An extract from The Virtual Currency Regulation Review, 3rd Edition

Introduction to the legal and regulatory framework

The rise of virtual currencies and the underlying blockchain 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 not to stifle innovation. Azerbaijani regulators are no exception.

Although it has been recognised that the use of virtual currencies and blockchain technology represents an emerging global trend,2 and despite real concerns about fraud, money laundering and other illicit activities potentially involving the use of virtual currencies, 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, but 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.

Banking and money transmission

Generally, the Banking Law attributes the activity of monetary transmission (money transfer services or payment instruments) to be a licensable banking activity.3 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, certain licensed post offices and entities holding foreign currency exchange licences may engage.4

The Law on Currency Regulation defines foreign currencies as money in the form of banknotes, treasury notes and coins in circulation that are legal tender in 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.5

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.