After the influx of Chinese miners in 2021, Kazakhstan has become one of the world leaders in the share of bitcoin hashrate.
Many companies have placed equipment in the country and invested in data centers. Among them are Bitmain, The9, BIT Mining Limited, Canaan – and this is not a complete list.
It seemed that Kazakhstan could become a world mining center. Up to a certain point, the authorities of the country gave positive signals.
In 2020, President Kassym-Jomart Tokayev urged attract more companies and investments to the country – according to him, by 2025 the volume of the latter in the mining industry should have grown to 500 billion tenge.
However, while the miners were actively moving to the country, the conditions in it began to change.
We figured out why Kazakhstan, which has barely begun to become a Mecca for the mining business, risks losing it all.
- After the miners began to massively move to Kazakhstan, the country introduced a tax on the production of cryptocurrencies. In February, the authorities announced the need to increase it from 1 to 5 tenge per 1 kWh.
- Due to the shortage of electricity, legal data centers and mining companies have been limited in supplies for several months. In January, they encountered problems in work due to an Internet shutdown, and later they were completely turned off from the outlet. Deliveries have not resumed so far.
- Business representatives and local profile associations say that against the backdrop of what is happening, many began to look for other jurisdictions.
Taxes, electricity and gray miners
In June 2021, Kassym-Jomart Tokayev signed a law providing for the introduction of an additional fee for cryptocurrency mining activities – 1 tenge per 1 kWh. The rules came into force on January 1, 2022.
Then the authorities explained this step by the desire to bring the miners into the legal field, and the established tax burden called “symbolic”.
The initiative did not really have much effect on the interest of business in Kazakhstan. As representatives of the Enegix data center told Cryplogger, in the summer many requests were recorded for the placement of equipment, as well as for the construction of sites (at the time of writing, Enegix declined to comment). Even after the adoption of the law, major players continued to develop business in Kazakhstan.
However, after just a couple of months, another problem arose – the authorities felt that the activity of mining crypto-currencies was creating too much load on the power grid.
In September, then Energy Minister Magzum Mirzagaliyev proposed limiting the consumption of mining data centers in the event of a shortage of electricity.
As published in October documentthe system operator of Kazakhstan, whose functions are performed by KEGOC, received the right to suspend or reduce the supply of electricity to miners in the event of its shortage, as well as “to prevent emergency situations.”
Speaking about the need to regulate mining, the President of the country argued that the so-called “white” miners will continue to work without any restrictions. In fact, they were the ones who suffered.
While legal miners have been facing problems with electricity for several months, they continue to import and connect equipment into the country, the operation of which is subsequently not displayed anywhere. The founder of the BTC KZ data center, which provides hosting for mining equipment, Din-Mukhammed Matkenov, told Cryplogger:
“We can be completely limited, sometimes during the day we get 30% of the power, sometimes it reaches 100%, but not for long. Everything is very unstable and it is very difficult to predict the profit.”
BTC KZ operates three data centers in the north of Kazakhstan in the city of Ekibastuz. Their capacities are 50, 30 and 20 MW, there are more than 30,000 mining devices.
Matkenov said that during the decision to build data centers in Kazakhstan, the government openly invited investors to invest in the country because of cheap electricity and its surplus in the north. According to him, in the early stages alone, the company invested $9 million in the business.
The founder of BTC KZ noted that in the country you can buy any amount of equipment and connect it anywhere – the state will not be able to restrict such miners, because it does not control them:
“They can turn us off, in contrast to the “gray” miners represented by small Chinese players who have connected in small volumes inside the cities. They cannot be limited, because the system operator, the state do not see them.”
The National Association of Blockchain and Data Center Industry of Kazakhstan has repeatedly spoken about the problem of gray mining. In a letter to the president of the country (available to Cryplogger), the organization stressed that the exact number of such miners is unknown, but, according to preliminary data, they consume about 1,400 MW of electricity.
“Nevertheless, to date, not a single illegal market player has been fully responsible for their activities, and official players have been sitting without electricity since September 2021,” the document says.
Cryplogger reached out to KEGOC, the Presidential Administration of Kazakhstan and the Astana International Financial Center for comment, but received no response as of press time.
Internet shutdown in Kazakhstan as another challenge
In early January 2022, large-scale protests broke out in Kazakhstan. On January 5, the country completely turned off the Internet.
According to experts, initially local authorities tried to block access to instant messengers and websites pointwise using equipment with a deep traffic filtering (DPI) function. It is used in the Russian Federation as part of the implementation of the so-called law on sovereign runet. However, it was not possible to completely block access to the network using DPI.
“It did not work out because in Kazakhstan DPI is used not for the sovereign Internet, filtering, but for analyzing and prioritizing traffic. Blocking requires special software, sometimes special equipment, as well as training, which, of course, was not in Kazakhstan,” said technical director of Roskomsvoboda Stanislav Shakirov.
As a result, the authorities instructed the operators to completely block the traffic transmission channel, said Forbes source familiar with the situation. According to another source close to the mobile communications company Kcell, the blocking was organized by the National Security Committee of Kazakhstan without the participation of operators.
In the Ministry of Digital Disconnection of the Internet explained an attempt to interfere with “coordination and planning of actions by terrorist groups.”
Earlier, Cryplogger talked about methods for bypassing blocking amid the shutdown in Belarus in 2020. However, in the event of a complete shutdown of the network, as happened in Kazakhstan, any methods are practically useless.
According to the resource Top10Vpnthe damage from the shutdown for Kazakhstan exceeded $429 million.
Miners also suffered from the shutdown. In just a few hours since the lockdowns began in Kazakhstan, bitcoin hashrate fell by 12% as all mining farms located in the country went offline.
Problems with access to the network were recorded for several more days. Accordingly, all this time, the mining industry of Kazakhstan did not work fully – during this period, farms functioned from 2 to 5 hours a day, Cryplogger was told in the Kazakhstan Association of Blockchain Technologies.
“The Internet shutdown finished off many who kept equipment here – investors, companies. For them, this was not a very good signal, and many began to look for other jurisdictions,” said Alan Dordjiev, head of the National Association of Blockchain and Data Center Industry of Kazakhstan.
Stopping the power supply of miners
However, after the resumption of stable access to the Internet, mining farms were able to return to normal operation for a short time.
At the end of January, all miners legally registered in Kazakhstan received a letter from KEGOC with a notification that electricity supplies would be canceled until the end of the month.
As reported on website of the Ministry of Digital Developmentas of December 31, 2021, 135 organizations have officially notified about the current activity in the field of mining or its beginning, 11 companies reported providing infrastructure for mining cryptocurrencies.
Later, the restriction was extended; at the time of writing, deliveries have not yet been resumed. They were completely canceled until at least February 28.
The shutdown is explained by “a tense situation with maintaining the balance of electricity and power.”
At the same time, according to an anonymous source, some companies continue to receive electricity, indicating consumption not due to mining, but due to another business – for example, under the guise of greenhouses.
Last year, miners began to leave Kazakhstan due to problems with energy supply. BitFuFu has begun relocation to the US, and Xive has closed its data center for 2,500 devices.
But then most of the miners were still hoping for change and were not going to leave the country. Now they are seriously considering the issue of relocation, the blockchain technology associations said.
The decision to move was also made by BTC KZ, Matkenov told Cryplogger:
“We are currently close to bankruptcy and clients are trying to find other countries to relocate.”
Among the main jurisdictions that miners are considering for relocation are the United States, Norway, Argentina and Russia.
The ongoing uncertainty with the regulation of cryptocurrency mining in the Russian Federation does not scare miners from Kazakhstan too much – as BTC KZ noted, if the circulation of crypto assets is banned, a clear tariff will most likely be determined for the mining business and it will be able to work.
New Taxes, Miner Purges, and an Uncertain Future
In addition to all of the above, the Kazakh authorities decided to give miners one more reason to worry and an additional reason to think about moving. In February, President Kassym-Jomart Tokayev instructed to increase the tax on the production of cryptocurrencies.
It is assumed that the electricity tax for miners will be increased from 1 to 5 tenge per 1 kWh. In addition, the authorities are considering the possibility of introducing a monthly taxation of equipment in the amount of 10 MCI.
To bring miners out of the shadows, the president also instructed to identify all mining farms and develop regulations that introduce licensing for such activities. The authorities and law enforcement officers have already begun to carry out “activities aimed at cleaning the electricity market from the shadow subjects of digital mining”, told at the Ministry of Energy.
The National Association of the Blockchain and Data Center Industry addressed the president, saying that the imposition of additional taxes would hardly have any effect on illegal miners, but would exacerbate the situation of officially registered businesses:
“In the current situation with the disconnections of “white” miners from the country’s energy systems, the issue of raising taxes for the industry is meaningless.”
The association pointed out the difference between miners and data centers, on the basis of which such activities take place.
BTC KZ noted that in the event of the introduction of additional taxation, the production of cryptocurrencies in Kazakhstan will become unprofitable, taking into account the purchase of electricity from abroad:
“There is no electricity, but they are thinking about taxes. Electricity will only be imported, and this is at least 25 tenge plus a tax of 5 tenge. At such prices, mining is unprofitable, even if the price of bitcoin is more than $42,000. We are moving, let them take taxes from no one knows who.”
Profile associations come up with various proposals to resolve the current situation – for example, on amending the legislation to create a market for balancing capacities and developing green energy, or revising the current rates for the supply of electricity to Kazakhstan from the Russian Federation.
They ask to create a working group with business representatives to jointly search for options for the development of this activity in the country.
However, it is unlikely that the authorities, who have already begun to implement the outlined course for regulating mining, will significantly reconsider their position. And even if this happens, it is incredibly difficult to regain the confidence of the market, whose expectations were deceived.
“Everyone said – we have a surplus, come, invest, give guarantees. And in one month, they just took it and came up with some kind of law, introduced severe restrictions,” BTC KZ noted.
Companies that have made multimillion-dollar investments in the market on the same terms and are faced with the reality of power cuts, additional taxes and new legislative initiatives affecting the industry can hardly feel secure.
All this allows us to make a disappointing forecast – Kazakhstan, which managed to become one of the leaders in bitcoin mining in a short time, runs the risk of losing its positions without even having time to consolidate them.
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