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The Future of Digital Assets. Is Kazakhstan ready for Web 3.0 Business?

By Matthew Farmer


The Republic of Kazakhstan (“Kazakhstan”) has a rich history of innovation, dating back to its nomadic ancestors who developed advanced techniques for survival in the harsh Central Asian climate. Modern Kazakhstan is no different, as it continues to prioritise innovation, focusing on science and technology. The country has made significant investments in research and development, leading to breakthroughs in renewable energy, biotechnology, and space exploration. Kazakhstan is also home to the Baikonur Cosmodrome, the world's largest space launch facility, and has played a crucial role in the history of international space exploration. Additionally, the country has developed advanced oil and gas extraction technologies and is a wind and solar power leader. Kazakh-stan’s commitment to innovation is evident in its ambitious plans for the future, including developing a "green economy" and establishing technology parks to foster entrepreneurship and research.


It is, therefore, of little surprise that Kazakhstan is set to join the digital asset regulatory landscape by adopting a new law governing digital assets as their rise in Kazakhstan and Central Asia continues to gain momentum. Kazakhstan, in particular, has been making strides towards adopting digital assets in recent years, with President Kasym-Jomart Tokayev speaking on the importance of embracing digital transformation in various spaces, including banking and finance, as well as expressing his desire to establish Kazakhstan as a leader in the region in the digital assets and cryptocurrency space. The National Bank of Kazakhstan has been exploring blockchain technology since 2018 and, in 2019, announced plans to launch a digital currency pilot project. The digital asset regulation, which was recently passed, seeks to regulate digital assets, including digital mining activities, exchanges, and secured digital assets. With that, it is poised to become an even more significant player in the region by providing a legal framework to pave the way for a more robust and secure digital asset market. This new legislation is a significant step towards the vision of the President, establishing Kazakhstan as a trendsetter and an early adopter of digital transformation.

The legislation outlines the basic concepts related to digital assets and digital platforms for their storage and exchange, as well as the principles of state regulation in the field. The law requires licenses for digital mining activities and accreditation for digital mining pools, with oversight from the state body responsible for managing the electric power industry. The law aims to develop the production and circulation of digital assets and digital mining to boost economic development and competitiveness.


Under the new law, procedures and mechanisms for the interaction and exchange of digital assets shall be determined by an act of the Astana International Financial Centre (the “AIFC”) in coordination with the National Bank and the authorised regulatory body for the regulation, control and supervision of the financial market and financial organisations. This places the AIFC in a prominent position as it relates to the continued development of the industry, as evidenced by the fact that secured digital assets must meet specific requirements, such as certification of rights and permission from authorities for issuance and circulation. In contrast, unsecured digital assets are prohibited except in the Astana International Financial Center, where exchanges are allowed only with licensing.


State control of digital assets will be carried out through inspections and preventive control, with legal liability for violating the laws on digital assets. The law took effect from 1 April 2023, with digital assets derived from digital mining activities required to be sold through licensed digital asset exchanges from 1 January 2024 until 1 January 2025.


This new law will bring more regulation to the cryptocurrency industry in Kazakhstan and provide a safer and more secure environment for investors and businesses alike.


While the approach outlined in the legislation above is groundbreaking and more than enough to generate interest in the Web 3.0 industry, the approach of the Astana Financial Services Authority (the “AFSA” in the regulations for the AIFC (as alluded to above) is of significant importance particularly as it relates to those interested parties to bring their businesses to the region, given the familiar English language environment and high regulatory standards of the AIFC.


AFSA has taken a prudent and comprehensive approach to regulating digital assets. AFSA has established a regulatory sandbox for digital assets to allow businesses to test innovative ideas in a controlled environment and has developed clear rules for licensing and registering digital asset activities. Furthermore, AFSA has implemented a robust framework for anti-money laundering and countering the financing of terrorism (AML/CFT) concerning digital assets and requires digital asset service providers to comply with these regulations.


The AFSA's balanced regulatory framework encourages innovation while protecting investors and the financial system's integrity, which is excellent news for businesses operating in the digital assets space. This approach could increase the confidence of companies to bring their operations to Kazakhstan via the Astana International Financial Centre. As a result, we could see a boost in investment and business activity in the region, benefiting the Kazakhstani economy and the wider business community. This development is exciting for all those involved in digital assets and for the industry's growth in the region.


These regulations demonstrate Kazakhstan's commitment to embracing emerging technologies and promoting economic growth through the digital economy. They are evidence that Kazakhstan is making significant steps towards becoming a hub for Web 3.0 and digital assets for the region, bringing the country closer to realising the vision of President Tokayev. AFSA and the AIFC will play a prominent role in developing the industry, given its underlying regulatory framework, by providing greater legal certainty and predictability for those operating a business in the field, creating a stable and secure environment for innovation and investment. So should you bring your operations to the AIFC? I can't answer that question for you. Still, with the AIFC's familiar English language environment and high regulatory standards, businesses operating in the digital assets space may find the region an attractive destination for investment and business activity.

 

About the Author Matthew Farmer works at the Leading Kazakh law firm Seven Pillars Law, headquartered in the AIFC and holds an Undergraduate law degree from the University of the Western Cape in South Africa and a Masters Degree in Intellectual Property law from the NTU (UK). Matthew has a passion for technology innovation and is particularly interested in the Web3 space.


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