Crypto Mining in Kazakhstan: Farms, Taxes, Electricity And Competition
The tightening of laws in China has brought Kazakhstan to the top three countries for mining of cryptocurrencies. Is further growth possible?
The reduction in China’s share in the field of cryptocurrency mining due to the recognition of mining as an undesirable activity allowed Kazakhstan to take third place in the global mining market. Even earlier, the Kazakh government singled out this industry as one of the most promising, trying to create a comfortable climate for both domestic players and foreign investors.
However, some actions, such as the introduction of an additional tariff for miners for electricity from January 2022, as well as the still imperfect legislation, can nullify all efforts. Forbes.kz spoke with Alan Dordzhiev, President of the Association of Blockchain and Data Center Industry in Kazakhstan.
How is mining developing in Kazakhstan today?
– Mining has been actively developing in the country over the past few years. But the highest activity began to appear in 2020. Until last year, development also went on, but in 2019 there was a noticeable crisis on the cryptocurrency market and many miners actually suspended their activities, since the price of cryptocurrencies was hardly higher than labor and energy costs. In 2020, development took off again as margins increased. According to our estimates, today there are 200-250 thousand mining devices deployed in the country. But here it is imperative to make a remark that this equipment is already three generations – the one before last, the past and the current one. And in this regard, their profitability also differs markedly.
Where are mining farms most often located?
– Mostly in regions, away from large cities and closer to affordable electricity. This is good for our small towns, since additional jobs are being created there and there are quite high wages. At the same time, back in 2017, we had a serious shortage of specialists. And foreigners even had to train local personnel, to show how everything works. During that period, one company brought here eight Germans and Croats to show all the nuances.
There are four main specialties in demand in mining: IT engineers, electronics engineers, high and low voltage electricians. Previously, there was a shortage of such specialists, but today there are more and more of them. And for the periphery, they have rather high salaries. I know that in one company the average salary reaches 400 thousand tenge.
Is it true that Chinese miners began to actively travel to Kazakhstan after their government tightened mining laws?
– The ban on mining in China appeared in June 2021, and the Chinese sent only about 4 thousand mining devices to Kazakhstan. In fact, they occupy less than 2% of our total number of devices. You need to understand that at the moment our power system will not be able to accept all the miners who worked in China, or from other countries, as some, let’s say, experts expect.
If we remove the issue of electricity reserves, which we will return to later, then what might be our attraction for foreign miners? Cheap electricity?
– I would not say that we have the lowest electricity prices. Moreover, in this regard, it is almost impossible for us to compete with the leader in the field of mining – the United States, since their energy system is 60 times larger than ours. And there are very cheap connection points there, even cheaper than in Kazakhstan. It all depends on the state, the specific electricity producer with which you can enter into an agreement. Prices in America are very competitive in places – 2.4-2.6 cents per kilowatt, that is, 10-11 tenge.
In Kazakhstan, electricity prices are higher – on average, 1 kilowatt-hour costs 14-16 tenge. Confusion often arises with this when they begin to compare our prices and American ones. Yes, it is possible that for a simple American consumer who lives in an apartment, the price for electricity can vary from the conditional 25-40 tenge per kWh, but these are residential customers. There are also industrial customers, the prices for which I have already told you. We often confuse these concepts.
Are all mining companies operating in Kazakhstan officially registered?
– This is an unlicensed activity. They may not receive any permits. I think we also have, shall we say, hidden farms. The only thing is that when importing equipment, you must obtain permission from the National Security Committee, since all this applies to encryption equipment. According to the laws, the import of such equipment is accountable to us. Also, according to the law, if you are mining, then you need to notify the Digital Development Committee about your activities.
How many such enterprises are officially registered in the country?
– About 20, but I think there are a little more of them. Not everyone is still officially registered as a company that is engaged in mining-related activities. This is what I would like to focus on. When digital mining was legalized last year, registering its functions by law, government agencies did not manage to introduce a new classification of economic activity in the OKED. And so far there is no “mining” item in our OKED list. And here, according to the law, as far as I know, the list of OKED can be updated every four years, and it was just updated at the end of last year. Accordingly, for another three years, Kazakhstani miners cannot be added to this list. Therefore, for now, we indicate that we are engaged in the mining industry.
How then will domestic miners from 2022 pay an additional tax of 1 tenge for each kilowatt of electricity consumed?
– This is the problem, since miners are not legally classified yet. In my opinion, the adoption of these tax amendments was hasty, because how they are legally defined. In fact, we do not yet have companies that are engaged in mining, because you cannot officially register this way. Accordingly, this law cannot be fully applied, since the subjects falling under its activities also cannot be officially registered as mining companies.
How big is the share of Kazakhstan in the world mining? Is it true that our share of the global hash rate has recently increased from 1.2% to 8% and more?
– This is true. And if we take into account that China is dropping out of the market, then this share will increase even more. We have been on the world market for quite a long time. But speaking in absolute terms, we are still far enough from the United States or China.
That is, the talk of the government that we have a high potential in this area is not based on empty space?
– There is certainly potential, but its development can always be interrupted. The same additional tax of 1 tenge can significantly reduce this potential. And if the tariffs again begin to change in the direction of increase. Our activity is quite specific. I must say that we cannot invest once, we need to constantly pour in new funds, reinvest. Because the life of the equipment is 3-4 years maximum. And then it needs to be updated. Therefore, in order for the entire industry to develop further, it is necessary not to spoil the investment climate, otherwise in 3-4 years the entire industry will stall – no one will invest money where the rules of the game are constantly changing for you.
What cryptocurrency are mainly mined by Kazakhstani miners?
– The bulk is bitcoin. But there are, of course, those who mine other cryptocurrencies as well.
Why Bitcoin?
– It is the most common and has the highest acceptance. If we draw analogies with the metal market, then Bitcoin is gold, all other cryptocurrencies are other, less precious metals. Bitcoin is the standard today.
Let’s talk about the electricity shortage in Kazakhstan. It is noted that in connection with mining, starting in 2023, we will begin to experience a shortage of electricity. What do you think about it?
– It is difficult for me to comment on this, because the data is different everywhere. From what calculations all this is taken – it is also not entirely clear. For example, in the strategy for long-term development of Samruk-Energo 4-5 years ago it was said that Kazakhstan has a surplus of 4 thousand megawatts of unused capacities. This figure constantly appeared everywhere, but later it unexpectedly dropped to 2 thousand megawatts. Quite recently, they began to talk about the fact that we generally have a deficit. In Kazakhstan, different departments, companies and operators show different numbers, and it is difficult to say how things really are.
It is preliminary calculated that an additional tariff of 1 tenge for each kilowatt used by miners, at the current market level, will bring Kazakhstan 3.5 billion tenge annually. Is it so?
– According to my data, the income will be 4.5-5 billion tenge, but I repeat, how this will be recorded is a big question.
Why did Kazakhstan need to register crypto exchanges at the Astana International Financial Centre (AIFC)?
– Now Kazakhstan ranks third in digital mining in the world. And at the same time, we actually do not deal with other areas in the cryptoindustry: exchanges, payment cryptosystems, storage systems, etc. The first place is occupied by the USA, the second – by the EU, followed by South Korea, Japan and other developed countries. And, for example, Korea does not have a mining industry inside the country at all, but at the same time they have a very high turnover of cryptocurrencies.
This issue was considered by the government for a long time, and finally our government agencies were convinced that the crypto industry as a whole can bring us additional income. Mining in Kazakhstan was developed by private companies, independently, but it is already impossible to raise the entire industry to a serious level without regulation. And it is there that the main money is spinning.
In 2019, the National Bank of the Republic of Kazakhstan issued a document on the formation of a risk management and internal control system for STBs. It noted that our banks cannot work with persons whose main activity is related to cryptocurrency. But now, as we expect, a pilot project should be launched in August-September 2021, in which banks will be allowed to open accounts for individuals associated with cryptocurrency. There is still a lot of work to be done, a number of nuances need to be sorted out, the authorized bodies are still working on this.
Which banks are participating in this pilot?
– I can’t name them. I will say this – five banks are planning to take part in this project. Four of them, in my opinion, just want to try themselves in this market, to understand how everything works, how this kitchen looks from the inside. But one bank, as I understand it, wants to take an active part in this. They want to enter this market and are now actively working on it.
