Kazakhstan loses Cryptocurrency miners due to the policy of the authorities

After the influx of Chinese miners in 2021, Kazakhstan became 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 country’s authorities gave positive signals.

In 2020, President Kassym-Jomart Tokayev called for attracting more companies and investments to the country — according to him, by 2025, the volume of the latter in the mining industry was to grow to 500 billion tenge.

However, while miners were actively moving to the country, conditions in it began to change.

Let’s figure out why Kazakhstan, which has barely begun to become a Mecca for the mining business, risks losing it all.

• After miners began to move to Kazakhstan en masse, a tax on the extraction of cryptocurrencies was introduced in the country. In February, the authorities announced the need to increase it from 1 to 10 tenge per 1 kWh.
• Due to the shortage of electricity, legal data centers and mining companies have been restricting supplies for several months. In January, they faced problems in work due to an Internet shutdown, and later they were completely unplugged. Deliveries have not resumed until now.
• Business representatives and local profile associations say that against the background of what is happening, many began to look for other jurisdictions.

Taxes, electricity and “shady 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 such a step by the desire to bring miners into the legal field, and the established tax burden was called “symbolic”.

The initiative really did not affect the business interest in Kazakhstan too much. As representatives of the Enegix data center said, in the summer there were many requests for the placement of equipment, as well as for the construction of sites (at the time of writing, Enegix refused any comments). Even after the adoption of the law, major players continued to develop business in Kazakhstan.

However, just a couple of months later, another problem arose — the authorities considered that the activity of mining cryptocurrencies creates too much load on the power grid.

In September, the then Minister of Energy Magzum Mirzagaliyev proposed to limit the consumption of mining data centers in case of a shortage of electricity.

According to a document published in October, the 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 a shortage, as well as “to prevent emergencies.”

Speaking about the need to regulate mining, the president of the country claimed 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, equipment continues to be imported and connected to the country, the work of which is subsequently not displayed anywhere. This was told by the founder of the BTC KZ data center, which represents hosting for mining equipment, Dean-Mohammed Matkenov:

“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 profits.”

Dean-Mohammed Matkenov said

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.

Mankenov said that during the decision on the construction of data centers in Kazakhstan, the government openly offered investors to invest money in the country because of cheap electricity and its surplus in the north. According to him, only in the early stages the company invested $9 million in the business.

The founder of BTC KZ noted that you can buy any amount of equipment in the country and connect it anywhere — the state will not be able to limit such miners because it does not control them:

“They can turn us off, unlike the “shady” miners in the face of small Chinese players who have connected in small volumes inside cities. They cannot limit them, because the system operator and the state do not see them”

Mankenov said

The National Association of Blockchain and Data Center Industry of Kazakhstan has repeatedly talked about the problem of “shady” mining. In a letter to the president of the country, the organization stressed that the exact number of such miners is unknown, but, according to preliminary data, they consume about 1400 MW of electricity.

Internet shutdown in Kazakhstan as another challenge

In early January 2022, large-scale protests broke out in Kazakhstan. On January 5, the Internet was completely turned off in the country.

According to experts, initially local authorities tried to block access to messengers and websites point-by-point with the help of equipment with the function of deep traffic filtering (DPI). It is used in the Russian Federation as part of the implementation of the so-called law on the sovereign Runet. However, it was not possible to completely block access to the network using DPI.

As a result, the authorities instructed the operators to completely block the traffic transmission channel, a source familiar with the situation told Forbes. According to another informant close to the mobile communications company Kcell, the National Security Committee of Kazakhstan independently organized the blocking without the participation of operators.

The Ministry of Finance explained the Internet outages as an attempt to prevent “coordination and planning of actions by terrorist groups.”

According to the Top10VPN site, the damage from the shutdown for Kazakhstan exceeded $429 million.

Miners also suffered from the shutdown. In just a few hours since the start of the blockages in Kazakhstan, the bitcoin hashrate fell by 12%, as all mining farms located in the country abruptly shut down.

Problems with access to the network were fixed for several more days. Accordingly, all this time, the mining industry in Kazakhstan did not work fully — during this period, farms operated from 2 to 5 hours a day, the Kazakhstan Association of blockchain Technologies told.

Stopping the power supply for 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 notifying them of the cancellation of electricity supplies by the end of the month.

As reported on the website of the Ministry of Finance, as of December 31, 2021, 135 organizations officially notified about current mining activities or about its beginning, 11 companies reported providing infrastructure for mining cryptocurrencies.

Later, the restriction was extended, at the time of writing the material, deliveries were still not resumed. They were completely canceled at least until February 28.

The shutdown is explained by the “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 at the expense of mining, but at the expense of other businesses — for example, under the guise of greenhouses.

Last year, miners began to leave Kazakhstan due to problems with energy supply. BitFuFu has started relocating to the USA, and Xive has also closed its data center for 2500 devices.

But then most miners were still hoping for changes and were not going to leave the country. Now they are seriously considering the issue of relocation, told the association of blockchain technologies.

New taxes, a “sweep” of miners and an uncertain future

In addition to all of the above, the Kazakh authorities decided to give the miners another reason for concern and an additional reason for thinking about moving. In February, President Kassym-Jomart Tokayev instructed to raise the tax on cryptocurrency mining.

Initially, it was assumed that the electricity tax for miners would 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.

Later, the Ministry of National Economy of Kazakhstan proposed to increase the tax rate on mining cryptocurrencies not by 5, but by 10 times.

In order to bring miners “out of the shadows”, the president also instructed to identify all mining farms and develop regulations introducing licensing of such activities. The authorities and law enforcement officers have already begun to carry out “measures aimed at clearing the electricity market from shadow subjects of digital mining,” the Ministry of Energy said.

The National Association of Blockchain and Data Center Industry appealed to the president, saying that the introduction of additional taxes will hardly have any effect on illegal miners, but will worsen the situation of officially registered businesses.

Companies that have invested millions of dollars in the market on the same terms and are faced in reality with the suspension of energy supply, additional taxes and all new legislative initiatives affecting the industry can hardly feel protected.

All this makes it possible to make a disappointing forecast – Kazakhstan, which has managed to become one of the leaders in bitcoin mining in a short time, risks losing its positions even before it has time to consolidate them.