On 9 September 2022, the Parliament of Georgia announced the framework of a new regulatory regime for virtual assets and associated services that will be effective from 1 January 2023 (the Amendments). The package of the Amendments will bring more clarity to the digital asset industry in Georgia. Mainly, the Amendments were made to the Organic Law of Georgia on National Bank of Georgia (the NBG Law Amendments) and the Law of Georgia on Facilitating the Prevention of Money Laundering and the Financing of Terrorism (the AML/CFT Law Amendments).
Before the Amendments were adopted, the only piece of legislation making a reference to digital assets was the Public Decision №201 of the Ministry of Finance of Georgia on Taxation of Crypto Assets and Services of Transmission of the Computing Speed (Power) for Mining, dated 28 June 2019 (the Public Decision). However, the Public Decision was designed to provide guidance for taxation purposes and left some legal aspects of digital assets ambiguous and subject to interpretation.
Notably, no amendments were made to the Tax Code of Georgia which means that the businesses operating in digital asset industry in Georgia shall continue taxation practice in the same manner. However, since the industry is constantly growing and in light of the recent legislative developments which clearly show that the Georgian Government plans to regulate the sector, constant monitoring of applicable legal and regulatory framework would be advisable to be carried out.
For the purposes of the Amendments, the virtual asset is digital representation of value that is interchangeable and is not unique, which can be digitally traded or transferred and used for investment and/or payment purposes. Virtual assets do not include digital representations of fiat currencies, securities and other financial instruments (the Virtual Asset).
From the definition of the Virtual Asset, it is clear that the Parliament of Georgia chose not to follow several jurisdictions’ approach according to which the virtual asset can be treated as the securities. Notably, NFTs are also excluded from the legal definition of Virtual Asset.
According to the Amendments, the Virtual Asset is not a legal means of payment, and it is prohibited to make payments with Virtual Asset. This prohibition does not apply to exceptional cases when such payment is necessary for providing the virtual asset services. The list of such exceptional cases will be determined by the National Bank of Georgia (the NBG) later. It is ambiguous how the prohibition of making payments with Virtual Asset will work or will be interpreted by the relevant authorities. However, such prohibition will be impractical and illogical to apply to exchange of Virtual Asset for some services or goods.
The Amendments specifically define the convertible virtual asset which is a Virtual Asset that has an equivalent value on the market in national or foreign currency, in other virtual asset or financial instruments in which it can be exchanged.
The Amendments will apply to the virtual asset services providers. According to the NBG Law Amendments, virtual asset services include: (1) exchange (including via kiosks) between convertible virtual assets and national or foreign currencies or one or more forms of virtual assets or financial instrument; (2) transfer of convertible virtual assets; (3) safekeeping and/or administration of convertible virtual assets or instruments necessary for using the convertible virtual asset enabling to control them; (4) management of portfolio consisting of convertible virtual assets (except management of collective portfolio); (5) administration of the trading platform of the convertible virtual assets; (6) borrowing of convertible virtual assets; or (7) initial offering of such assets and the service related to initial offering (the Virtual Asset Services).
All persons/entities providing the Virtual Asset Services for or on behalf of another person are deemed to be virtual asset service providers (VASPs) and, thus, shall comply with the Amendments.
Before the Amendments were introduced, VASPs had no obligation to comply with Georgian AML/CTF regulations. However, according to the AML/CTF Law Amendments, VASPs are added to the list of accountable entities which are obliged to observe the AML/CTF requirements. Obligation to act in accordance with the AML/CTF regulations will apply to VASPs only if they are involved in the management of convertible virtual assets or convertible virtual assets accounts.
After 1 January 2023, VASPs will be obliged to evaluate and manage the risks of money laundering and the financing of terrorism associated with their activities and adopt an effective system for that purpose. While assessing the risks, VASPs shall identify a client and its beneficial owner, the essence of their activities and location, product, service or the means of their provision, transactions and other risk factors and implement the following preventive measures:
a) identify and verify a client based on a reliable and independent source;
b) identify a beneficial owner and take reasonable measures for verification thereof based on a reliable source;
c) identify essence of the client’s business and acquire information about nature, volume and frequency of the prospect transactions; and
d) examine the transaction prepared, made or executed within the business relationship in order to determine whether such transaction complies with the information about the client, commercial or professional activities of the client or its risk level. If necessary, the VASPs shall also examine the origin of the client’s property, funds and convertible virtual assets.
VASPs shall implement these preventive measures in the following cases:
a) establishment of a business relationship;
b) concluding a single transaction associated with the Virtual Asset Services if the value of such transaction exceeds USD 1,000, EUR 1,000 or GEL 3,000;
c) single transfer of monetary funds if the value of such transfer exceeds GEL 3,000 or its equivalent in foreign currency;
d) there is a doubt that the identification data of the client is not correct.
VASPs shall ensure that before transfer and/or receipt of convertible virtual assets the required identification information about the client and the transfer is obtained.
VASPs shall retain the information obtained within the scope of the Georgian AML/CTF regulations for 5 years from the termination of business relationship with the client or conclusion of a single transaction.
The entity which is supervising compliance with the AMl/CTF regulations is LEPL Financial Monitoring Service of Georgia.
VASPs are obliged to register at the NBG and comply with the registration requirements which are yet to be adopted by the NBG. It is prohibited to provide Virtual Asset Services without such registration.
VASPs are prohibited to carry out any activity other than providing Virtual Asset Services or other related services.
The NBG may terminate or restrict operations of VASPs if such operations involve increased risks of money laundering and terrorism financing or avoiding the financial sanctions, hinder traceability of a transaction or supervision.
In case VASPs violate the normative acts of the NGB, they might be subject to monetary penalties.
The fee for registration as a VASP amounts to GEL 5,000.
AMENDMENTS TO THE LAW COMMERCIAL BANK ACTIVITIES
The exhaustive list of activities that Georgian commercial banks are allowed to carry out is determined by the Law of Georgian on Commercial Bank Activities. New package of the Amendments also envisages addition of the following activity to such list:
“Provision of the Virtual Asset Services for the benefit of other person, particularly, exchange (including via kiosks) between convertible virtual assets and national or foreign currencies, other virtual currency or financial instrument, transfer or storing virtual assets or other assets necessary for their use enabling to exercise overall control over the virtual assets and auxiliary services.”
Due to addition of the above services within the scope of the permitted activities of the commercial banks, it is ambiguous whether the commercial banks are still required to register as a VASP. This addition might be interpreted as an automatic inclusion of the above services to the banking activities which will most likely give a leverage to the commercial banks over the entities involved only in the provision of the Virtual Asset Services which will be required to comply with the registration requirements.