Georgia has introduced a regulatory framework for virtual assets and related services to bring legal clarity to the digital asset industry. The framework is primarily based on amendments to two key laws:
- The Organic Law of Georgia on the National Bank of Georgia (NBG), and
- The Law of Georgia on Facilitating the Prevention of Money Laundering and the Financing of Terrorism (AML/CFT Law).
These legal updates establish clear definitions, responsibilities, and compliance standards for entities operating in the virtual asset sector.
Before the Amendments were adopted, the only one piece of legislation referring to digital assets. It was the Public Decision №201 of the Ministry of Finance of Georgia on Taxation of Crypto Assets. It also covered Services of Transmission of the Computing Speed (Power) for Mining, dated 28 June 2019 (the Public Decision). However, the Public Decision was designed to guide taxation purposes. It left some legal aspects of digital assets ambiguous and subject to interpretation.
Notably, no amendments were made to the Tax Code of Georgia. This means that the businesses operating in the digital asset industry in Georgia shall continue the taxation practice in the same manner. The digital asset sector continues to expand in Georgia. Legislative developments suggest that the Georgian Government plans to regulate this growth. Ongoing monitoring of the applicable legal and regulatory framework would be advisable to be carried out.
Definitions of Virtual Asset
The virtual asset is a digital representation of value that is interchangeable and is not unique. It 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).
Exclusions and Legal Status
The Parliament of Georgia decided not to follow the approach of several jurisdictions that treat virtual assets as securities. Notably, the legal definition of Virtual Asset also excludes NFTs.
The Amendments specify that a Virtual Asset is not a legal means of payment, and they prohibit making payments using a Virtual Asset.
This prohibition does not apply to exceptional cases when such payment is necessary for providing the virtual asset services. The National Bank of Georgia (the NBG) will later determine the list of such exceptional cases. How the relevant authorities will apply or interpret the prohibition on making payments with Virtual Assets remains unclear. However, such a prohibition will be impractical and illogical to apply to the exchange of Virtual Assets for some services or goods.
Convertible Virtual Asset Defined
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 assets or financial instruments in which it can be exchanged.
Virtual Asset Services
The Amendments will apply to the virtual asset services providers. According to the NBG Law Amendments, virtual asset services include:
- Exchange (including via kiosks) between convertible virtual assets and national or foreign currencies or one or more forms of virtual assets or financial instruments;
- Transfer of convertible virtual assets;
- Safekeeping and/or administration of convertible virtual assets or instruments necessary for using the convertible virtual asset, enabling control over them;
- Management of a portfolio consisting of convertible virtual assets (except management of a collective portfolio);
- Administration of the trading platform of the convertible virtual assets;
- Borrowing of convertible virtual assets;
- Initial offering of such assets and the service related to the initial offering (the Virtual Asset Services).
All persons or entities providing the Virtual Asset Services for another person, virtual asset service providers (VASPs). And they must comply with the Amendments.
AML/CTF Regulations for VASPs
Before the Amendments, Georgian AML/CTF regulations did not require VASPs to comply. However, the AML/CTF Law Amendments now include VASPs in the list of accountable entities obligated to follow AML/CTF requirements. VASPs must comply only when they manage convertible virtual assets or accounts related to convertible virtual assets.
Risk Evaluation and Management Requirement
VASPs must 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. They also need to understand the nature of their client’s activities, location, product, service, or the means of their provision, transactions, and other risk factors.
Based on this assessment, VASPs shall implement the following preventive measures:
- Identify and verify a client based on a reliable and independent source;
- Identify a beneficial owner and take reasonable measures for verification thereof based on a reliable source;
- Identify the essence of the client’s business and acquire information about the nature, volume, and frequency of the prospect transactions; and
- 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:
- Establishment of a business relationship;
- 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;
- Single transfer of monetary funds if the value of such transfer exceeds GEL 3,000 or its equivalent in foreign currency;
- There is a doubt that the identification data of the client is not correct.
VASPs must obtain the required identification information about the client and the transfer before transferring or receiving convertible virtual assets.
The information gathered must be retained by Georgian AML/CTF regulations for five years. This retention period starts from the termination of the business relationship with the client or the conclusion of a single transaction.
The entity that is supervising compliance with the AMl/CTF regulations is the LEPL Financial Monitoring Service of Georgia.
Registration
VASPs must register with the NBG and comply with registration requirements, which the NBG will adopt soon. Providing Virtual Asset Services without registration is prohibited. VASPs may only engage in providing Virtual Asset Services or related activities and must not carry out any other business.
The NBG may terminate or restrict the operations of VASPs. This can happen if the operations involve increased risks of money laundering and terrorism financing. It can also happen if the operations involve avoiding financial sanctions. Additionally, if the operations hinder the traceability of a transaction or supervision, the NBG may take action.
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 on Commercial Bank Activities
The exhaustive list of activities that Georgian commercial banks are allowed to carry out is determined by the Law of Georgia. This law is called the Law on Commercial Bank Activities.
The new package of Amendments also envisages the addition of the following activity to such a 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 the 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 in the banking activities, which will most likely give leverage to the commercial banks over the entities involved only in the provision of the Virtual Asset Service, which will be required to comply with the registration requirements.
As Georgia continues to formalize its regulatory stance on virtual assets, it’s crucial for businesses operating in this space to stay ahead of legal obligations. If you’re a virtual asset service provider (VASP) or planning to enter the digital asset sector in Georgia, ensure timely registration with the National Bank of Georgia and adopt robust AML/CTF compliance measures.