Kazakhstan might benefit from the expansion of the crypto business to the tune of 72 billion USD | FinReview
29 March 2022

Kazakhstan might benefit from the expansion of the crypto business to the tune of 72 billion USD

While the world order is in disarray, cryptocurrencies are gaining traction. There is a growing interest in digital currency to protect savings and international payments. The price of bitcoin and stablecoins has risen. Bitcoin’s price actively reacts to current events, rising to 47 thousand USD before falling to 38 thousand USD.

The crypto world has had a very busy 2021. Bitcoin was approved as legal tender in El Salvador, cryptocurrency use was prohibited for all intents and purposes in China, and the first exchange-traded investment fund Bitcoin-ETF debuted in the United States. Because of the circumstances, Russians regard the crypto-exchange as a “savior” of their savings. And the Russian Ministry of Finance sees cryptocurrencies as a threat, despite the fact that demand in the country is rapidly increasing.

The crypto market is not illegal in Kazakhstan; our country is steadily analyzing new trends in the financial industry and taking actions toward its development. FinReview.info analysts determined the current health of Kazakhstan’s crypto-industry, what the future holds for it, and how much the geopolitical environment has affected mining.

The fantastic year of cryptocurrencies, or how anti-Russian sanctions aid in their growth

The crisis between Russia and Ukraine has put great pressure on the cryptocurrency market since February 2022. Sanctions implemented by Western countries have restricted not only the finances of specific Russian individuals, but also public funds deposited in European banks. Russia can get around these sanctions by developing the country’s cryptocurrency business. The thing is, cryptocurrencies are a form of decentralized finance, and their transactions are not entirely regulated by financial institutions. As a result, they can be utilized to reach mutual agreements with Russia’s commercial and economic partners.

Cryptocurrency mining might also become a new source of revenue for Russia. The country has enormous supplies of cheap electricity, which is ideal for developing the main cryptocurrencies. In 2021, Iran, for example, earned more over 1 billion USD from mining.

However, the United States and the European Union are concerned that Russia may be able to defy the sanctions imposed on it by using cryptocurrency. To avoid this, they increased their efforts to control the industry. Europe, in particular, is working on the Markets in Crypto-Assets regulation, which will allow the regulator to define global rules and monitor transactions, while the United States is creating documents that will govern digital assets.

As a result, cryptocurrencies, which were formed as spontaneous and unregulated alternatives to national currencies, have drawn the attention of regulators all over the world. In truth, most nations have already established the standards for the functioning of crypto exchanges, but due to geopolitical tensions, big changes are yet to come. And 2022 will undoubtedly be the year when the crypto market is regulated.

Cryptocurrencies in Kazakhstan: Will they grow, or will they fade into oblivion?

Kazakhstan is also keeping up with the times and following global trends. Today, the country’s crypto economy is steadily gaining traction. In 2021, our country placed second in the world in terms of bitcoin hash rate. America is ahead of us, and Russia is behind us. Several factors contribute to the rapid expansion of Kazakhstan’s electronic currency sector. First, the country has a low cost per kilowatt-hour of electricity. The average cost of one kW is roughly 18 KZT (0.037 USD), which is much lower than in the CIS and Europe.

The proximity to China was the second consideration. Following the tightening of China’s mining policy, crypto miners decided to leave the country or sell their equipment. In consequence, Kazakhstan has become not just a sales market for equipment, but also a new site of employment for Chinese miners.

Cryptocurrency mining generates approximately 230 million USD in revenue for Kazakhstan each year. As an indicative figure, GDP last year was 190.8 billion USD. At the same time, the amount of mining is the result of solely the economic activity of firms that carry out their activities formally. When “gray” miners are included, the figure rises by a factor of two or three.

However, as mining increased, so did electricity usage, reaching a record 8 percent by the end of 2021, up from the usual 2 percent. According to several estimations, underground crypto miners can utilize twice the amount of electricity as officially registered miners. Because of the massive uncontrolled unofficial consumption of energy, network and power disruptions have grown more common. And experts began warning about a possibly impending energy deficit in the country, as well as the necessity to take immediate action to minimize consumption from shadow mining.

How can Kazakhstan address the issue of shadow mining, which is impeding the development of the crypto industry?

In 2021, the estimated growth in electricity usage by miners under the pretense of “regular population” will approach 20%. At the same time, home energy consumption in some regions has increased by 2-3 times the norm.

This is due to shadow miners, who installing energy-intensive bitcoin mining equipment in residential and non-residential facilities without registering their business. They require a substantial amount of energy (500-700 MW), and their numbers may range between 40 and 100 thousand people.

However, there are currently no clear policies in place in the country to reduce shadow mining. They will be available by the beginning of April, particularly a full-fledged package for the regulation and growth of this area. Meanwhile, Head of State Kassym-Jomart Tokayev has directed that a multiple increase in mining taxes be implemented as quickly as possible.

FinReview.info analysts reviewed international experience and found some critical elements for eliminating shadow mining. For starters, there is a need in Kazakhstan to establish a crypto-exchange and mining pools for lawful market participants. And the “grey” ones must be identified and their equipment seized. In fact, illicit mining farms have already been identified in Almaty, Turkestan, Pavlodar, and Karaganda districts. However, effort in this area is generally inadequate.

Second, it is planned to implement energy consumption norms for individuals, such that surplus electricity volumes are paid at corporate pricing.

Third, an excise charge on excess electricity usage is required. After all, the customary rise in taxes for all miners will not solve the problem of underground activity.

Fourth, the government must specify the criteria under which mining farms can operate in Kazakhstan. There are huge worldwide firms, for example, that are ready to enter the market with their own capital, build new power plants, use some of the electricity in mining, and export the remainder to the network. In fact, this is a type of energy investment, which implies that such firms will be interested in the correct operation of mining farms because they are the guarantor of its financial stability.

AIFC contributes to the growth of the country’s crypto industry

The cryptocurrency sector in Kazakhstan is underdeveloped; only mining is actively pursued in our country. Other fields, in particular exchanges, cryptosystem payment, and storage services, are almost unrepresented. The government has already considered the question of their development, and possibly their key conclusion was that they were sure that the cryptocurrency business as a whole could bring in additional revenue for the country.

However, if mining in Kazakhstan was developed autonomously by private enterprises, it would be impossible to build the entire industry without regulation. Despite the fact that it is due to the mining busines that that the government is able to receive such vast sums of money.

The regulatory framework is still being developed, and it is unclear what type of regulation the state will embrace. However, the rules for the operation of crypto-exchanges will be established this year on the basis of the Astana International Financial Centre.