With mining industry layout and central bank digital currency pilot, what is the status of Kazakhstan's "crypto dream"?

Original title: Kazakhstan’s “Crypto Dream”
Written by: Pan Zhenglin

“In addition to the booming mining industry, Kazakhstan has also made a series of cryptocurrency-related arrangements, such as the recent announcement of the creation of the world’s first space-based crypto exchange.”

Energy consumption has always been a sword of Damocles hanging over the cryptocurrency world. As of May 10, 2021, the global mining industry consumed 149.37 terawatt hours (1 terawatt hour equals 100 million kilowatt hours of electricity). China has been restricting the development of virtual currencies within its borders, but for a long time, China has been the main gathering place for the mining industry of cryptocurrencies such as Bitcoin. Data from the University of Cambridge in the UK shows that China once occupied 65.08% of the computing power of the Bitcoin network.

But recently, Chinese regulators have begun to intensively introduce policies to restrict cryptocurrency trading activities within the country and completely ban the operation of cryptocurrency mines.

As the regulatory situation becomes stricter, many mines are considering going overseas. Among many countries, Kazakhstan has become one of the most popular places to go overseas. Kazakhstan's advantages in policies, energy and costs have attracted many mines to come.

Why has it become one of the top choices for mining companies to go overseas?

The reason why Kazakhstan can attract a large number of computing power clusters and become the main choice for many mainland Chinese mining owners to go overseas is related to its unique natural resources and climatic conditions, but it is also inseparable from the support of the local government.

Weather conditions

The average temperature in Kazakhstan is 0℃ ~ 11℃ throughout the year, and the highest temperature does not exceed 28°C. The highest temperature that a mining machine can withstand is 32°C. After reaching the highest temperature, the equipment must be turned off and allowed to cool for a period of time. The power supply usually starts to burn out at 29.4°C. Therefore, how to keep the mining machine within a controllable temperature is a very important consideration. The relatively low average temperature in Kazakhstan provides good conditions for the mining farm. The mining farm can keep the mining machine operating within the operable temperature range at a lower cost.

Source: Weather & Climate

Policy tilt

Kazakhstan passed a law in 2020 recognizing Bitcoin as a digital asset and allowing it to be traded within the country like other commodities. The law also allows the establishment of cryptocurrency exchanges within Kazakhstan under the premise of compliance.

The Astana International Financial Center (AIFC, a financial center established by Kazakhstan) has established a special IT park. Mining farms settled here do not need to pay any taxes except for a "royalty fee" of 1% of the annual turnover. However, as more and more mining farms choose to settle in Kazakhstan, the country intends to revise its tax law and plans to charge a digital mining tax of 1 tenge (0.00232 US dollars) per kilowatt-hour from 2022.

In addition, Kazakhstan’s Ministry of Digital Development is working with AIFC and the Blockchain Association to draft regulations on the cryptocurrency industry and blockchain technology to standardize the country’s blockchain regulations.

Kazakhstan's unwavering support for cryptocurrencies, its active efforts to standardize relevant policies, and its introduction of policies favorable to cryptocurrencies have led to a large number of mining machines being transferred to Kazakhstan.

Energy Resources

According to GlobalPetrolPrice, the commercial electricity cost in Kazakhstan is $0.052 per kWh (0.34 RMB per kWh). Data from the State Grid Energy Research Institute shows that the average electricity price in China is 0.542 RMB per kWh. Data from Ping An Securities shows that the electricity price in Sichuan is between 0.2632-0.39 RMB per kWh.

Electricity prices have always been one of the most important liquidity costs in the cryptocurrency mining industry, directly affecting the actual revenue of the mining farms. Previously, a large number of miners would "migrate" on a large scale during the flood season and the dry season, and move frequently between regions in order to pursue cheaper electricity. The electricity price cost in Kazakhstan is even comparable to that in Sichuan, which may be one of the main reasons why many mining farms have moved to Kazakhstan.

Although Kazakhstan is the world's ninth largest oil exporter, it has been actively developing renewable energy for a long time. In 2009, Kazakhstan passed the "Law on Supporting the Utilization of Renewable Energy" to establish a green economic transformation model based on renewable resources. Although traditional energy is the main source of power generation today, Kazakhstan has set a goal of achieving 6% of electricity from renewable energy by 2025, 10% of electricity from renewable energy by 2030, and at least 50% of electricity from renewable energy by 2050.

At the same time, the Kazakh government is also emphasizing the importance of economic diversification, and the energy transformation efforts are also continuing to increase. As of 2020, there are 97 renewable energy power facilities in Kazakhstan, more than half of which are solar power generation. Because there is no demand for power transportation and storage, local companies have started a new business, that is, to build mines near power facilities. Relatively experienced contractors can help miners build mines within 3-4 weeks.

Transfer costs

In addition to lower energy prices, relatively low transportation and labor costs are also reasons that attract a large number of mines. Due to the epidemic, shipping costs from China to the United States have soared, and it is still "hard to find a container." In addition, the relatively low local labor costs have also made Kazakhstan one of the preferred destinations for going overseas.

The main modes of transportation are sea, air or land. The price list of air transportation from China to various countries can be found on the website of the logistics company and can be compiled into Table 3.

The price of air freight is mainly determined by the distance. The longer the flight, the higher the freight per kilogram. The United States is relatively far away, so the freight is higher. Kazakhstan is a neighboring country of China, and the flight distance is relatively short, so the air freight is the lowest.

The price of shipping to the United States has soared 469% in the past two years due to the epidemic! In 2018, the average freight cost of shipping a container from China to the United States was about US$1,500; while the price in May 2021 was US$7,000 per container. The price of shipping containers to Europe has also risen 485% in the past two years to US$10,174.

Kazakhstan borders China and has the China-Europe train as a transportation channel, so sea transportation is not feasible. According to the website of the China-Europe train, the freight cost of shipping a container from Shenzhen to Almaty (a city in Kazakhstan) is US$5,100. In comparison, shipping mining machines to Kazakhstan has become a relatively good choice. In addition, containers shipped to Europe and the United States are now "hard to find"; while the waiting time for the China-Europe train is relatively short. To sum up, among the many options, Kazakhstan's freight and time costs are the lowest.

According to World Data, the average monthly income in the United States is $5,488, while in Kazakhstan it is $735. This means that the mine can hire the same number of people to maintain the operation and maintenance of the mine at a lower cost. This will lead to an increase in the profit margin of the mine. A mine owner revealed that the local wage is about $3 per hour. Therefore, more mines are willing to choose Kazakhstan as their first choice for going overseas rather than the United States.

Challenges of Mining in Kazakhstan

Although the export of mining machines to Kazakhstan has become a major trend, there are still some challenges in setting up mines in Kazakhstan.

In addition to shipping the mining machines to Kazakhstan, the cleaning machines and shelves for the mining machines also need to be imported from China to Kazakhstan. This has increased the cost of the mining farm. Currently, 70% of the world's mining machines are produced in China. Logistics and tariffs will be inevitable issues for mining farms going overseas in the future.

Even though there are specialized service providers in the market that offer services to transfer mining machines abroad, for small and medium-sized mines, the cumbersome procedures and costs are probably unaffordable.

In addition, each country has different regulatory policies and market conditions, which require mining farms to spend a long time to adapt. For example, issues such as mining machine maintenance and adapting to the working hours of overseas staff are challenges to the overseas expansion of Chinese mining farms.

The relatively high local maintenance hardware costs and downtime losses, intermittent power supply, and frequent power grid failures will ultimately lead to rising costs and efficiency losses.

Opportunities always come with challenges. Mining farms going overseas to Kazakhstan has become a major trend. These problems also need to be solved by the mines, but as long as the cost is controlled and the operation is proper, the above challenges will not be a problem.

In addition to mining, Kazakhstan also likes these things

In addition to becoming the world's top mining destination, Kazakhstan's government and enterprises are also actively promoting cryptocurrency-related industries, including launching central bank digital currency and launching space exchange projects.

Actively pilot central bank digital currency

The Central Bank of Kazakhstan is designing a central bank digital currency that will allow businesses and consumers to make payments in fiat currency on the blockchain. The Central Bank of Kazakhstan said in a statement that the focus of its development of a central bank digital currency is to ensure consistency with overall monetary policy goals.

The AIFC is working on the project to help the country develop a legal framework for the new central bank digital currency. The AIFC agreement will include legal definitions of many terms, such as digital currency classification, smart contracts, and digital wallets.

In fact, in addition to Kazakhstan, China, Japan, Canada and EU countries are stepping up the testing of central bank digital currencies based on pilot projects. Russia is also studying related issues. Currency digitization has become a development project in many countries, and Kazakhstan is one of the most active countries.

Currently, the Central Bank of Kazakhstan is analyzing various technical infrastructures and regulatory measures, and formulating a scenario report on the introduction of digital currency in Kazakhstan, which is scheduled to be officially announced in the second half of 2021. In the future, based on the discussion results of relevant government departments, international financial organizations, market participants and experts, pilot projects will be implemented in advance, and then the central bank digital currency will be introduced in stages.

For Kazakhstan, the opportunity to leverage digital currencies is huge. The low local energy costs can attract many block reward mining companies to the country. As the legal framework for the country's digital currency industry continues to improve, Kazakhstan will surely become an ideal destination for investors in block reward mining businesses. The introduction of a central bank digital currency may accelerate this process.

Cryptocurrency is going global

Eurasian Space Ventures (ESV), an investment company based in Kazakhstan, has launched two projects, Biteeu and Divine, in partnership with the SpaceChain satellite network. Biteeu plans to be the world’s first space-based cryptocurrency exchange, using licensed and compliant digital asset exchange programs from the European Union and Australia. The Divine project uses space technology to broadcast Quranic content to Muslims and people interested in the Quran around the world for free via satellite.

Biteeu's competitive advantage is the promise to keep all operational and customer transaction data in low Earth orbit. The project is expected to process multi-signature Bitcoin transactions from space after activation this fall. Unlike the standard method with a single signature, multi-signature technology requires multiple private keys to authorize Bitcoin transactions from a cryptocurrency wallet address, making transactions more secure than the standard single signature method.

Placing data and transactions in space will enhance the security of data and transactions. The various security mechanisms of the Biteeu space node, including a 12-hour communication delay between the ground station and the satellite, can prevent network fraud and theft because hackers cannot quickly transfer digital assets or data.

Shukhrat Ibragimov, co-founder and chairman of Biteeu, said in an interview: "As digital currencies become the driving force of a new era of global commerce, we see that the limitations of land-based infrastructure and increasing security issues hinder users from realizing the full benefits of cryptocurrencies. By integrating innovative, decentralized space technologies, we are able to address security vulnerabilities and continue to build the confidence of institutional and retail traders to manage their funds with the best trading experience."

What can cryptocurrency bring to Kazakhstan?

Why is the Kazakh government actively embracing blockchain and cryptocurrency?

Diversification of government revenue

In July 2021, Kazakh President Tokayev signed a new law amending the Central Asian country's legislation on "payment of taxes and other budget obligations" to impose additional taxes on energy used by crypto miners operating in the country. The new law will come into effect in January 2022. Cryptocurrency miners will need to pay an additional fee of approximately $0.0023 for each kilowatt of electricity used.

As China closes a large number of mining farms and moves a large number of mining farms to Kazakhstan, the number of mining farms in Kazakhstan is bound to grow rapidly. These mining farms run day and night, perform complex calculations, and consume a lot of electricity. This consumed electricity will bring additional and considerable income to the Kazakhstan government when the new policy takes effect.

Becoming one of the pioneers in cryptocurrency regulation

Kazakhstan is the second country in the world after Japan to recognize the need to develop a cryptocurrency market system at the government level. The Kazakh authorities have recognized that the legal framework related to blockchain and cryptocurrency is relatively backward.

Nurlan Kussainov, CEO of the AIFC Authority, once said in an interview: Despite the rapid growth it has experienced in the past few years, cryptoeconomics lacks a regulatory mechanism. There is an urgent need to create the necessary conditions for the legal framework of blockchain projects and cryptocurrencies. Currently, no other jurisdiction can fully meet all the requirements of cryptoeconomics. AIFC has a good opportunity to take a step ahead and occupy this niche in the global market.

The AIFC has set up a special working group whose goals are to develop legislation to regulate cryptocurrency transactions; to establish an ecosystem for the use of blockchain technology, crypto assets, and blockchain-based projects; to create a favorable environment for the development of innovation in Kazakhstan, to promote dialogue between businesses, citizens, and the government, and to improve Kazakhstan’s investment environment to develop and support innovative technologies.

It is not difficult to see that Kazakhstan wants to become a legal pioneer in the blockchain and cryptocurrency industry. Although blockchain and cryptocurrency have developed rapidly in the past decade, the legal framework is still relatively lacking. Kazakhstan is optimistic that blockchain will become an innovative technology in the future and is also optimistic about the long-term development of the cryptocurrency industry. Therefore, it wants to take the lead in establishing a relevant regulatory framework and become a reference for other latecomers in this field.

Energy consumption exceeds demand

Kazakhstan is a vast country with a low population density and its power generation capacity is mainly concentrated in the north of the country. This means that the energy generated is lost when it is transported over long distances. According to the International Energy Agency (IEA), in 2018, the total energy generated in Kazakhstan (equivalent to the energy generated by burning 178 million tons of oil) was enough to meet twice the country's energy needs. Much of this energy cannot be used effectively.

Cryptocurrency mining farms can help Kazakhstan effectively digest excess energy. Many mining farms are located near power facilities, which can digest excess electricity on site. For Kazakhstan, energy waste ultimately cannot generate value or make substantial contributions to the country, but mining farms can make these energies generate additional value. This is one of the reasons why Kazakhstan vigorously promotes mining farms.

Increase employment opportunities

Every mine introduced is an additional job opportunity for Kazakhstan. The increase in jobs in mine operation, mining machine repair, and mining machine maintenance will further reduce Kazakhstan's unemployment rate. For example, Kazakhstan's Ekibastuz mining facility, which has the potential to generate 4% of Bitcoin's global hash rate, will require 160 workers to maintain operations and host up to 50,000 mining machines.

According to data from Micro Trends, Kazakhstan's unemployment rate used to be between 4% and 5%. However, under the ravages of the COVID-19 pandemic in 2020, Kazakhstan's unemployment rate soared to 6.05%. Solving the unemployment rate has become a thorny issue that the country needs to face. As cryptocurrencies have become popular in 2020 and 2021, the government has also turned its attention to the cryptocurrency field in the hope of solving the employment problem of a part of the population.