Is Armenia About to Overregulate Its Crypto Space?

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As global financial regulatory consensus builds over centering cryptocurrency regulation around monetary authorities, Armenia’s Central Bank, with the backing of the State Revenue Committee, is pushing for similar legislative overhauls at home. They cite concerns over consumer protection, market integrity, and legitimation. On April 25, the Armenian Government approved a bill aimed exclusively at introducing non-cash transactions for crypto asset operations and is currently developing comprehensive cryptocurrency regulations. While these reforms are expected to bring Armenia in line with newly converging international standards, the legislation, as it stands, raises serious issues over privacy, personal freedom, economic growth, and potentially harming innovation, including conflicting government projects.

Chief among detractors are the local Web3 community, civil libertarians, and other economic stakeholders, particularly in the tech startup space. They have been increasingly vocal about fears that Armenia’s attractiveness as an investment destination and innovative ecosystem might be at risk.

Crypto: From the Currency of Freedom to (Inter)national Clampdowns

Built on decentralized peer-to-peer (p2p) networks, cryptocurrencies offer users an alternative form of exchange that promises increased transparency, security, and functionality on a cross-network distributed ledger that records all transactions. This ledger is commonly known as the overused Silicon Valley buzzword “the Blockchain”. These ledgers allow senders and receivers to independently authenticate the validity of digital transactions, eliminating the need for third parties, primarily banks, and making them hard to track. 

This innovation is praised for being a faster, more private, efficient, and safer way to trade currency. However, regulatory agencies and government bodies decried it as a method for criminal and terrorist organizations to fund transnational activities undetected.

Early critics like the economist Nouriel Roubini (in)famously dismissed blockchain as “little better than an Excel spreadsheet”. However, it wasn’t long before global governments found common ground on the need to regulate this space. On one extreme, democracies were concerned about the spread of illicit activities, and on the other, authoritarian regimes hoping to tighten the noose over their own citizens.

China, unsurprisingly, has moved swiftly and dramatically by outright banning the mining, trade, and payment of cryptocurrencies, while promoting its alternative, government-controlled currency, the digital RMB. Other states, like Switzerland, have positioned themselves as crypto-friendly by drafting clear regulatory guidelines and supporting innovation, while ensuring compliance with financial and anti-money laundering (AML) regulations​. Most countries have taken a more balanced approach, intending to encourage innovation while ensuring compliance with AML and counter-terrorism financing (CFT) regulations. Some, like South Korea, have implemented stricter measures, including real-name verification for crypto trading and stringent AML requirements. 

The Central Bank of Armenia was among the slower movers to regulate this space. In 2018, it drafted a letter to the country’s banks cautioning against trading in crypto but did little else until the recent regulatory overhaul was announced last year. This draft law was likely influenced by events closer to home. In April of last year, the European Union adopted a comprehensive legislative framework to standardize and regulate the crypto asset market across all member states. As one of Armenia’s largest trading partners, and a principal source of currency inflow, these changes would inevitably trigger similar legislative reforms in Armenia, if only for the sake of fiscal harmony. 

In fact, the Central Bank all but admitted this when it announced its own legislative reform package in November 2023, less than five months after the EU’s MiCA came into force. In its official statement, the CBA cited “international standard-setting organizations (IOSCO, FSB, IMF, BIS, FATF) which expressed a clear position emphasizing the need for unified and comprehensive regulation of virtual assets by all countries due to the non-localized (virtual) nature of the virtual assets market and cross-border circulation.” 

A Solution Without a Problem?

The CBA cited five key objectives in enacting this regulatory reform: 

(1) regulatory compliance: Aligning with global standards to prevent regulatory arbitrage; (2) Risk mitigation: Addressing anonymity concerns that facilitate illegal activities; (3) Public confidence: Demonstrating proactive oversight of emerging financial technologies; (4) Economic policy: Controlling cryptocurrency impacts on monetary policy; and (5) Encouraging innovation: Creating a balanced environment for technological advancements while protecting economic and security interests.

A chief concern among critics is that in their zeal to close regulatory loops and meet international standards, Armenia’s fiscal authorities could be sacrificing the country’s innovative industries. Arguably, the Central Bank may have been unintentionally damaging the country’s crypto industry since issuing that 2018 letter. Numerous founders of crypto or blockchain-related startups have complained about overcautious banks declining their requests to open bank accounts upon reading the word “crypto” in their paperwork since 2018. This also sets the stage for fears among the country’s Web3 community that the incoming regulatory framework could, in the words of one local crypto startup founder, “kill the industry” in Armenia. 

Ironically the current governing party’s predecessor, the “Yelq” Bloc, proposed legislation back in 2018 calling for minimal government oversight on crypto and even exempt crypto mining entirely. This legislation prompted the government at the time to issue a response discouraging such a move. 

Nevertheless, real concern over terrorism or financial fraud has garnered support for this reform package from two powerful agencies: the Ministry of Internal Affairs and the Investigative Committee. Individuals can theoretically exchange and move very large sums of money in virtual anonymity through crypto exchange points as opposed to traditional banks, greatly burdening investigators. Earlier last year, the Investigative Committee announced a sting operation against a local hacker who had managed to steal 236,000 USD worth of a cryptocurrency known as Ethereum––the first such case in the agency’s history. Since then, Armenian law enforcement have been closely cooperating with international partners like the Office of the Co-ordinator of OSCE Economic and Environmental Activities (OCEEA) and the United Nations Office on Drugs and Crime (UNODC) to crack down on crimes of this nature. 

Balancing Act

Experience from regulatory overhauls around the world suggests that legislation similar to that proposed by the CBA doesn’t inherently lead to a drop in foreign direct investment or a collapse of the local tech industry when applied correctly. Armenia is making visible strides to align its current financial regulatory rules and financial crime-fighting efforts with international standards. Yet there is little evidence to suggest this has negatively impacted the country’s innovation space; at least not yet. 

Aside from the dangers of stifling innovation in the crypto space, Armenian regulators need to avoid being too heavy-handed in their intervention in this nascent market. This is especially important since it is built on technology that Armenia’s own state digital transformation strategy largely relies on for success: the blockchain. Estonia’s X-Road, the precursor to pretty much all modern integrated e-government services being developed today, including Armenia’s, uses the same principles of cross-network distributed ledgers as Blockchain does. This includes the same peer-to-peer authentication technology which makes crypto users so hard to track. It’s still unclear if Armenia intends to apply surgical precision to such regulatory measures in this case. 

Crafting a Future-Proof Crypto Framework? 

Armenia stands at a crossroads in its approach to regulating the crypto space. The Central Bank’s proposed regulations could create a safer and more transparent environment for cryptocurrencies, but they must be carefully calibrated to avoid stifling innovation and driving away investment. The key will be to implement a regulatory framework that fosters trust and stability while still allowing the crypto and Web3 communities to thrive. Balancing these competing interests will determine whether Armenia can position itself as a leading player in the global crypto economy or risk falling behind more progressive jurisdictions.

The future of Armenia’s crypto space will depend on policymakers’ ability to navigate these complex issues and create a regulatory environment that supports both innovation and security. As the discussion unfolds, attention will focus on Armenia’s approach to navigating the complex terrain of cryptocurrency regulation. For those raising alarms over the future of Armenian currency exchange, tech innovation, or even of Armenian democracy itself, it’s important to remember that regulation does not equate to legislation. 

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