The Crypto Ban, Great Migration and Bitcoin Mining in Kazakhstan

In July 2021, the Cambridge Centre for Alternative Finance (CCAF), one of the leading research institutes in the world focusing on non-traditional financial instruments, which came into prominence, among other things, for the Cambridge Bitcoin Electricity Consumption Index (CBECI) [Cbeci.org, 2021], a real-time index that tracks the total electricity consumption of the Bitcoin network, published a report on global bitcoin mining. According to the report, between September 2020 and April 2021 China’s share in the global bitcoin mining dropped from 75.5 percent to 46 percent, while the share of the United States for the same period increased from 4.1 percent to 16.8 percent, which brought it to second place in the world [Rauchs, 2021]. Interestingly, the plunge of China’s global bitcoin mining share came in before the launch of a series of regulatory and restrictive measures on virtual currencies from May 2021, since according to the statement by the State Council of the People’s Republic of China, “bitcoin mining and trading-related activities will be cracked down” [English.gov.cn, 2021a]. Later, in June 2021, the crackdown of bitcoin and other virtual currencies was imposed to the services of the banks and non-bank paying platforms, as they were urged not to provide services for bitcoin and other virtual currencies trading and speculations [English.gov.cn, 2021b]. The move would immediately hit bitcoin value, as its price tumbled 11 percent following the June announcement by Chinese authorities [Robertson, 2021].

To our greater astonishment, however, the CCAF report revealed that the bitcoin mining share of Kazakhstan increased almost six-fold from 1.4 percent in September 2019 to 8.2 percent in April 2021, bringing the country to third place in global mining power share, ahead of Russia (6.8 percent) and Iran (4.6 percent) [Rauchs, 2021]. This, however, seemed like an expected outcome of the bitcoin crackdown in China, once the home of more than 75 percent of global bitcoin mining. Since, according to experts, the bitcoin miners proved themselves to be a very mobile community, it was inevitable that they were already eager to leave China with their mobile equipment [BBC, 2021]. This mobility was already evident by pre-crackdown research, as miners regularly migrated from one province of China to another driven by the availability of lower priced hydropower electricity in rainy seasons [Rauchs, 2021]. Thus, as China became “less attractive for miners,” the United States and Kazakhstan would turn into primary beneficiaries of these developments, as mining would be driven to existing power capacity to respond to the huge demand [Graffeo, 2021]. This massive flight of miners and their machines from China following the governmental crackdown started being referred to as the “Great Mining Migration” [Orloff & Yu, 2021]. Since, unlike many other industries, bitcoin mining as a sector is not location-bound and could be functioning from anywhere with Internet connection, the range of migrations could be very diverse, therefore Texas with one of the lowest energy prices in the world, significant share of which comes from renewables, and Kazakhstan with abundant coal mines and energy supply naturally turned into favorable candidates [Sigalos, 2021]. Later, in mid-October, Kazakhstan was reported to become the second largest crypto mining country in the world surpassing China [Gill, 2021].

In the meantime, Kazakhstan with an electric power capacity of 22 gigawatts [Browne, 2021] and almost half of the average prices per kilowatt hour in China, Russia and the United States [Sorbello, 2021], started reacting to sudden mining surge, as on 24 June 2021 the President of Kazakhstan Kassym‑Jomart Tokayev signed a law that stipulated additional taxation and fees for cryptocurrency miners, which would come into force from 1 January 2022 [RBC.ru, 2021]. Later in July, it was announced that the government intends to legalize all the cryptocurrency operations, so that it would be possible to open a cryptocurrency bank account in Kazakhstan, invest in them or sell in the exchange market [24.kz, 2021]. Thus, BIT Mining Limited, one of the world’s largest cryptocurrency mining companies, delivered 320 mining machines to Kazakhstan, with another 2,600 to be delivered by 1 July 2021 [BTC.com, 2021]. Following the inflow of several bitcoin mining companies to Kazakhstan, Canaan, the second largest manufacturer of bitcoin mining machines, established an after-sales center in Kazakhstan [Redman, 2021].

The prospects of becoming one of the leading bitcoin mining countries in the world, however, have a downside, as the carbon footprint and impacts on climate of bitcoin mining become a matter of thorough scrutiny and pessimism. Due to massive computer networks and cooling systems, the bitcoin mining is estimated to consume 121.36 terawatt hours a year, which is more than the overall annual energy consumption of Argentina, or “more than the consumption of Google, Apple, Facebook and Microsoft combined,” while only 39 percent of this energy comes from renewable sources, primarily hydropower, which itself has a massive impact on ecosystems [Cho, 2021]. Besides, the carbon emission of a single bitcoin transaction is comparable to that of more than 1.8 million Visa purchases [Bala, 2021: 68]. On top of that, the cryptocurrency mining brings in massive e-waste and water issues, as the power plants release large amounts of heated water used in cooling systems, which endangers biodiversity [Cho, 2021]. This could become a major concern for Kazakhstan, where 87 percent of electricity is generated from fossil fuels, primarily from coal (70 percent of overall electricity generation) [BBC, 2021]. Thus, amidst the cryptocurrency surge and growing energy consumption, the Kazakh president stated in his address to the nation on 2 September 2021 that in order to achieve carbon neutrality in 2060 and respond to imminent electricity deficit by 2030, Kazakhstan would reconsider the nuclear energy alternatives [Vlast.kz, 2021]. As of now, the government already intends to toughen the registration of new crypto mining farms and limit the electricity supply for existing one [Kursiv, 2021], while purchasing electricity from Russian amid shortages seems like an unavoidable possibility [Tassev, 2021].

References

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Note: The views expressed in this blog are the author’s own and do not necessarily reflect the Institute’s editorial policy.