The rise of virtual currencies is pushing governments around the world to come up with new rules. Some countries have banned bitcoin and other cryptocurrencies outright. Others, including Venezuela and Russia, reportedly are looking to create state-sponsored cryptocurrencies as a way to get around economic sanctions.
In December, authoritarian Belarus apparently became one of the world’s most favorable countries for cryptocurrencies, thanks to a decree legalizing cryptocurrency transactions. It’s an unusual modernization experiment in authoritarian Belarus, as the decree leaves these payment systems almost entirely outside the Belarus state regulatory system.
Here are three things to know about Belarus’s cryptocurrency law:
1) Belarus just moved to the front of the cryptocurrency pack
The decree by President Alexander Lukashenka makes Belarus, long weighted down by bureaucracy and state-dominated enterprises, one of the world’s leading countries in terms of cryptocurrency development. The goal? Position Belarus to attract investment from the world’s information technology companies by making cryptocurrency transactions and related income tax-free for the next five years.
The decree is not limited to a blockchain regulation. It also recognizes existence of “other distributed information systems,” providing for a broader cryptocurrency regulation with a number of possible implementations.
The new decree allows smart contracts, initial coin offerings (ICOs), bitcoin and other digital currencies and their circulation in everyday life in Belarus. Individuals and entities will be able to mine, store, buy, donate, bequeath, bestow, monetize and also exchange cryptocurrencies for Belarusian rubles, foreign currency or electronic money.
According to the decree, a special economic zone within the country’s High Technologies Park (HTP) will be the primary beneficiary. Besides the freedom to engage in cryptocurrencies transactions, among other things, companies within the HTP will be allowed to pay income tax at a reduced rate (9 percent), hire foreign citizens without permits and purchase advertising from foreign platforms like Google or Facebook tax free.
2) The IT sector alone will experiment with liberalization
In contrast to IT, the remaining sectors of the Belarusian economy remain firmly under state control; these sectors have been lacking in progressive reforms since Lukashenka came to power 24 years ago.
Expanding the innovations to all industries at once was not in Lukashenka’s interest. As an authoritarian who has ruled for years under the title of “Europe’s last dictator,” he cannot afford the rise of competing centers of authority beyond his control that would present a potential threat to his political survival.
However, with the pressures of a weak economy, Belarus’s authoritarian ruler needed cooperation from asset holders in the booming IT industry, where there were valuable assets to be taxed. IT leaders were able to push for the HTP liberalizations and a cryptocurrency-friendly zone.
3) The new decree is a workaround to compensate for the lack of foreign investment in the country
The main goal of the decree, according to the president, is to make it easier for the country’s IT sector to attract foreign investors. Despite the government’s reputation for influencing many aspects of the economy, Belarus’s HTP has been realizing the country’s ambition to become the Silicon Valley of Eastern Europe. EPAM, Viber and MSQRD are some of the world-famous brands produced by the Belarusian IT industry.
The new presidential decree aimed to stimulate foreign investment by introducing English legal institutions that previously were not possible in Belarus. In particular, the decree introduced option agreements, convertible loans, compensatory damages and noncompetitive agreements with employees.
The decree is limited to just few institutions, despite the need for broader legal modernization across the country’s commercial sector. The big question is whether a hybrid of different systems of law will work under the existing legal regime in Belarus. For instance, Belarus lacks local lawyers and law enforcement agencies, primarily courts, to handle these newly introduced instruments. And the country lacks a strong tradition of consistent application of laws.
What’s next? The liberal Belarusian cryptocurrency law has alerted Russian politicians interested in issuing a state-sponsored cryptocurrency and accompanying cryptocurrency regulations. Last week, Russian Deputy Finance Minister Alexei Moiseev acknowledged that imposing heavy cryptocurrency regulation in Russia could risk encouraging the possible outflow of ICOs from Russia into the special economic zone of Belarus.
Over the longer term, building a more fair and efficient legal system may prove a costly move for Lukashenka. If Belarus’s bold experiment with cryptocurrency takes off, there may be greater demand for legal and financial reform from other sectors — and this could weaken the authoritarian regime. At the same time, by preserving its weak rule of law, Belarus cannot ensure a predictable investment climate and attract foreign investors.
Tatsiana Kulakevich is a PhD candidate in political science at Rutgers University.