The Law will assist the authorities in preventing illegal mining and protecting the rights of entities that comply with the legal framework. The Law is aimed to make this field transparent; it will force miners to declare profits from the sale of digital assets and control the circulation of cryptocurrency in Kazakhstan and within AIFC. Carrying out digital mining activities on the territory of the Republic of Kazakhstan is allowed to individual entrepreneurs and legal entities, though, digital mining does not apply to the issuance and turnover of unsecured digital assets. Issuance and turnover of unsecured digital assets on the territory of the Republic of Kazakhstan are still remaining illegal. Unsecured digital assets are not recognised as a financial instrument in the territory of the Republic of Kazakhstan, which is not the case within AIFC, where blockchain technology is aiming at the development of international and cross-platform legal relationships with cryptocurrency.

As we have pointed out above, digital mining activities are carried out by a digital miner through an accredited mining pool using a digital mining data centre and in accordance with digital mining licences.


Accredited Pool

The Law defines an accredited pool as an accredited legal entity that provides mining equipment pooling services and distributes digital assets that are derived from joint activities among miners.

According to the Accreditation Rules for Digital Mining Pools: Accreditation of a mining pool is paid for by the applicant. The accreditation procedure for a mining pool includes:

1. Submitting information on security compliance tests, including handing over access to the pool's IP for verification activities, followed by submitting a report to the regulatory authorities for accreditation purposes;
2. Providing current information on the location of the pool; and
3. Confirmation of compliance with the list of requirements according to the Accreditation rules for digital mining pools.

We should note that an accredited pool must file the following information with the tax authority, pursuant to paragraph 3 of Article 10 of the Law on Digital Assets in the Republic of Kazakhstan:

1. Miner's name (full name of the legal entity);
2. BIN (business identity number);
3. Licence number and date (information on the licence issued to participants in the pool);
4. Digital e-wallet details (Information on the account where unrealised assets are held);
5. Date of distribution of the unsecured digital asset (Date on which the mining pool distributed the collectively mined assets);
6. Name of unsecured digital asset (Name of the cryptocurrency or other blockchain-derived asset);
7. Amount of unsecured digital asset distributed to the digital miner (Amount of cryptocurrency sold); and

Mining pool fee, expressed in digital assets (The value of the assets retained by the pool).


Digital Mining Licences

One of the most important changes introduced by this Law (On Digital Assets in the RoK) is the authorisation of the Ministry of Digital Development, Innovation and Aerospace Industry to issue a licence for digital mining activities. Based on the Rules for Informing Digital Mining Activities, obtaining a licence is currently done through a notification by the e-government portal under the licence section. The licence is subdivided into 2 sub-licences, based on the ownership of the data centre.

I sub-licences - characterised by the property rights to data centre or other legal rights.

According to Digital mining licensing rules: the cost of procedure for I sub-licences is 2000 month calculated index (“MCI”) approximately 15,880 USD. The MCI is a coefficient for the calculation of benefits and other social payments, as well as for the application of penalties, taxes and other payments in accordance with the legislation of Kazakhstan, for 2023 the adopted MCI is 3,450 tenge. Processing period is 15 working days for acquiring a licence, and 3 working days for renewal of licences. Application filings are undertaken by electronic government portal.

The following information must be submitted in order to obtain an I sub-licence:

1. information on inclusion in the register of hardware and software complex for digital mining;
2. proof of ownership or other legal basis for the digital mining data centre, specifying the location of the data centre;
3. information on the location of the digital mining data centre outside a residential area (free-form letter of guarantee); and
4. supporting documents on the implementation of digital mining activities through the digital mining pool.

II sub-licences - characterised by the fact that the data centre is not legally owned and the mining is done with digital mining equipment hosted in the data centre.

The cost of procedure for II sub-licences is 5 MCI units which is approximately 40 USD.
It follows from the subdivision of sub-licences that there is a need to place the computing power of "mining farms" into an accredited pool, or execute hosting contracts for those who do not legally own a data centre.

The following information must be submitted in order to obtain an I sub-licence:
1) information on the inclusion of the hardware and software complex for digital mining in the register;
2) information on the placement of a hardware and software complex for digital mining owned by it in the data processing centre; and
3) supporting documents on the implementation of digital mining activities through the digital mining pool.

Tax Regulation

As we noticed before, the pool is obliged to submit tax reports in required tax periods as per legislation of RoK. Tax periods are calculated in quarters and returns are submitted to the location authority on a quarterly basis. Quarter counting period starts from 1st January. It is also necessary to calculate and pay a fee for the consumption of electricity by mining activities. Payments are due no later than the 25th day of the month following the month in which the tax returns are filed. It is necessary to use electricity meters, so in the case of a non-working or missing meter the rate of payment is calculated in the amount of 25 tenge per KWh. In the case of a working meter, the electricity consumption is billed in proportion to the electricity consumed. You can see a table of calculations below. The rate of 10 tenge per kilowatt hour is fixed for the use of own electricity. The most profitable method is the usage of electricity generated through Renewable Energy Sources (RES), with a rate of 1 tenge per KWh for green energy.


Restrictions

In addition to taxes, the mining activity also imposes a number of restrictions on the legal entity. Restrictions related to digital mining activities include the following points:

1. Other activities not related to digital mining activities are prohibited;
2. Acquisition of shares in the authorised capital or shares of legal entities, creation and participation in non-commercial organisations, except for membership in a self-regulatory organisation and the National Chamber of Entrepreneurs of the Republic of Kazakhstan, are prohibited; and
3. Unsecured digital asset restricted in circulation and not recognised as a financial instrument.

Digital Asset Exchange and AIFC legislation

The Digital Asset Exchange and its activities are accredited and regulated by AIFC legislation. As an accompaniment, second-tier banks set up an account for AIFC participants and the exchange. This is an important consideration because the Digital Asset Exchange is also required to warn potential buyers of the risks associated with dealing in unsecured digital assets.

In case of sale of digital assets, obtained as a result of digital mining on the territory of the Republic of Kazakhstan, such digital assets are subject to mandatory sale through digital asset exchanges which are licensed by the AIFC, in the amount of at least 75% (seventy-five percent) of the assets in accordance with the rules for submitting information on the income of digital miners and digital mining pools in for tax purposes. Digital asset exchanges are required to notify individuals and legal entities about the risks associated with the purchase, possession and execution of transactions with unsecured digital assets. The issuance and turnover of unsecured digital assets, as well as the activities of digital asset exchanges on unsecured digital assets, except on the territory of the AIFC, are prohibited on the territory of the Republic of Kazakhstan.

The AIFC is currently preparing interactions with crypto exchanges ATAIX Eurasia and Biteeu Eurasia. The AIFC has already provided 7 crypto-exchanges with the licenses and expects to increase the list of licensed entities.

As an example, Binance, which is licensed by the AIFC, has signed a memorandum dated 25th May 2022 on the assistance to the state authorities of the Republic of Kazakhstan in the tracing of illegal cryptocurrencies.

Thus, based on the above stated, we may conclude that Kazakhstan is striving for development of blockchain technologies and is willing to become an international hub for digital miners. We assume that the newly adopted regulations do not seek to stifle mining but, vice versa, to assist the digital mining in integrating and provide transparency for investors who are willing to develop the industry and make crypto assets eligible around the world.