of the Draft Law addresses initial coin offerings (ICOs); namely, setting forth issuing procedures, rules for the advertisement and sale (placement) of tokens, as well as documentary, informational and disclosure requirements related to an ICO.29

For each ICO, the Draft Law requires that the issuer publish, simultaneously, a public offer, an investment memorandum, rules for maintaining the register of digital transactions, as well as other documents, no later than three business days before the date specified in the public offer for the release of tokens. Such tokens may not be offered to anyone or advertised prior to publishing the public offer.30

The Draft Law sets forth a monetary limit beyond which unqualified investors (as defined in the Federal Law of the Russian Federation 'On the Securities Market')31 may not invest in tokens.32 Incidentally, the Azerbaijani equivalent of the above-mentioned Law, the Securities Market Law,33 contains a definition of institutional investors, which also draws parallels with its Russian counterpart.

vii Conclusion

The absence of specific regulations on virtual currencies and their underlying technology in Azerbaijan may contribute to uncertainty and potentially stifle innovation in their implementation. For this reason, and in the interest of encouraging innovation in this sphere, the adoption of a separate law (along the lines of the Russian precedent discussed above) would be, in our view, a welcome legislative development.

A great deal of care should be given to striking the correct balance in regulating virtual currency-related activities and providing clear guidance to market players, while at the same time avoiding unintended consequences of overzealous regulation, which is a difficult, but not impossible, task. It remains to be seen if the Azerbaijani regulators will take up this challenge any time soon.


1 Ulvia Zeynalova-Bockin is counsel at Dentons. The author would like to acknowledge the invaluable editorial guidance of James E Hogan, managing partner at Dentons.

2 Law of the Republic of Azerbaijan 'On Banks', No. 590-IIQ, dated 16 January 2004, Republic of Azerbaijan Collection of Legislation 2004, No. 03, Item 130 (in Azerbaijani), Article 32. Available at http://e-qanun.gov.az/framework/5825.

3 Law of the Republic of Azerbaijan 'On Currency Regulations', No. 910, dated 21 October 1994, Supreme Council of the Republic of Azerbaijan Information [Bulletin] 1995, No. 07, Item 116 (in Azerbaijani), Article 3. Available at http://e-qanun.gov.az/framework/9238.

4 Id., Article 1.7-1, 1.7-2, and 3.

5 Law of the Republic of Azerbaijan 'On the Prevention of the Legalization of Criminally Obtained Funds or Other Property and the Financing of Terrorism', No. 767-IIIQ, dated 10 February 2009, Republic of Azerbaijan Collection of Legislation 2009, No. 02, Item 58 (in Azerbaijani) [Law on the Prevention of the Legalization of Criminally Obtained Funds or Other Property and the Financing of Terrorism], Article 7. Available at http://e-qanun.gov.az/framework/16347.

6 Id., Article 4.

7 Tax Code of the Republic of Azerbaijan, approved by Law of the Republic of Azerbaijan No. 905-IQ, dated 11 July 2000, Republic of Azerbaijan Collection of Legislation 2000, No. 08, Item 583 (in Azerbaijani). Available at http://e-qanun.gov.az/code/12.

8 Law on Currency Regulation, Article 7.2.

9 Code of Administrative Offenses of the Republic of Azerbaijan, approved by Law of the Republic of Azerbaijan No. 96-VQ, dated 29 December 2015, Republic of Azerbaijan Collection of Legislation 2016, No. 02, Item 202 (in Azerbaijani), Article 483. Available at http://e-qanun.gov.az/code/24.

10 Criminal Code of the Republic of Azerbaijan, approved by Law of the Republic of Azerbaijan No. 787-IQ, dated 20 December 1999, Republic of Azerbaijan Collection of Legislation 2000, No. 04, Item 251 (in Azerbaijani), Article 208. Available at http://e-qanun.gov.az/code/11.

11 Constitution of the Republic of Azerbaijan, adopted at a nationwide referendum on 12 November 1995, Republic of Azerbaijan Collection of Legislation 1997, No. 03, Item 159 (in Azerbaijani), Article 19.I and 19.III. Available at http://e-qanun.gov.az/framework/897.

12 Id., Article 19.II.

13 Civil Code of the Republic of Azerbaijan, approved by Law of the Republic of Azerbaijan No. 779-IQ, dated 28 December 1999, Republic of Azerbaijan Collection of Legislation 2000, No. 04, Item 250 (in Azerbaijani), Article 439.1. Available at http://e-qanun.gov.az/code/8.

14 Labour Code of the Republic of Azerbaijan, approved by Law of the Republic of Azerbaijan No. 618-IQ, dated 1 February 1999, Republic of Azerbaijan Collection of Legislation 1999, No. 04, Item 213 (in Azerbaijani), Article 174.4. Available at http://e-qanun.gov.az/code/7.

15 Anvar Mammadov, 'CBA head comments on use cryptocurrency in Azerbaijan', Trend News Agency (21 November 2017), accessed on 8 August 2018, https://en.trend.az/business/economy/2824191.html (in Azerbaijani).

16 Lada Evgrashina, 'Azerbaijan takes up crypto-currencies: the bill is being prepared, the country will be visited by co-founder Ethereum', 1news.az (29 January 2018), accessed on 6 August 2018, http://www.1news.az/news/azerbaydzhan-vzyalsya-za-kriptovalyuty-gotovitsya-zakonoproekt-stranu-posetit-so-osnovatel-ethereum (in Russian).

17 Samuel Haig, 'Azerbaijan rejected Crypto as means of Payment', Cryptofame (4 December 2017), accessed on 18 August 2018, https://news.bitcoin.com/azerbaijan-rejects-crypto-as-means-of-payment/.

18 Draft Federal Law of the Russian Federation 'on Digital Financial Assets', MinFin.ru (25 January 2018), accessed on 6 August 2018, https://www.minfin.ru/ru/document/?group_type=&q_4=о+цифровых+финансовых+активах&DOCUMENT_NUMER_4=&M_DATE_from_4=&M_DATE_to_4=&P_DATE_from_4=&P_DATE_to_4=&t_4=565527874&order_4=P_DATE&dir_4=DESC (in Russian).

19 Id., Paragraph 13, Article 2. Smart contracts are defined as contracts concluded in an electronic form, under which the performance of rights and obligations are carried out by the automatic transfer of digital transactions in the distributed register of digital transactions in accordance with a strictly defined sequence and upon the occurrence of certain circumstances. Rights of counterparties to smart contracts are protected in the same manner as the rights of those to contracts, concluded in an electronic form.

20 Id., Articles 1 and 5.

21 Id., Paragraph 1, Article 2.

22 Id. Paragraph 8, Article 2.

23 Id., Paragraph 10, Article 2.

24 Id., Paragraph 8, Article 2.

25 Id., Paragraph 14, Article 2.

26 Law of the Republic of Azerbaijan 'On the Securities Market', No. 1284-IVQ, dated 15 May 2015, Republic of Azerbaijan Collection of Legislation 2015, No. 07, Item 813 (in Azerbaijani) [Securities Market Law]. Available at http://e-qanun.gov.az/framework/30333.

27 Law of the Republic of Azerbaijan 'On Electronic Trade', No. 908-IIQ, dated 10 May 2005, Republic of Azerbaijan Collection of Legislation 2005, No. 07, Item 564 (in Azerbaijani). Available at http://e-qanun.gov.az/framework/10406.

28 Law on the Prevention of the Legalization of Criminally Obtained Funds or Other Property and the Financing of Terrorism, Article 9.

29 Draft Federal Law on Financial Digital Assets, Article 3.

30 Id., Article 3.5.

31 The Federal Law of the Russian Federation 'On the Securities Market' No. 39-FZ of 22 April 1996.

32 Id., Article 3.1.

33 Securities Market Law, Article 1.0.7.