Uzbekistan cracks down on illegal cryptocurrency market as it wants official market to grow

On May 31, 2024, subsequent court hearings of a case against Binance are expected to occur as the country’s authorities accuse the cryptocurrency exchange of rendering services to Uzbekistani citizens without a proper license and refusing to pay a fine for violation of the national legislation. So far, there are more than ten companies officially authorized to be engaged in cryptocurrency activities. On the other hand, authorities have introduced a set of fines and punishments for illegal turnover of cryptocurrency in its administrative and criminal codes. 

The state budget in focus 

As of May 21, 2024, two cryptocurrency exchanges, ten shops and three depositories had licenses issued by Uzbekistan’s government. According to the local regulator – the National Agency for Prospective Projects (NAPP), the cryptocurrency business is ‘quite profitable.’ This is why the agency significantly raised fees for companies within the industry in March of this year. As a result, cryptocurrency exchanges should pay about $20,000 monthly to the state budget (a twofold increase), while cryptocurrency shops pay around $5,000 (a ninefold increase). These figures mean that the state budget is going to receive more than $1 million from industry participants per year. 

According to the NAPP, it always informs cryptocurrency businesses about upcoming changes in fees in advance and so far, no one has protested. Companies engaged in the cryptocurrency industry are probably gaining enough to be fine with any tariff increase, the agency believes.

However, experts Kursiv has talked with were undecided about the real cryptocurrency turnover in Uzbekistan. According to Askarzhon Zakirov, head of the crypto-asset currency turnover sphere development department under the NAPP, «the agency is analyzing the market, using data the cryptocurrency service providers have reported.» He also said that the agency managed to bring out of shadow a «huge amount of money.» 

Data provided by the platforms is open and anyone can check it. Kursiv’s monitoring has shown a sharp increase in trade volume over the last year. For instance, UzNex, the biggest cryptocurrency exchange in Uzbekistan (which has been operating since 2019) offered only Ethereum and bitcoins (3 to 9 coins per day on average) last year. The current bitcoin trade volume is 500 to 1,000 coins per day. For example, on May 21, the platform reported 526 BTC or $37 million worth of transactions per day. Given that both a buyer and a seller should pay 0.1% in fees, the exchange can earn about $74,000 per day from Bitcoin transactions only. Along with bitcoin UzNex also trades 16 altcoins, which means that the annual crypto-asset turnover on official platforms in Uzbekistan can be estimated in billions of dollars. 

Punishment for ‘illegal’ traders

The high performance of the legal cryptocurrency market is partly the result of the zero-tolerance approach Uzbekistani authorities apply to cryptocurrency platforms that fail to obtain a license from the NAPP. All such platforms are blocked and even with VPNs users find it difficult to use them. Furthermore, on April 20, 2024, the country introduced administrative and criminal punishments for illegal purchasing and selling crypto-assets along with digital mining. 

The regulator warned citizens against using unauthorized platforms because a violation of this rule might be punished with administrative detention for up to 15 days or $500 to $800 in fines. Any repetitive violation could lead to criminal punishment. Illegal turnover of cryptocurrency might be punished with a fine of up to $2,700, correctional labor, imprisonment for up to twelve months or even more serious consequences if the crime is repeated more than twice.

Illegal cryptocurrency exchanges are also under pressure, which has been vividly illustrated by the case of Uzbekistan vs. Binance. The conflict emerged when Binance ignored a warning from the NAPP not to render services to Uzbekistanis without a license. OKX, the other cryptocurrency exchange, has chosen a different strategy and officially announced that it would stop rendering services for users in Uzbekistan. The platform called for users to close their opened positions before March 15 and withdraw their assets before March 30. 

According to the NAPP, its top priority is to promote the development of the domestic market, counter the outward flow of foreign exchange and prevent the use of funds for criminal purposes. 

Cryptocurrency risks 

According to Natalia Yalovskaya, director of the Financial Institutions Department at S&P Global, using funds for illegal activities is one of the most serious risks associated with cryptocurrencies.

«Even though the entire system is open, P2P transfers are challenging for countering money laundering and financing terrorism,» the expert explained.

It is worth noting that Binance was strongly advocating for the legalization of such transactions in Uzbekistan and asked the NAPP to authorize transactions like these. However, the regulator’s stance in refusing the move was adamant. As a result, the negotiations went to a deadlock and Binance failed to obtain a license. 

As Yalovskaya noted, there are also some other risks for Uzbekistan, including households’ well-being.

«Usually, cryptocurrencies are more volatile than capital markets. In addition, not everyone in Uzbekistan may fully understand risks associated with investing in cryptocurrencies such as volatility of the exchange rate, high fees and some security issues,» the expert explained.

Moreover, there is a risk to the country’s financial stability as well, the S&P representative highlighted. For example, the better cryptocurrencies are distributed in a country, the less effective the monetary policy becomes (a similar situation to dollarization). It can lead to a more active drain of capital and crossflow of funds from banking deposits to cryptocurrency, diminishing the financial sustainability of banks.

While talking about macroeconomic risks, Yalovskaya cited the case of Nigeria where the volume of incoming transfers to cryptocurrency wallets exceeded $60 billion in 2022 (12% of the national GDP) against the backdrop of foreign exchange control. For comparison, the total volume of money transferred by labor migrants was just about $22 billion, while 10% of the population already possesses cryptocurrencies. The regulator has imposed tougher control over any activity related to cryptocurrencies and imposed a tax on crypto revenue in response to these risks.

«Even though all these risks are real, they are quite distant for Uzbekistan. The penetration rate is still relatively low, while regulation is primarily focused on control rather than banning this sphere,» Yalovskaya summarized.