Kazakhstan Surges to Third Place in Global Crypto-Currency Production, Behind China and US

While many crypto-currency advocates worldwide promote this sector as the next step in international finance, multiple governments are becoming increasingly leery because of digital currencies’ energy-intensive mining requirements, volatile price swings, potential for fraud, associated criminal issues, and privacy concerns. China, formally the global leader in crypto-currency generation, with nearly half of the world’s crypto-mining operations, in 2021 began preventing its citizens from mining or holding crypto-currencies. As a result, the nation’s global share of crypto-mining decreased from 75.5 to 46 percent. Chinese crypto-miners moved their operations abroad, at which point neighboring Kazakhstan’s global share dramatically surged by 610 percent, from 1.4 percent to 8.6 percent (Caixin Daily, July 29; Jbs.cam.ac.uk, July 15). And in a policy shift further sharply diverging from its giant eastern neighbor, bank accounts for crypto-currency will soon be available in Kazakhstan as the country expands its crypto-mining potential to the global fiscal market (Kapital.kz, June 25).

Since the 1991 collapse of the Soviet Union, Kazakhstan has persistently pursued progressive efforts to move beyond its Soviet past. In shifting from a socialist centrally planned economy to a global capitalist market model, economic reforms have produced a dynamic economy with the highest standard of living in post-Soviet Central Asia.

Kazakhstan was the chief regional beneficiary of the Chinese government’s arbitrary crypto-currency shutdown notice, which followed a May 21 meeting of the State Council’s Financial Stability and Development Committee, chaired by Vice Premier Liu He, where he specifically stated that China would “crack down on Bitcoin mining and trading” because of the financial risks (Caixin Daily, July 29). The potential rewards—despite the risk—are not insubstantial. According to industry information platform Buy Bitcoin Worldwide, perhaps the most well-known crypto currency Bitcoin, which reached a record high of $61,724.60 in March 2021, currently has 18,789,300 tokens in “virtual” existence, with 2,210,700 left to mine and about 900 issued each day around the world (Buybitcoinworldwide.com, accessed August 17).

On June 25, Kazakhstani President Kassym-Zhomart Tokaev signed legislation officially legalizing crypto-mining in Kazakhstan. As part of this law, Kazakhstan introduced a new tax, stipulating a fee of one tenge per 1 kilowatt-hour (kW/h) for miners, starting on January 1, 2022 (Kapital.kz, June 25).

Beyond helping to diversify Kazakhstan’s economy from its dependence on oil and hydrocarbon exports, the implementation of a progressive crypto-currency sector will benefit the country by providing employment and increase the country’s taxable revenue. The Kazakhstani government intends to support crypto-currency mining operations by introducing the lowest taxation rate among major crypto-currency mining countries. This has already produced a surge of activity. As of June, Kazakhstan hosted 20 crypto farms, many of them recent migrants from China (Unicaselaw.com, accessed August 17).

In the wake of the Chinese government’s crackdown, the Shenzhen-based BIT Mining Ltd., a crypto-currency mining company that provides cloud mining equipment rental services, announced the suspension of its operations in China and later stated that it had transferred 320 machines with a Bitcoin net hashrate performance of 18.2 PH/s, from China to Kazakhstan. It additionally plans to shift another 2,600 pieces of equipment in the near future. The move to date cost $9 million, but the company is so certain of its future in Kazakhstan that it has raised $50 million for future operations there from investors through a private placement (Informburo.kz, June 22).

Another Chinese company has also begun to increase its digital footprint in Kazakhstan. Canaan, one of the world’s largest manufacturers of ASIC bitcoin mining computer equipment, after opening its first overseas after-sales service center in the country, announced on June 21 that it was delivering on its 2021 strategic plans by driving its crypto-mining business in Kazakhstan. The firm stated it is delivering and operating the latest Avalon Miner units in Kazakhstan and is ready to service associated crypto-mining equipment there (Canaan.io, June 21). At a cost of approximately $0.03–0.04 per kW/h (depending on the tenge-dollar exchange rate), electricity tariffs in Kazakhstan are among the cheapest in the world. Kazakhstan’s largest crypto-mining rivals charge $0.06 per kW/h (Russia), $0.08 per kW/h (China) or as much as $0.09–0.12 per kW/h (United States) (Informburo.kz, July 29).

Even as Kazakhstan develops a crypto-mining-friendly environment with low electricity and taxation costs, the country’s potential to become the world’s digital fiscal Switzerland depends on a number of variables beyond the government’s control. A major uncertainty is the ongoing volatility of the price of various crypto-currencies, inducing caution in all but the heartiest of investors and slowing global acceptance. A second consideration is that most crypto-currencies have an emission ceiling, restricting the mining and release of new coins into circulation after a certain number of tokens have been mined, meaning that any further turnover of funds, either profit or loss, will be achieved exclusively due to an increase in the price of the currency itself, which is determined by investor interests in global markets. This introduces substantial risks for short-term and long-term potential investors. Substantial risks also remain for investors of losing funds when buying crypto-currencies because of their high volatility as well as anonymity and the lack of collateral backed by tangible “real” assets.

Kazakhstan’s crypto-currency policies nestle neatly between its neighbors: China’s increasingly authoritarian micromanaged control of its citizens’ financial assets on the one hand and Russia’s freewheeling kleptocracy on the other hand. The last three decades have proven the Central Asian republic’s stability and investor-friendly environment, both of which bode well for its hopes as a future major crypto-currency player if and when the volatile uncertainties currently wracking global crypto-currency markets mature and subside.