## 1kazea2024005 - EXECUTIVE SUMMARY

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### Crypto market overview in Kazakhstan
- Market size and participation:
  - Approximately 1–3   percent of residents in Kazakhstan buy or sell crypto assets.
  - A substantial underground market is noted as being approximately 100 times larger than the legitimate market for crypto.
- Mining footprint and dynamics:
  - Crypto miners contribute roughly 13 percent of the global Bitcoin hashrate (as of March 2023, authority estimate: 13.2 percent).
  - At its peak in October 2021, Kazakhstan accounted for an estimated 27.3 percent of the global Bitcoin hashrate.
- Transaction channels and behavior:
  - Most resident transactions occur through global exchanges that are not subject to domestic regulatory oversight.
  - Estimated retail penetration: 1-3 percent of the population (one market participant gave an upper estimate of 8 percent).
  - Most market participants thought about a quarter of crypto users were active monthly users.
  - Potentially half of crypto asset owners in the country are Russian citizens who moved to Kazakhstan since the start of the Russian invasion of Ukraine.
- AIFC requirement for miners:
  - Miners are required to store a majority of their crypto assets in exchanges registered in the Astana International Financial Centre (AIFC).

### Legal and regulatory status
- Broad prohibition and permitted exceptions:
  - The circulation of unsecured digital assets is banned in Kazakhstan (unbacked crypto assets, stablecoins, security tokens).
  - The circulation of secured digital assets is allowed, but as of April 2023 there is no underpinning regulation, active market, or significant demand.
  - Crypto assets are not allowed to be used for payments.
- Key legal milestones and dates:
  - “Law on Informatization” in force since July 2020 (prohibits circulation of unsecured digital assets and use as means of payment).
  - “Law of the Republic of Kazakhstan ‘On Digital Assets in the Republic of Kazakhstan’” came into force on April 1, 2023.
- Miners’ deposit requirements (phased):
  - Miners will be expected to deposit 50 percent of their mining rewards in AIFC-registered exchanges by January 2024.
  - Miners will be expected to deposit 75 percent of their mining rewards in AIFC-registered exchanges by January 2025.
- Enforcement reality:
  - Supervision and enforcement of the prohibition are challenging and authorities appear to tolerate some degree of circumvention.
  - Banks block customers’ fiat transfers to non-AIFC-registered crypto exchanges or wallets, though circumvention via international exchanges remains possible.

### AIFC pilot project: design, limits, and market outcomes
- Institutional design and objectives:
  - AIFC is a Jurisdictionally Separated International Financial Centre operating under English and Welsh common law; AFSA is the financial regulator in the AIFC.
  - Pilot allows circulation of unsecured digital assets within the AIFC under significant restrictions, largely serving residents in Kazakhstan using fiat settlement rails of commercial banks domiciled and registered in Kazakhstan.
- Pilot participation and activity (as of April 2023):
  - Nine crypto asset entities licensed by AFSA (seven offering exchange and custody services; two offering intermediation and custody services; not all live).
  - These entities serve 110 professional clients and 6363 retail clients, with most clients resident in Kazakhstan.
  - Pilot project facilitated $6 million worth of crypto transactions until April 2023 (one estimate: around $6 million between August 2022 and February 2023).
  - Total retail clients under registered exchanges is around 6,000.
  - Estimated daily transaction values of around $30,500.
- Retail investor limits and activity restrictions:
  - Retail investment limits: Not more than $1,000 each calendar month per retail user; Maximum of $12,000 each year per retail user.
  - Prohibited activities in pilot: staking, lending, yield investing; margin or leverage services not allowed.
  - Restrictions on transfers: no transfers to anonymous wallets, non-AIFC-registered exchanges, exchanges not served by domestic commercial banks, or peer-to-peer transfer (miners exempt from financial restrictions).
- Prudential and operational arrangements:
  - Custody regulatory capital: waiver on minimum capital requirement when providing custody services exists, but all FinTech Lab companies must have minimum capital equivalent to at least 12 months of operational expenses.
  - Exchanges expected to act as market makers but rely on global exchanges in practice; liquidity often sourced via market makers and connections with global exchanges.
- Supervision and sandbox operation:
  - AIFC Fintech Lab is a product testing regulatory sandbox with licensing and reporting requirements, transaction volume caps, user suitability tests, product restrictions, and close supervision during testing.

### Financial stability, transmission channels, and tail risks
- Short-term assessment:
  - Limited short-term financial stability implications given the small market size among retail and professional clients as of April 2023.
  - Little demand from residents and banks to increase exposures to crypto assets at that time.
- Tail risks and possible rapid changes:
  - Rapid changes are possible: growth in global crypto markets and rising crypto prices could quickly increase domestic demand and financial stability implications.
  - Expansion of the AIFC pilot into a live launch could legitimize the market and increase user engagement, with potential implications for financial stability.
- Transmission channels and domestic influence:
  - Domestic authorities can influence crypto markets through oversight of commercial banks that provide fiat settlement rails to crypto exchanges.
  - Banks participate in pilot by providing fiat settlement services; as of April 2023, five commercial banks were involved in the pilot project.

### Institutional capacity, supervisory arrangements, and coordination
- Current institutional capacity and staffing (as of April 2023):
  - AFSA Fintech Division: eight staff including a director reporting to AFSA CEO.
  - KISC: 150 staff; PFTDC: 22 staff. Proposed NPC expects to have 250 staff; approximately 10 staff currently work on blockchain projects.
  - MDAI Division for the Development of Crypto Assets: four staff generalists with monthly trainings.
  - FMA FIU: six staff focused on crypto assets; EIS: at least one crypto-focused staff in each of 20 regions.
- Supervisory approach and recommendations:
  - Most domestic authorities identify and respond to crypto risks through existing supervisory structures rather than creating new institutional arrangements.
  - Upskilling within existing supervisory structures is recommended over creating new institutions.
  - Coordination improvements: formalize and regularize meetings of the existing domestic interagency working group on crypto assets; consider working-level subgroups to share upskilling, monitoring, and response burdens.
- International engagement:
  - AFSA has signed Fintech Cooperation Agreements; ARDFM is a member of IOSCO; NBK participates in certain Basel Committee working groups.
  - Recommendation: extend membership/activity in crypto and fintech subgroups of global and standard-setting bodies and consider additional Fintech Cooperation Agreements with peer regulators.

### Consumer protection, market conduct, and digital literacy
- User education and disclosure:
  - Authorities should improve user education via joint communication to markets and consumers.
  - Short-term priority: inform users of trade-offs when using international crypto exchanges (not registered, operating illegally) versus AIFC-registered exchanges (which may provide regulatory protections).
  - Long-term objective: enable informed decision-making by users on preferred approaches.
- Market conduct and investor suitability:
  - AFSA consulting on enhancements to governance, operational and cyber resilience, safekeeping and segregation of client assets, conflicts of interest, disclosure, pre- and post-trade processes and settlement risk; proposals include easier certification of professional investors and easing listing processes.
  - Suitability tests, transaction caps, and product restrictions are used as investor protection measures in the pilot.

### Energy, mining economics, and market contraction
- Energy impacts and government responses:
  - Power use grew considerably in 2021; some estimates suggest up to 7 percent of Kazakhstan’s generating capacity was used for crypto mining in 2021.
  - Government responses included shutting down illegal mining, reduced incentives for registered miners, constrained access to the electricity grid, increasing electricity costs for crypto miners from $0.0023 per Kwh to $0.01 per Kwh, taxing mining equipment like GPUs, and removing mining hardware from certain tax exemptions.
- Market contraction and firm exits:
  - One authority estimated about 70 percent of mining companies have left Kazakhstan since the peak of activities, with about 265 registered mining firms remaining.
  - Crypto market volatility (example: collapse of TerraUSD in May 2022) reduced mining profitability and contributed to exits.
- Mining mechanics and environmental considerations:
  - Bitcoin uses Proof of Work (PoW), energy-intensive brute-force computations requiring GPUs or ASICs; difficulty adjusts to target one block every 10 minutes.
  - Kazakhstan’s mining largely used coal-fired generation, altering the global Bitcoin mining energy mix by reducing the proportion of renewables compared with prior concentration in China’s hydro-driven mix.
  - Long-term risk: networks shifting from PoW to less energy-intensive methods could reduce mining revenues.

### Monitoring, enforcement, underground market, and transitional policy options
- Monitoring and enforcement status:
  - Monitoring and enforcement of crypto activities is limited; FMA enforces prohibition but acknowledges circumvention and limited crypto-specific legislation.
  - Some crypto exchanges serve the local market despite not having AIFC registration; one market participant estimated less than 2 percent of crypto related fraud involving domestic markets is presented to courts.
- Underground market scale and effects of prohibition:
  - Active "underground" market approximately 100 times the size of the legitimate AIFC market.
  - The prohibition likely added frictions and dampened market growth but can be circumvented.
- Transitional policy options and interim measures:
  - Immediate targeted restrictions recommended as interim measures:
    - Restrict the use of crypto assets for payments.
    - Restrict the marketing of crypto assets.
    - Restrict the ability of banks to easily facilitate crypto transactions as a transitional measure until a live domestic regulatory framework is implemented.
  - Principles for transitioning to comprehensive regulation:
    - Preconditions include a growing domestic crypto market, upskilling of supervisors, acquisition of appropriate legal powers, and a global transition to coordinated prudential and conduct regulation.
    - Avoid premature legitimization that removes frictions managing market growth.
  - If demand from banks arises, bank exposures should be limited in line with developing global standards and BCBS guidance; any allowance would require legalization, extensive risk assessment, robust risk management, and appropriate capital and liquidity requirements.

### Key policy recommendations and sequencing (Table 1 summary)
- Immediate (within 1 year)
  1. Formalize and regularize meetings of the interagency working group on crypto assets and create active sub-groups on areas of interest and concern. (¶28)
  2. Extend membership of crypto and broader fintech subgroups of global and standard-setting bodies and consider Fintech Cooperation Agreements with peer international regulators; leverage AFSA’s membership of global bodies. (¶28)
  3. Work closely with AFSA to improve and standardize user education and communication about trade-offs between AFSA-registered and international exchanges. (¶45)
  4. Better understand and respond to interconnections between banks and exchanges, and interlinkages between domestic and international exchanges through enhanced monitoring using the interagency working group, and take regulatory action where necessary with AFSA where appropriate. (¶43, 44)
- Near term (1–3 years)
  5. Begin upskilling supervisors to recognize risks from crypto markets, in relation to banks and broader mandates. (¶44, 56)
  6. Ensure authorities have legal powers to regulate crypto markets should demand in Kazakhstan grow, while imposing targeted restrictions. (¶61)
  7. Consider replacing the broad prohibition with a robust regulatory framework contingent on market growth, upskilling, and a globally coordinated move to conduct and prudential regulation. (¶61, 62)
  8. Limit bank exposures to crypto assets in line with developing global standards; if banks are allowed exposures, subject them to developing global standards and guidelines. (¶55)

### Strategic considerations and recommended sequencing
- Movement toward a comprehensive regulatory framework should be the ultimate goal, paced by:
  - Market growth in Kazakhstan.
  - Upskilling and capacity development of supervisors.
  - Evolution of global standards and coordinated international regulatory moves.
- Targeted restrictions could accompany regulation (for example, continuing restrictions on using crypto assets for payments and on crypto marketing).
- Authorities should balance short-term containment via prohibition with medium-term preparedness to regulate if the market expands.

*Source: EXECUTIVE SUMMARY and excerpts from Technical Note on crypto assets in the Republic of Kazakhstan, as of April 2023.*

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### 1kazea2024005 - EXECUTIVE SUMMARY

### Crypto market overview in Kazakhstan
- As of April 2023, crypto asset activities in Kazakhstan remain small:
  - Approximately 1–3   percent of residents in Kazakhstan buy or sell crypto assets.
  - The crypto ecosystem is dominated by crypto miners that contribute roughly 13 percent of the global Bitcoin hashrate.
  - At its peak in October 2021, Kazakhstan accounted for an estimated 27.3 percent of the global Bitcoin hashrate.
- Most resident transactions occur through global exchanges that are not subject to domestic regulatory oversight.
- A substantial legitimate market is small; an underground market is noted as being approximately 100 times larger than the legitimate market for crypto.
- AIFC requirement: miners are required to store a majority of their crypto assets in exchanges registered in the Astana International Financial Centre (AIFC).

### Legal and regulatory status
- Broad prohibition:
  - The circulation of so-called unsecured digital assets is banned in Kazakhstan. These correspond to unbacked crypto assets (Bitcoin, Ether etc.), stablecoins (USDT, USDC etc.) and security tokens.
  - The circulation of so-called secured digital assets is allowed, but as of April 2023 there is no underpinning regulation, active market, or significant demand. These are akin to tokenized assets (excluding tokenized securities or tokenized deposits).
  - Crypto assets are not allowed to be used for payments.
- Enforcement challenges:
  - Supervision and enforcement of the prohibition are challenging and authorities appear to tolerate some degree of circumvention.
- AIFC pilot project:
  - The AIFC (a Jurisdictionally Separated International Financial Centre) launched a pilot project allowing circulation of unsecured digital assets under significant restrictions.
  - The pilot largely serves residents in Kazakhstan and uses fiat settlement rails of commercial banks domiciled and registered in Kazakhstan.
  - Uptake as of April 2023: approximately 6000 users and $6million of transactions.
  - Users are restricted in amount they can invest, the type of crypto assets they can trade, and activities they can conduct.
  - Transition from pilot to live launch will likely alter regulatory requirements and restrictions.

### Financial stability and systemic risk assessment
- Short-term implications:
  - Limited short-term financial stability implications given the small market size among retail and professional clients as of April 2023.
  - Little demand from residents and banks to increase exposures to crypto assets at that time.
- Tail risks:
  - Rapid changes are possible: growth in global crypto markets and rising crypto prices could quickly increase domestic demand and financial stability implications.
  - Expansion of the AIFC pilot into a live launch could legitimize the market and increase user engagement, with potential implications for financial stability.
- Transmission channels and domestic influence:
  - Domestic authorities, while not directly overseeing crypto markets, can influence markets through oversight of commercial banks that provide fiat settlement rails to crypto exchanges.
  - Prohibition, even if lightly enforced, likely dampened market activity.

### Institutional capacity and supervisory arrangements
- Legal powers and capacity:
  - Current legislation prohibits circulation of certain crypto assets, but domestic authorities should be empowered to have oversight if the local market grows.
  - Should domestic authorities be tasked with oversight, they need to upskill staff.
- Supervisory approach:
  - As of April 2023, most domestic authorities identify and respond to crypto risks through existing supervisory structures rather than creating new institutional arrangements (e.g., sandboxes specifically for crypto).
  - Upskilling within existing supervisory structures is recommended over creating new institutions.
- Coordination:
  - Domestic collaboration and international cooperation need improvement:
    - Formalize and regularize meetings of the existing domestic interagency working group on crypto assets.
    - Consider working-level subgroups to share the burden of upskilling, monitoring, and responding to risks.
    - Authorities should participate proactively in fintech and crypto subgroups of global and standard-setting bodies and leverage AFSA’s membership of global bodies.

### Consumer protection and market conduct
- User education:
  - Authorities should improve user education via joint communication to markets and consumers.
  - Short-term priority: inform users of trade-offs when using international crypto exchanges (not registered, operating illegally) versus AIFC-registered exchanges (which may provide regulatory protections).
  - Long-term objective: enable informed decision-making by users on preferred approaches.

### Key policy recommendations and priorities (Table 1 summary)
- Immediate (within 1 year)
  1. Domestic authorities together with AFSA should formalize and regularize meetings of the interagency working group on crypto assets and create active sub-groups on areas of interest and concern. (¶28)
  2. Domestic authorities should extend their membership of crypto and broader fintech subgroups of global and standard-setting bodies and consider signing and making use of Fintech Cooperation Agreements with peer international regulators to upskill staff and better monitor developments. Domestic authorities should also leverage AFSA’s membership of global bodies and Fintech Cooperation Agreements to better understand global developments. (¶28)
  3. Domestic authorities should work closely with AFSA to improve and standardize user education and communication, to ensure users have a better understanding of trade-offs when using AFSA-registered crypto exchanges or international exchanges. (¶45)
  4. Domestic authorities should better understand and respond to possible interconnections between banks and exchanges, and potential interlinkages between domestic and international exchanges through enhanced monitoring using the interagency working group, and take regulatory action where necessary through greater engagement of regulation and supervision, and in conjunction with AFSA where appropriate. (¶43, 44)
- Near term (1–3 years)
  5. Domestic authorities should begin upskilling supervisors to better recognize risks from crypto markets, in relation to banks, but also broader risks to mandates. (¶44, 56)
  6. Authorities should have the legal powers to regulate crypto markets—should demand in Kazakhstan grow—while imposing targeted restrictions. (¶61)
  7. Although not a regulatory priority, the broad prohibition on crypto assets could be replaced by a robust regulatory framework, contingent on market growth, upskilling supervisors, and a globally coordinated move to implementing conduct and prudential regulation. (¶61, 62)
  8. Bank exposures to crypto assets should be limited in line with developing global standards. While banks don’t face demand to have or increase their exposures, this could change in the near term. Should demand from banks arise, authorities may consider allowing banks to have exposures to crypto assets. In such a case, the exposures should be subject to developing global standard and guidelines. (¶55)

### Strategic considerations and recommended sequencing
- Movement toward a comprehensive regulatory framework should be the ultimate goal, but the pace should depend on:
  - Market growth in Kazakhstan.
  - Upskilling and capacity development of supervisors.
  - Evolution of global standards and coordinated international regulatory moves.
- Targeted restrictions could accompany regulation (for example, continuing restrictions on using crypto assets for payments and restrictions on crypto marketing).
- Authorities should balance short-term containment via prohibition with medium-term preparedness to regulate if the market expands.

*Source: EXECUTIVE SUMMARY (Technical Note on crypto assets in the Republic of Kazakhstan), as of April 2023.*

### 6. Volatility in crypto markets and energy shortages have reduced the size of the crypto

### 6. Volatility in crypto markets and energy shortages have reduced the size of the crypto market in Kazakhstan

### Market developments and drivers of contraction
- Power use grew considerably in 2021, turning Kazakhstan from a country with an energy surplus to one with a deficit resulting in power outages.
- Some estimates suggest up to 7 percent of Kazakhstan’s generating capacity was used for crypto mining in 2021.
- Government responses:
  - Shut down “grey” (illegal) crypto mining operations throughout the country.
  - Reduced incentives for “white” (registered) crypto mining entities and severely constrained access to the electricity grid.
  - Increased the cost of electricity for crypto miners from $0.0023 per Kwh to $0.01 per Kwh, implemented a tax on crypto mining equipment like GPUs, and removed mining hardware from certain tax exemptions.
- Crypto market volatility reduced mining profitability:
  - The collapse of TerraUSD in May 2022 had extended ramifications across crypto markets, including the failure of several crypto entities and a fall in the price of crypto assets, including Bitcoin.
- Market size and firm exits:
  - As of March 2023, Kazakhstan accounts for 13.2 percent of the global Bitcoin hashrate according to authority estimates.
  - One authority estimated that about 70 percent of mining companies have left Kazakhstan since the peak of activities, with about 265 registered mining firms remaining.

### Bitcoin mining mechanics and energy implications (Box 1)
- Bitcoin mining overview:
  - Mining mints Bitcoin and verifies new transactions via distributed networks and consensus mechanisms.
  - Proof of Work (PoW) is described as the fundamental consensus mechanism for Bitcoin, requiring nodes to solve cryptographic hashes; the Bitcoin protocol adjusts difficulty to ensure a new block is produced every 10 minutes.
  - Mining is energy-intensive because nodes use “brute force” trial-and-error computations requiring specialized computing systems (GPUs or ASICs).
- Market concentration and energy sourcing:
  - Mining has become concentrated among participants with greater resources and specialized hardware.
  - During mining growth in Kazakhstan, miners paid $0.0023 per Kwh and benefited from tax breaks.
  - Kazakhstan’s crypto mining largely used coal-fired generation, altering the global Bitcoin mining energy mix by reducing the proportion of renewables compared with previous concentration in China’s hydro-driven mix.
- Long-term risks to mining revenues:
  - Some networks have shifted from PoW to less energy-intensive methods (example: Ethereum moved to Proof-of-Stake), and if more networks move away from PoW, mining revenues may fall in the longer term.

### Retail holdings, usage, and pilot activity
- Estimated retail penetration and user behavior:
  - Estimated retail holding of crypto assets in Kazakhstan is small: 1-3 percent of the population are holders; one market participant gave an upper estimate of 8 percent.
  - Most market participants thought about a quarter of crypto users were active monthly users.
  - Potentially half of crypto asset owners in the country are Russian citizens who moved to Kazakhstan since the start of the Russian invasion of Ukraine.
  - If crypto prices were to rise, it is likely the domestic crypto market would also grow.
- AIFC pilot project and exchange activity:
  - One estimate suggests total transaction volumes in the pilot project of around $6 million between August 2022 and February 2023 involving all participants in the AIFC pilot project.
  - Total retail clients under registered exchanges is around 6,000.
  - Those crypto exchanges carry out estimated daily transaction values of around $30,500.
  - Most popular trading pairs involve Bitcoin, Ether, and Tether, and fiat currencies Kazakhstani Tenge, U.S. Dollar, and Russian Ruble.
- Motivations and barriers for retail holdings:
  - Reasons to hold crypto cited: speculative or investment purposes; belief in technology efficiencies, transparency, and financial inclusion; potential high yields through DeFi; and awareness from domestic mining activity.
  - Unique demand noted for dollar-denominated stablecoins largely from import-export businesses wanting quick settlement.
  - Reasons for small retail market: risky nature of trading crypto assets; lack of use cases given a relatively mature fintech ecosystem and available domestic payment rails; prohibition of crypto assets for payments; issuance, trading, and storage of unsecured digital assets prohibited outside AIFC; ready access to U.S. dollars via exchange bureaus and banking apps; cultural risk aversion and mistrust due to past fraud and scams.

### Institutional setting, regulatory approach, and taxonomy
- Key prohibitions and legal milestones:
  - The “Law on Informatization” (in force since July 2020) prohibits the circulation of unsecured digital assets and bans crypto as a means of payment.
  - The Law of the Republic of Kazakhstan “On Digital Assets in the Republic of Kazakhstan” came into force on April 1, 2023; it maintains prohibitions on unsecured digital assets and bans their use for payments.
  - Unsecured digital assets are defined as crypto assets received as mining rewards that do not express monetary obligations and can be traded on a crypto exchange (examples include Bitcoin, Litecoin, Ether; stablecoins such as Tether and USDC are considered unsecured digital assets in Kazakhstan).
  - The use of stablecoins and security tokens are prohibited; these crypto assets cannot be traded, stored, lent, staked, or used for payments within Kazakhstan.
  - Banks block customers’ fiat transfers to non-AIFC-registered crypto exchanges or wallets to help implement the prohibition, though circumvention via international exchanges remains possible.
- Permitted activities and registration regime:
  - Legislation allows crypto mining and certain types of crypto assets.
  - The Law on Digital Assets creates a regime for crypto miners to register with the Ministry of Digital Development, Innovations and Aerospace Industry (MDAI) and be subject to oversight; the regime went live on April 1, 2023.
  - The regime will require miners to deposit mining rewards in AIFC-registered exchanges in a phased approach:
    - Miners will be expected to deposit 50 percent of their mining rewards in AIFC-registered exchanges by January 2024.
    - Miners will be expected to deposit 75 percent of their mining rewards in AIFC-registered exchanges by January 2025.
  - The circulation of secured digital assets (digital assets certifying rights to tangible, intellectual services, and assets, except for money and securities) is allowed under the same legislation, but as of April 2023 a regulatory framework to permit circulation of secured digital assets had not been developed.
- Institutional stance and roadmap:
  - Authorities published a roadmap toward a hybrid infrastructure combining traditional finance and blockchain, including a “green paper” published jointly by the National Bank of Kazakhstan (NBK) and Binance on the future of DeFi in Kazakhstan.
  - Roadmap steps include: development of a pilot project for crypto assets, financial and crypto literacy programs, national regulatory frameworks to ensure interoperability, potential for a CBDC, tokenization of real sector assets, and development of DeFi services.
  - Institutional positions vary: the government and some authorities support a more open approach to crypto and use the AIFC to experiment; other authorities (e.g., Agency for Regulation and Development of the Financial Market (ARDFM)) are more cautious due to mandates on financial stability, market integrity, and market conduct.

### Financial sector interconnections and consumer protection efforts
- Bank involvement:
  - Banks in Kazakhstan are not able to invest in crypto assets directly or indirectly, so there is little to no institutional investment in crypto assets.
  - Some commercial banks participate in the AIFC pilot providing fiat settlement services for crypto exchanges, with potential limited direct exposure to crypto assets if operations remain within the AIFC.
  - Banks reported weak customer demand and the risky nature of crypto as reasons for limited involvement, though pilot outcomes or growth in crypto prices could change this.
- Digital literacy and awareness initiatives:
  - Authorities and industry believe users generally understand crypto risks but broader digital literacy is low.
  - Initiatives in place include NBK and Astana Hub efforts: a Blockchain Center aimed at supporting blockchain development and launching educational initiatives; Binance Academy launched an online training of teachers in February 2023 to support blockchain education.

### Key statistics and figures (preserved exactly)
- 7 percent (estimate of generating capacity used for crypto mining in 2021).
- May 2022 (collapse of TerraUSD).
- As of March 2023, 13.2 percent of the global Bitcoin hashrate.
- About 70 percent of mining companies have left Kazakhstan since the peak of activities.
- About 265 registered mining firms remaining.
- Miners initially paid $0.0023 per Kwh; electricity increased to $0.01 per Kwh for crypto miners.
- Retail holders estimated at 1-3 percent of the population (one market participant gave an upper estimate of 8 percent).
- About a quarter of crypto users are considered active monthly users.
- Potentially half of crypto asset owners are Russian citizens who moved to Kazakhstan since the start of the Russian invasion of Ukraine.
- AIFC pilot estimated total transaction volumes of around $6 million between August 2022 and February 2023.
- Total retail clients under registered exchanges is around 6,000.
- Estimated daily transaction values of around $30,500.
- Legal dates and requirements:
  - “Law on Informatization” in force since July 2020 (prohibits circulation of unsecured digital assets and use as means of payment).
  - “Law of the Republic of Kazakhstan ‘On Digital Assets in the Republic of Kazakhstan’” came into force on April 1, 2023.
  - Miners expected to deposit 50 percent of mining rewards by January 2024, and 75 percent by January 2025.

*Source: REPUBLIC OF KAZAKHSTAN INTERNATIONAL MONETARY FUND*

### 17.      A pilot project for crypto assets has been launched in the AIFC, a jurisdictionally

### 17.      A pilot project for crypto assets has been launched in the AIFC, a jurisdictionally 

### Overview of the AIFC pilot and institutional mandates
- The “Law on the Astana International Financial Centre” establishes the AIFC as an international economic free zone based on English and Welsh common law, with an aim to attract investment and grow capital and digital markets. AFSA is the financial regulator in the AIFC.
- AFSA, in conjunction with domestic authorities such as the MDAI, the NBK, and ARDFM, launched a pilot project to foster the development of a crypto asset market allowing circulation of crypto assets within the AIFC through registered local exchanges, serviced by commercial banks located in the Republic of Kazakhstan.
- The crypto framework appears largely to serve the domestic market; any impact is likely to be on domestic banks and users rather than global capital inflows.

### Institutional roles and coordination
- MDAI: tasked by the President to coordinate overall approach to crypto assets; oversight of crypto mining and secured digital assets via the “Law on Digital Assets” (no subordinate regulatory framework exists for secured digital assets).
- ARDFM: regulates banks that serve AIFC crypto exchanges and oversees compliance with financial integrity rules.
- NBK: regulates payment systems (including potential future crypto payments infrastructure) and considers macrofinancial implications of crypto assets.
- KISC and PFTDC (subsidiaries of NBK) focus on digitization and financial innovation; expected to merge to create a new National Payment Corporation for Kazakhstan (NPC) by June 2023.
- AFSA: leads implementation and delivery of the pilot, including regulation and supervision of crypto asset service providers, working closely with domestic partners.
- FMA (Agency for Financial Monitoring): enforces the crypto asset prohibition within Kazakhstan and monitors entities that may contravene the prohibition.
- Coordination mechanism: an interdepartmental working group at Deputy Chair level (AFSA, NBK, ARDFM) supplemented by an exchange of information tripartite agreement; includes FMA and the Association of Financiers of Kazakhstan. Meetings were regular before launch but are now ad-hoc and infrequent.
- AFSA has an MoU with FMA on financial integrity implications of crypto assets.

### Supervisory structures and capacity
- AFSA Fintech Division (as of April 2023): consists of eight staff including a director reporting to AFSA CEO; works with Regulatory Office Division, Enforcement Division, Policy Division, and Legal Division.
- ARDFM: uses existing supervisory structures to monitor crypto risks; supervisors receive specialist in-house training. No separate crypto/fintech unit currently deemed necessary unless rapid market growth and greater bank exposures occur.
- NBK: integrates crypto consideration across functions; Payment Systems Department leads on crypto risks and chairs an internal task force including Monetary Policy, Payment Balance, and Financial Monitoring.
- KISC and PFTDC (as of April 2023): KISC has 150 staff; PFTDC has 22 staff. Proposed NPC expects to have 250 staff and expand remit (Real-Time Gross Settlement, interbank transfers and clearing, Faster Payments, Digital ID, Open Banking, SWIFT, Secured Data Exchange, data analytics). Approximately 10 staff currently work on blockchain projects, including a proposed CBDC; no pure in-house blockchain specialists.
- MDAI Division for the Development of Crypto Assets: four staff generalists with monthly trainings from global donors and private crypto entities.
- FMA: FIU has six staff focused on crypto assets (generalists trained by international donors); EIS has at least one crypto-focused staff in each of 20 regions. FMA seeks IT graduates for analytical systems and uses third-party blockchain analysis vendors.

### Market structure and sandbox operation
- AIFC Fintech Lab: a product testing regulatory sandbox (testing and developing activities). Accepted firms must be licensed; during testing they are closely supervised and must submit interim and final reports. After testing, firms must migrate to full authorization, continue as non-regulated entities, or cease business.
- Sandbox risk management: restrictions commonly applied (transaction volume caps, user suitability tests, product restrictions). Regulatory relief can create contagion and reputational risks; multiple large firms in tests can pose financial stability risks.

### Pilot project market outcomes and limits (key statistics)
- As of April 2023:
  - Nine crypto asset entities licensed by AFSA (seven offering exchange and custody services; two offering intermediation (brokerage) and custody services; not all live).
  - These entities serve 110 professional clients and 6363 retail clients, with most clients resident in Kazakhstan.
  - Pilot project facilitated $6 million worth of crypto transactions until April 2023.
- Crypto miners under the “Law on Digital Assets in the Republic of Kazakhstan” are mandated to store up to 75 percent of their mining rewards (in a phased approach) with crypto exchanges licensed in the AIFC.
- Retail investment limits in pilot:
  - Not more than $1,000 each calendar month per retail user.
  - Maximum of $12,000 each year per retail user.
- Restrictions on transfers:
  - Customers cannot transfer assets to anonymous wallets, non-AIFC-registered exchanges, exchanges not served by domestic commercial banks, or conduct peer-to-peer transfer (miners are exempt from financial restrictions).
- Prohibited activities in pilot: staking, lending, yield investing. Margin or leverage services not allowed.
- Custody regulatory capital: waiver on the requirement to maintain minimum capital when providing custody services exists, but all FinTech Lab companies must have minimum capital equivalent to at least 12 months of operational expenses.

### Prudential, conduct, and regulatory framework within AIFC
- AFSA applies existing AIFC acts and rules to crypto activities (listed acts and specific COB/AMI/Prudential references in source).
- Current rules include capital requirements, governance requirements (including conflicts of interest), risk disclosures and complaints management, cyber and operational resilience (including a designated Chief Technology Officer), and safeguarding and segregating client assets.
- AFSA can restrict which crypto assets may be listed on AIFC-registered crypto exchanges.
- AFSA is consulting on enhancements: governance, operational and cyber resilience, safekeeping and segregation of client assets, conflicts of interest for multifunction crypto entities, disclosure, pre- and post-trade processes and settlement risk; proposals include easier process for certifying users as professional investors and easing listing processes.

### Risks, supervision challenges, and supervisory mitigants
- Supervision difficulties:
  - Customer journey contains frictions to facilitate oversight: users must open a bank account at a participating domestic commercial bank (subject to customer due diligence) and an account with an AIFC-registered crypto exchange (subject to customer due diligence).
  - In absence of a central clearing counterparty, settlement risk is mitigated by pre-funding requirements of fiat and crypto assets.
  - Exchanges are expected to act as market makers but rely on global exchanges in practice.
  - Supervision complexity: private keys in cold wallets can be stored overseas in a pool where underlying crypto assets may be lent out.
- Potential domestic market impacts:
  - Pilot involves commercial banks and investors based in the Republic of Kazakhstan; potential spillovers into domestic financial markets.
  - Pilot used as first stage to create a more tokenized ecosystem; originally set to run until December 2022 but extended until approval of the mechanism for interaction between AIFC registered crypto exchanges and commercial banks in the Republic of Kazakhstan.
  - If successful, AFSA with NBK and ARDFM will launch a full regulatory framework within the AIFC for the inter-jurisdictional crypto-fiat system.

### Gaps in international engagement and recommended improvements
- Current international engagement:
  - AFSA has signed Fintech Cooperation Agreements.
  - ARDFM is a member of IOSCO; NBK participates in certain Basel Committee working groups, but neither authority plays a proactive role in crypto or broader fintech subgroups.
- Recommendations (domestic collaboration and international cooperation):
  - Improve domestic collaboration: make working group meetings more regular; establish subgroups of working-level staff to explore specific issues and reduce burden on individual entities—more important if powers to regulate crypto markets domestically are granted.
  - Improve international cooperation: play more proactive roles in fintech-related international fora; join fintech-related working groups or subgroups of global standard-setting bodies where feasible.
  - Consider signing Fintech Cooperation Agreements with peer regulators in jurisdictions with similar crypto market conditions to better monitor developments and improve information sharing.

*Source: IMF staff summary of AIFC crypto asset pilot project material (excerpts as provided).*

### Box 4. Crypto Regulation in the AIFC

### Box 4. Crypto Regulation in the AIFC

### AFSA monitoring, supervision, and enforcement
- AFSA uses a traditional template-based approach to supervision through periodic reporting in-line with their supervision for firms operating within the Fintech Lab, combined with RegTech solutions such as blockchain analytics firms to tailor monitoring to crypto markets.
- AFSA has taken three enforcement actions for compliance failures in relation to AIFC-registered crypto entities, including:
  - two compliance failures at a single exchange, and
  - a notice to delist a crypto asset that acquired privacy enhancing features as part of a code update.
- AFSA is considering creating a bespoke crypto asset rule book to better tailor regulation to the characteristics and risks of crypto markets.
- Following the conclusion of the mission, in August 2023, AFSA published consultations on regulatory frameworks for security tokens and stablecoins.

### Market access, user behavior, and market integrity risks
- Despite the pilot regime and prohibition on the circulation of certain crypto assets in domestic markets, some users are buying and selling crypto assets on non-registered exchanges by evading prohibitions via virtual private networks, cross-border intermediaries, and potentially miscoding of transfers at domestic banks.
- AIFC-registered crypto exchanges serve a smaller market with shallower liquidity, resulting in broader spreads and poorer prices for users compared to international exchanges.
- Constraints on AIFC-registered exchanges:
  - limited number/type of crypto assets offered,
  - restrictions on volume and location of transfers,
  - restrictions on offering additional services such as lending, staking, investment, and leverage-based products.
- Client investment restriction: clients are restricted from investing more than $1,000 each calendar month; anecdotal evidence indicates users on global platforms invest on average $5000 a month.

### Liquidity sources and interconnections with international exchanges
- Some AIFC-registered exchanges rely heavily on Bitcoin miners depositing holdings to generate liquidity; one exchange reported up to 60 percent of their Bitcoin liquidity is generated by Bitcoin miners depositing mining rewards (activity can fluctuate with Bitcoin price).
- Liquidity for other crypto assets is created by:
  - market makers (global exchanges) operating on the exchanges,
  - connections with global exchanges including shared order books,
  - tapping liquidity of larger exchanges through master accounts or partnerships.
- AIFC-registered exchanges are required to have legal separation from parent companies, but practical connections (market makers, master accounts, shared systems/controls, shared order books) exist with larger international exchanges.
- Such connections can:
  - generate risks to domestic exchanges where large international exchanges hold market power or lack conduct/prudential regulation,
  - undermine the domestic prohibition if global entities serve domestic users without AIFC-registration while partnering with AIFC-registered exchanges or operating subsidiaries in the AIFC.

### Risks from pilot-to-live transition and potential market growth
- Current status: market remains small and pilot-stage; risks to domestic markets are well contained.
- Transition risks:
  - As the project moves from pilot to live launch, market legitimization and growth of circulation of crypto assets domestically are possible, particularly if global crypto prices increase.
  - Rapid market growth or greater interconnections with domestic commercial banks could result in a buildup of risk.
- Authorities should ensure monitoring and mitigation of these risks ahead of any crystallization, including ensuring appropriate powers and tools to oversee crypto markets if growth impacts the domestic market.
- AFSA may alter restrictions/constraints as the project moves to live launch; domestic authorities should be able to take action if such changes impact users or banks in Kazakhstan.

### Services expansion, investor exposure, and proportional risk management
- Potential impact if exchanges begin offering additional services or if client investment limits are lifted:
  - Exchanges currently restricted from offering lending, staking, investment, and leverage-based products but do offer market making.
  - Small number of users are using full $1,000 monthly allowance; global platform evidence shows average $5000 monthly investment by Kazakhstan residents.
- Policy implication: where additional products/services are offered, authorities must manage risk along the activity–risk spectrum (e.g., greater prudential requirements, suitability tests, governance requirements).
- Domestic authorities should proactively monitor exchanges offering market making and consider investor and bank exposure to market integrity risks.
- Risk management should be proportionate to size, risk, complexity, and systemic importance of the crypto market in Kazakhstan.

### Interagency coordination, information sharing, and capacity building
- Existing foundation: coordinating the “Rules of pilot project” has fostered interagency coordination between domestic authorities and AFSA via MoUs, agreements, and an interagency working group.
- AFSA shares regulatory reporting submissions from AIFC-registered crypto exchanges with domestic authorities, providing an up-to-date overview of emerging risks.
- Recommended cooperation measures:
  - formalize and regularize the interagency working group on crypto assets,
  - domestic authorities to take a more active role in assessing risks from growing retail user numbers,
  - request further information from crypto exchanges to improve risk assessment.
- Should domestic crypto markets grow, domestic authorities should increase oversight of crypto asset regulation with a firm legal underpinning and upskill staff by:
  - joining and playing a pro-active role in global and standard-setting bodies,
  - receiving training from public and private entities,
  - working closely with peer regulators through Fintech Cooperation Agreements.

### Role of domestic banks in the pilot project and risk controls
- As of April 2023, five commercial banks were involved in the pilot project; these banks are subject to oversight by domestic regulatory authorities.
- Bank functions in pilot:
  - provide services for AIFC-located crypto asset exchanges and other AIFC participants,
  - provide fiat settlement services subject to the national currency control regime.
- Regulatory requirements and risk management:
  - “Rules for the formation of the risk management and internal control system for commercial banks” require enhanced due diligence when interacting with crypto asset entities registered in the AIFC.
  - “Rules of the Pilot Project” require customer fiat funds to be placed in customer accounts of crypto exchanges opened in commercial domestic banks; banks are not allowed to use these fiat funds or crypto assets for their own purposes and these funds are ringfenced.
- Banks’ engagement and attitudes:
  - Banks are mostly engaging to improve knowledge; most have not experienced significant customer demand for crypto assets.
  - Banks are largely reluctant to engage deeply due to volatility, uncertainty about market embedding, and lack of regulatory certainty; only one bank was actively experimenting with blockchain internally.
- Reporting and information flows:
  - Banks report to ARDFM and the NBK; crypto exchanges report to AFSA and the NBK (and other authorities depending on mandate, e.g., FMA on AML/CFT).
  - AFSA provides access to crypto exchange reporting to the NBK to assess threats to financial stability.
  - Reporting covers number of retail and professional clients, transaction volumes, breakdown of trading pairs, and banks used to settle fiat transactions.
  - Currently, exchanges submit reports monthly to AFSA; banks submit reports monthly on crypto asset activities to their authorities.
  - Reporting is limited to information pre-agreed in the Tripartite Agreement between AFSA, ARDFM and the NBK; domestic authorities may need access to further information if markets grow quickly.
- Bank response options:
  - Domestic banks can quickly terminate business relations with a crypto exchange if risks grow beyond tolerance, enabled by banking legislation and AML/CFT requirements for risk management and internal controls.
- Investment restrictions:
  - Domestic commercial banks are not allowed to have any direct or indirect exposures to crypto assets domestically.
  - Entities registered and with branches in the AIFC can have exposure to crypto assets if limited to the AIFC; there is one domestic bank registered in the AIFC that can have direct and indirect exposure subject to clearance from domestic bank regulators.
  - Banks can invest in firms including fintech-driven firms, but ARDFM prohibits those firms or clients from engaging in crypto assets, acknowledging residual small indirect exposures may remain.
- Capital outflow and macro considerations:
  - Authorities do not believe there are large risks from capital outflows using crypto assets given small market size, mining reward deposit requirements in AIFC-registered exchanges, and currency control on settlement banks.
  - Risk could increase if crypto prices rise quickly or if the Tenge loses value relative to other currencies, facilitating capital flight via international or AIFC-registered exchanges.
- Policy stance on bank exposures:
  - Bank exposures to crypto assets should be limited in line with developing global standards.
  - If demand rises and exposures are allowed, they should be subject to BCBS standards on prudential treatment of bank exposures for crypto assets and only after legalization of crypto assets in domestic markets, extensive risk assessment, robust risk management, and appropriate capital and liquidity requirements.
- Conduct and ownership risks:
  - Most exchanges and banks are separate legal entities with contractual relationships for fiat settlement rails, but some exchanges may share beneficial owners with commercial banks, introducing complex interlinkages and risks.
  - Domestic bank regulators should ensure effective conduct rules, transparency, disclosure, and conflicts of interest management.

### Enforcement of the domestic prohibition on unsecured digital assets
- The FMA enforces the prohibition of the circulation of unsecured digital assets in Kazakhstan, extending to centralized and decentralized crypto entities and peer-to-peer domestic transactions.
- Enforcement tools:
  - The FMA has administrative and criminal powers to act against firms and users that circumvent the prohibition and has taken enforcement action against crypto exchanges serving the domestic market without AIFC registration.
  - There are no crypto-specific clauses in legislation; enforcement is carried out using broader administrative codes on illegal entrepreneurship and broader criminal codes.

*Source: 1kazea2024005 - Box 4. Crypto Regulation in the AIFC*

### 59.      Monitoring and enforcement of crypto activities is limited. Given the small size of the

### 1kazea2024005 - 59.      Monitoring and enforcement of crypto activities is limited. Given the small size of the

### Monitoring, enforcement, and current market observations
- Monitoring and enforcement of crypto activities is limited.
- There continue to be crypto exchanges that serve the local market despite not having AIFC registration.
- The FMA believes additional enforcement powers specific to crypto assets, and the transition from a pilot regime in the AIFC to a live regime, will allow it to play a more proactive role in supervising and enforcing against the prohibition.
- One market participant estimated that less than 2 percent of crypto related fraud involving domestic markets is presented to courts.
- Some market participants mentioned the prohibition existed more in theory than practice.

### Effects of prohibitions and the underground market
- Broad bans and prohibitions can impact the size of the market; the prohibition on the circulation of unsecured digital assets within Kazakhstan has likely impacted market size.
- Prohibitions can be circumvented, and an active "underground" market approximately 100 times the size of the legitimate AIFC market for the circulation of crypto assets exists.
- The prohibition, whether effectively enforced or not, is likely to have added frictions for users to purchase crypto and dampened growth.
- If crypto markets grow rapidly, authorities could face difficult challenges given fast growing risks to domestic markets and users.

### Policy options and transitional measures
- An alternative approach might provide domestic authorities with the relevant powers to regulate crypto markets, or to collaborate with AFSA more closely in line with respective mandates.
- While legitimizing the market could occur, over the longer-term an effective regulatory regime would provide greater protection to market integrity and user protection.
- Legalizing the circulation of crypto assets in domestic markets should not be a regulatory priority, but authorities should be prepared to make such a transition.
- Authorities should consider upskilling their supervisors, improving domestic collaboration and cross border cooperation, and preparing institutional structures to ensure they are able to quickly provide oversight of crypto markets if empowered by the relevant authorities.
- Consistent, comprehensive, and coordinated regulation in line with peer global regulators is preferred to broad bans and prohibitions, though these can be supplemented by targeted restrictions.

### Targeted restrictions recommended as interim measures
- Restrict the use of crypto assets for payments.
- Restrict the marketing of crypto assets.
- Restrict the ability of banks to easily facilitate crypto transactions as a transitional measure until a live domestic regulatory framework is implemented.
- Note: restricting banks could lead consumers to use alternative means to access crypto markets if crypto asset prices rise, potentially generating greater risks.

### Principles for transitioning to regulation
- Transition should be done in line with global standards and best practice, and in response to increasing risk in domestic crypto markets.
- Preconditions for moving from prohibition to comprehensive regulation include:
  - A growing domestic crypto market (retail and institutional).
  - Upskilling of supervisors.
  - Acquisition of appropriate legal powers.
  - A global transition to coordinated prudential and conduct regulation on crypto markets.
- Risks of premature transition: prematurely legitimizing the market and removing frictions that have managed market growth.
- Regulatory scope and objectives:
  - All entities in crypto markets carrying out key activities should be subject to regulatory oversight.
  - Multifunction crypto intermediaries that carry out multiple activities should be subject to greater prudential requirements and oversight.
  - Regulation should ensure stability and soundness of financial markets, market integrity, financial integrity, and market conduct including consumer protection.
  - Regulation should ensure effective risk management, governance frameworks, reporting requirements, disclosures and transparency, safety and security of users’ assets, and address dependencies and interconnections within crypto markets and broader financial services.

### Circulation of secured digital assets and the crypto asset roadmap
- The Government of Kazakhstan has issued a roadmap toward a greater tokenized economy; it is a five-step process beginning with the pilot project in the AIFC and aiming to:
  - improve financial and digital literacy across Kazakhstan,
  - create domestic regulation around crypto to fiat channels,
  - implement a digital-financial assets and CBDC bill,
  - improve international cooperation,
  - and eventually have a national CBDC or stablecoin act as a settlement instrument, including for DeFi services, and tokenization of real sector assets.
- The “Law on Digital Assets” allows for the circulation of secured digital assets (tokenized assets).
- The MDAI is responsible for oversight of secured digital assets and the “Rules on the Issuance and Turnover of Secured Digital Assets” sets out key requirements for issuers and entities that support the circulation of secured digital assets in Kazakhstan.
- The MDAI determines which secured digital assets are able to circulate within domestic markets through a “green list” of permissible crypto assets.
- As of April 2023, there is no comprehensive regulatory framework for entities that issue, trade, and store secured digital assets; such a framework will be created in upcoming by-laws.
- Tokenized securities and security tokens are prohibited from circulation within domestic markets.

### Institutional clarity, stakeholder engagement, and risks
- Authorities are unclear on the future regulatory framework for secured digital assets and which authorities should be the relevant competent authorities.
- The MDAI envisions providing permits to issuers but is unsure how this would work in practice and is likely to work with financial market regulators to create a regulatory framework.
- Domestic authorities should monitor the development of securitization of projects that might be easier in tokenized form.
- Authorities should ensure a mix of public and private entities deliver the roadmap; they should not rely on one firm or a small number of firms for training, infrastructure, research, and ecosystem development.
- Partnerships with private sector entities must be transparent, with clear disclosure to markets and users, especially where there are impacts to users (e.g., authorities having the ability to directly inspect wallets).
- Authorities should avoid providing excessive incentives to private sector participants in exchange for subjecting firms to regulation, and should regulate in line with their mandates to provide a level playing field.
- Regulation through incentives can lead to reputational risks as entities may still avoid regulatory requirements.
- Authorities should consider unintended consequences of the roadmap facilitating new crypto products and services, such as crypto payment cards.

### Preparedness and resource allocation
- Authorities should be prepared for all eventualities:
  - If a market exists and demand rapidly grows, authorities should have comprehensive, consistent, and coordinated regulation, working closely with other financial authorities and regulatory authorities from other industries depending on the underlying asset.
  - Authorities should consider whether expending significant resources on tokenization is warranted where there may be other priorities.
- Regular third-party independent reviews of blockchain and tokenization projects can help determine ongoing viability.
- Aims such as deepening capital markets and improving payments infrastructure might be achieved more cheaply through alternative approaches and technologies.

*Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1kazea2024005.pdf*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1kazea2024005.pdf_