A Chinese crackdown on the industry in May triggered an influx of miners into the normally energy-rich country, which appeared to welcome them with open arms. Quickly, however, Kazakhstan found its power supply taxed by the sudden spurt of mining, which sucks up huge amounts of electricity.
Miners feel they have been unfairly maligned due to the shortcomings of an outdated, creaky and inefficient national grid. Some have already gone elsewhere. Those that remain — and the government — are groping for ways to make the industry more sustainable and keep the digital currency flowing.
“They made mining [a] scapegoat” with the result that miners are leaving the country, Didar Bekbauov, founder of local cryptocurrency mining hosting company Xive, complained on Twitter in early December. He made the comment after his company closed its main facility in southern Kazakhstan because its power supply was abruptly cut in November.
Xive still operates another mining farm in Kazakhstan, but the company is looking into setting up in the U.S.
At the start of 2021, the Central Asian nation was a relatively minor player on the global crypto scene. But as China moved to wipe out the industry, Kazakhstan went from accounting for 6.17% of the world’s hash rate — a measure of processing power used to mine cryptocurrency — to 18.1% by August, according to the Cambridge Centre for Alternative Finance.
The blame game started in October, when the Kazakhstan Electricity Grid Operating Company (KEGOC) partially pinned an outage at three power plants, including the country’s largest facility Ekibastuz-1, on increased demand from digital mining companies.
The following month, the energy ministry brokered a deal with KEGOC and the Data Center Industry and Blockchain Association of Kazakhstan to guarantee power supplies to registered miners. But after KEGOC reneged on the agreement and started turning off the lights, miners began shutting down operations and voting with their feet.
Earlier this month, another major player called BitFuFu — a Bitmain-backed platform that allows investment in mining without operating any facilities — closed its mines in Kazakhstan and began moving operations to the U.S.
Alan Dorjiyev, president of the Data Center Industry and Blockchain Association of Kazakhstan, told Nikkei that it was up to the government to “tell the Ministry of Energy not to support the state grid company” in limiting electricity supplies. He went so far as to allege that the state grid company was “actually violating the entrepreneurship code” and said he believes “that there will be consequences for them.”
KEGOC said it would not comment immediately, saying it had “certain requirements for providing information.” The company in November stressed the country faced a “difficult situation” with peak power consumption exceeding last year’s values by more than 1,500 megawatts.
“This abnormal growth in consumption is primarily associated with an increase in the share of consumers engaged in digital mining,” the company said in a statement. Noting that power plants were also facing unscheduled repairs during the winter, there was a risk of a “major systemic accident.” So it said it would “limit electricity consumption in accordance with the schedules agreed with local executive bodies.”
On paper, energy should not be a problem in a country that the International Energy Agency describes as “a major producer of all fossil fuels,” including coal, natural gas and crude oil. But much of its power infrastructure dates back to the Soviet era and requires regular maintenance.
Dorjiyev explained, “There was a lack of electricity, and imports started from Russia, and at that point [KEGOC] decided they were going to reduce the transmission of electricity to the mining farms.”
While legal, registered companies have been feeling the electricity pinch, a shadow industry outside the regulated sector continues unhindered. These gray miners are small-scale operators working out of houses, apartments and small factories, but they still use a considerable amount of energy. Their hidden nature presents another challenge for the authorities, Dorjiyev told Nikkei.
“Unfortunately it’s very hard to get rid of them or to do something with them,” he said.
On the whole, Kazakhstan has been open to digital currency mining, having established a legal framework for the industry in July 2020. It hopes to reap some financial rewards, with a new tax of $0.0023 per kilowatt-hour of electricity used by registered companies coming into force in January.
But to make the most of it, the power problems need to be ironed out.
In November, President Kassym-Jomart Tokayev announced Kazakhstan was considering nuclear energy to help meet the surge in demand. “Looking into the future, we will have to make an unpopular decision about the construction of a nuclear power plant,” he said.
But a turn to atomic energy — a particularly controversial issue in Kazakhstan due to the legacy of Soviet nuclear testing — would likely take at least a decade to pay off.
In the shorter term, Bekbauov’s Xive is betting on gas, even as it eyes opportunities in the U.S.
Xive plans to construct a gas-fueled facility that will buy supplies directly from a new power plant — apparently holding out some hope that cryptocurrency mining has a future in Kazakhstan.