“I’d like to believe that the state will take into account the global experience and will not speak bluntly. Miners will exist with any stance of the state, given the peculiarities of law enforcement in our country. The only way out is to admit the fact of existence of miners and to monitor their activities,” Kyrgyzstan-based Kanat Nogoibaev, graduate of the CABAR.asia-2021 Analytics School, wrote in his article for the said portal.
Recently, politicians talk often about the energy crisis, while local authorities do rolling blackouts in the regions of Kyrgyzstan. Many people blame not only the old power grid and inefficient management, but also miners who have increased significantly in number over the years.
First, we need to understand what crypto mining farms are and who miners are. Crypto mining is a process of cryptocurrency production by the permanent use of electricity for computer equipment. One of the most popular cryptocurrencies is Bitcoin, which was worth 56,585 dollars on the Bitfinex Exchange on November 24, 2021.
Amid restrictive measures against miners in China and Iran, Kazakhstan is ranking in the top three in the world by bitcoin mining. Central Asian countries such as Uzbekistan and Kyrgyzstan also attract miners with low electricity rates, which forces them to make legislative decisions to regulate these activities. In Uzbekistan, for example, the price of electricity is 0.031 dollars per kWh, while in Kazakhstan it is 0.045 dollars per kWh. In contrast, Kyrgyzstan has the cheapest electricity. 0.024 dollars per kWh. It is critical for miners to have the lowest electricity price, therefore it is highly attractive to place their farms in Central Asia.
Speaking about the legal status of crypto mining, Kyrgyzstan began to regulate crypto mining by tax regime in 2020. At the same time, the country has no laws to regulate the circulation of cryptocurrencies and there is only the draft Law “On turnover of cryptocurrencies” suggested by the National Bank. The former chief of the National Bank did not particularly welcome any experiments with digital money and preferred not to raise the issue. However, despite the tax regime and license granting, GKNB carries out regular checks of crypto mining farms and disconnects them from the grid referring to the order of April 4, 2019 No. 56 of the National Energy Holding Company, which imposes temporary ban on granting technical authorisation for crypto mining operations. This all doubts the possibility of further investment from large crypto mining companies or forces many companies to work underground. Bona fide payers are often cut off along with “grey miners” in order to save electricity. A crypto mining farm with 10,000 devices consumes an average of 408,000 kilowatts of electricity per day – the same amount as an area with 40,000 people. This is enough to provide electricity to the city of Naryn with population about 40 thousand people.
If we switch on all 80,000 devices in the country, they will consume 76 million kWh of electricity in 30 days. According to the Ministry of Economy, 20 per cent more of electricity is required for ventilation. It equals to 91.2 million kWh per month or about 3 million per day. This figure is not as high as the daily electricity consumption across Kyrgyzstan, which is 67 million kilowatt hours, with 15 million consumed in Bishkek.
Are crypto mining farms profitable to the country’s budget?
If we speak about the state’s income, the Ministry of Economy of the Kyrgyz Republic has imposed the tax of 15 per cent of electricity consumed by mining equipment on crypto mining farms.
The Ministry of Economy is planning to collect nearly 350 million som (approximately 4 million 122 thousand dollars) in taxes every year. For example, this was the amount received by Kyrgyzstan from intenrational donors for the pandemic response in 2020. From January to August 2021, the national budget of Kyrgyzstan received 4 million 622 thousand 514 som (54.4 thousand dollars) as crypto mining tax. It is quite a significant amount given that on top of that miners pay for electricity.
Exact figures of the number of miners in the country are not available, and the figure of 80,000 devices is known. However, most miners often carry out illegal activities disguised under previously established production, such as brickworks, and fill the building with machinery and equipment. For example, one year before regulation, at the end of September 2019, Kyrgyzstan switched off electricity for 45 cryptocurrency mining firms because they consumed more energy than the three local regions combined.
Since the beginning of this year, population has been actively discussing the Government’s proposal to increase electricity prices and the inevitability of rolling blackouts given the current water levels. On November 17, the level of water in Toktogul water reservoir reached 11 billion 455.57 cubic metres. This is 2.9 billion cubic metres less than in 2020. These figures raise concerns of the state regarding its preparedness for providing electricity across the republic in winter season.
In early November, Severelectro announced the 5-kilowatt limit for users with single-phase power supply according to the Electricity Use Rules, and up to 10 kilowatt limit for users with three-phase power supply. Residents of the country report rolling blackouts and ban on the use of electrical heaters. The electricity issue upsets the people and becomes even more relevant amid the energy crisis in the country and hiking prices of diesel fuel and other convenience goods.
Moreover, minister of energy of the Kyrgyz Republic Doskul Bermurzaev predicts that the country has suspended imports of energy from neighbouring countries for a score of reasons. The minister has been very optimistic about the energy supply issue for a long time, but now few people trust his words. There is no real reform of the energy system, and the debt of electric stations is still rising. There is no hope for the improvement of the current situation so far. The president blames his predecessors and promises to remedy the situation after the parliamentary election. As the president assures us, we need to wait for better days.
Are crypto miners to blame for energy crisis?
The government and expert have raised the issue of the appropriateness of crypto mining farms in Kyrgyzstan. Taking into account the current electricity situation, the additional load of crypto mining farms on the country’s power grid creates a critical situation. Most of the authorisation documents were issued to crypto mining companies at times of excessive electricity, and now, in crisis, they deprive ordinary citizens of their access to consumer services.
For example, according to GKNB, two crypto mining farms were identified in September, which connected to Severelectro power grid illegally and stole power in a large scale. According to the intelligence agency, 500 crypto mining devices were found and the total volume of damage was nearly 20 million som (235 thousand dollars). It should be noted that one devices consumes nearly 1,500-3,000 kWh, which is comparable to the daily consumption of 15-30 refrigerators with 10 kW capacity.
Uncertainty in the state’s attitude towards crypto miners leads to insecurity for entrepreneurs and constant checks. For this reason, most crypto miners prefer to be in the “shadows” and to be illegally connected to electricity. The workers of the power grid help them to do so. Given the level of corruption in the country, crypto miners do not bring benefits to the treasury, yet they can use resources almost free of charge.
On the other hand, if there were no crypto miners, the country would still have problems with electricity. Such cases have occurred many times in the history of sovereign Kyrgyzstan and the main reason has been ineffective management of the national power grids, irrational water regulation in Toktogul water reservoir and the lack of modernisation and construction of new HPPs. It should be noted that one of the main factors of the April 2010 events in Kyrgyzstan that resulted in the violent change of power was the rise in electricity rates and constant rolling blackouts. Since then, the authorities are reluctant to raise electricity prices as their future depends on them.
Global crypto mining experience
In the meantime, crypto mining is a very popular kind of activity in many countries of the world. The Unites States is the leader in the market, which has recently surpassed China by the volume of computation capacity in the bitcoin network. The United States differs from other countries by its well-developed legal framework for a good cryptocurrency environment. Crypto miners in the United States may get necessary protection and solve business issues with attraction of superior authorities. Electricity prices depend mainly on the state, but Washington is a recognised leader.
For example, Americans managed to modernise the old HPP and started to mine cryptocurrency there. According to some estimates, it turned out to be more profitable for bitcoin mining than for just selling electricity.
In Venezuela, crypto currencies take a special place. The country has been in crisis and humanitarian disaster for a long time. Local money doesn’t solve anything, and residents have to solve their financial problems themselves. In 2020, the authorities approved crypto mining and the National Superintendence of Cryptoassets (SUJACRIP) began to issue licenses officially. It all took place amid electricity interruptions in the country.
Crypto mining is actively developing in Ukraine. They use alternative methods to produce energy. For example, one of the largest farms is opening near the Zaporozhye nuclear power plant, the largest nuclear power plant in Europe. The cost of the project jointly with the Swiss company is estimated at 700 million dollars. Another farm will be built jointly with the Netherlands-based company near Rivne nuclear power plant. Its location next to nuclear plants is perfect for crypto mining farms, which consume a large amount of electricity. Companies will be paying 5 per cent of profit and will be exempt from VAT, while individuals will be paying 5 per cent with the grace period until the end of 2025.
The general conditions for crypto mining in Central Asia are favourable only in Kazakhstan. This is so mainly because of the excess of power and general openness of economy to investments into the IT sector. According to the research of the University of Cambridge, our closest neighbour has become the second largest producer of cryptocurrency in the world. Nearly 18 per cent of all bitcoin mining computations fall on Kazakhstan. Amid the energy crisis, although there are calls for the closure of farms and their negative impact on the electricity shortage in six regions of Kazakhstan, President Tokayev states that it is necessary to regulate the sphere and to make a real profit from the presence of crypto miners in the country. To solve the energy crisis, it is proposed to build a nuclear power plant to cover the high demand for electricity.
The largest crypto mining farm can consume as much as the whole city of Karaganda. The main problem in the country is with illegal crypto miners, whose number is growing. According to preliminary estimate of KEGOC, the volume of power consumption in Kazakhstan by cryptocurrency mining farms exceeds 1 GW. From January 1, 2022, the law on crypto mining taxation is coming into effect and the payment rate is going to be 1 tenge per 1 kilowatt-hour of electricity consumed by digital crypto mining. Currently, crypto mining provides a 98 billion tenge impact to the economy of Kazakhstan every year.
In Uzbekistan, the government’s attitude is largely similar to the one of Kyrgyzstan and currently is unregulated. So far, they propose a project, where cryptocurrency miners would pay three times higher than the existing electricity tariff, which is now about 0.031 dollar per 1 kWh. In early 2020, Uzbekistan launched the first licensed cryptocurrency exchange Uznex. So far, it is the only platform of a kind in the country.
Problem solving options
Cryptocurrency mining means opportunities for investments and export of electricity. Businesses actively promote the idea that this is an opportunity for export and it should be widely used. Kyrgyzstan is not in its best position regarding energy security. However, crypto mining could be an opportunity to solve this issue.
For example, the National Energy Holding suggested the idea of creation a crypto mining territory near a large power substation or a hydropower plant. The authorities planned to allocate 100-200 MW of power to ensure uninterrupted operation of crypto mining farms, yet the idea was abandoned, although it could help control illegal crypto miners. Grey crypto miners pose the biggest risk for the state, including legal miners. Banning their activity is certainly not an effective way of control, as they can still consume energy under the guise of enterprises and firms not related to crypto mining. In this case, the state won’t benefit from them and the electric grid will be under strain. In case of a transparent system of legalisation, crypto mining farms could be located near substations and the energy consumption in communities could be easily tracked down via electric meters.
In terms of a possible solution to the problem of electricity shortages, it is worth considering the use of alternative energy sources. It’s not about solar panels and wind turbines, but about small hydroelectric power plants, which already exist in the country. Due to the geographical location and great potential of mountain rivers in Kyrgyzstan, it is possible to build more than 100 small hydroelectric power plants and to produce more than 1 billion kW/h. Currently, 19 small HPPs with total capacity of 54 megawatt are operating in the country.
The great advantage of small HPPs is their ownership structure and benefits from the state. Investors can count on value-added tax exemption if they import equipment to the country and on income tax exemption up to five years if they are going to invest into development of renewable energy sources. The state may ensure to buy power for the grace period for up to 10 years, but it can change if direct contracts are entered between small HPPs and crypto mining farms. The cost of construction of one small HPP is estimated at nearly 400 thousand dollars. It is quite an affordable amount for medium- and large-scale investors. However, it is still a question how the electric power produced would be sold after its launch. The key factor is the price per 1 kWh, which is very low for private investors. Foreign investors could build small HPPs and build crypto mining farms by entering into mutually beneficial contracts. In turn, some energy could be transferred to the nearest settlements as agreed by the state and all parties could have all their demands met. 14 small HPPs are being built now in the four regions of Kyrgyzstan. It should be noted that the order of the National Energy Holding of 2019 does not prohibit crypto mining farms using alternative energy sources.
Some countries of the world are actively using such direct investment contracts. For example, recently one of the largest crypto mining companies of Canada announced investments to the construction of a crypto mining farm in Argentina. The project will be implemented in cooperation with a local private electric power plant.
The leader in the market of use of renewable energy sources should be Iceland, which uses geothermal sources and volcano energy for crypto mining farms and data centres. The country has become the leader in cryptocurrency mining and according to recent researches of the University of Cambridge, it is in the top 10 countries favourable for crypto mining.
If we speak about Kyrgyzstan, we should mention the plans of Kyrgyz Wind System to construct a wind farm Ecowind near Balykchy in Issykkul region (east of the country). The capacity of the station will be 100 MW at each site and the project will be innovative for the country. The company has raised many investments, but it still considers additional sources to expand its capacities. The station of a kind could sell its energy to crypto mining farms and give rise to the development of this industry in the country.
We should not forget about the plans of neighbouring countries to build a nuclear power plant. Uzbekistan and Kazakhstan are actively negotiating with Russian suppliers regarding the launch of the NPP in their territory. The whole region will be the main consumer of this energy and the existing people’s demand for electricity will be fully complied with. In this case, the interest of crypto miners in the region will increase and it seems quite possible to locate crypto mining farms in Kyrgyzstan given a good price for energy and agreement between the countries. It’s not only cheap electricity, but also lease of premises, general pricing policy in the country and workforce that matter. Based on these indicators, Kyrgyzstan has an advantage among other Central Asian states.
However, state regulation of the sphere is needed to implement all these projects. Most of the countries leave this issue open and do not rush to legalise cryptocurrency transactions. The American legislative framework ensures the security of foreign investments and their interest in entering the country. Some countries are actively using cryptocurrency in their cash transactions and make profit. The position of our country’s National Bank has been sceptic about any electronic money for a long time. Just recently, the head of the National Bank of Kyrgyzstan left his office and it can open new opportunities for the introduction of such initiative. The president of Kyrgyzstan has repeatedly emphasised his interest in development of this industry.
In addition to the legislative regulation of cryptocurrency turnover, it is important to ensure import and supply of equipment. Currently, most of grey crypto miners import their equipment and do not register it. If relevant customs regulations are available and taking into account our proximity to China, these factors could facilitate the supplies of necessary high-capacity equipment for crypto mining. The quality of equipment has a direct impact on the crypto mining environment.
Recommendations
We want to believe that the state will take into account international experience and will not act straightforwardly. Illegal crypto miners will exist with any stance of the state, taking into account the complex nature of law enforcement in our country. The only way out is to admit the fact of presence of crypto miners and to control their activities. In terms of taxation, we should adopt the experience of Argentina and the United States, which show good results and budget revenues. It is also critical to attract foreign investments amid growing interest of Chinese companies to the Central Asia region, particularly, to Kazakhstan.
The problem of energy crisis had emerged long before the notion of crypto mining appeared, and we should not shift the responsibility to those companies. The state had better modernise power grids and make management effective instead of trying to disconnect citizens from heating and leaving entrepreneurs without income. The main burden of solving the energy crisis lies with the Ministry of Energy of the Kyrgyz Republic and it should launch a series of reforms to update the system, and also needs to strengthen the policy of encouragement of renewable power sources together with the Ministry of Economy. Renewable power sources are the future of Kyrgyzstan and we need to study the relevant global experience in order to construct such green plants.
The National Energy Holding should cancel its order No. 56 to stop GKNB from persecuting honest crypto miners. The practice of intimidation and disconnection of all crypto mining farms must be replaced with persecution of illegal crypto miners, whose number is increasing. The ministry of digital development plays a critical role in it. It should, together with the National Bank of the Kyrgyz Republic, determine the policy of cryptocurrency use and mechanisms to protect such investments. Adoption of bitcoins has helped countries to benefit from cryptocurrency and leave them within the country. In fact, the rising price of bitcoin is expected to raise the overall attractiveness of this currency.
The association of small HPPs can hold a bilateral meeting with representatives of crypto mining companies and discuss the terms of cooperation, when future small HPPs can buy power at a good price from private suppliers, without any burden on the public system. In turn, the state can come up with a mechanism of encouragement of such contracts and determine the benefits for local residents.
Crypto mining companies in Kyrgyzstan should make the unified association, which can effectively communicate the requests from its members and become the official person to negotiate with the state. Their help in removing illegal crypto miners who discredit bona fide taxpayers will be critical.
Crypto mining has a future in Kyrgyzstan. The question is who will control this future and will the authorities have enough power and competence to regulate this sphere.
This article was published as part of the CABAR.asia-2021 School of Analytics held on November 15-20 this year in Almaty.