After a sharp hardening of rhetoric against the cryptocurrency industry in China, local miners began seeking other jurisdictions. One of these states was Kazakhstan.
However, interest from Chinese miners may wane due to a new legislative initiative to impose an additional electricity charge on miners.
We examined what the initiative entails and how it might affect the migration of mining companies from China to Kazakhstan.
- Chinese authorities have urged a move away from crypto-related business and to combat mining.
- Local mining companies began seeking other jurisdictions to host equipment, turning to Kazakhstan. However, migration plans were put into doubt by the new bill proposing an additional electricity levy for miners.
- Experts say that the bill’s adoption would negatively affect Kazakhstan’s investment appeal to foreign investors, and Chinese miners would favour other countries.
From China to Kazakhstan
In May, three associations under the People’s Bank of China (PBOC) issued a notice prohibiting companies from engaging in cryptocurrency-related business. The notice advised residents of the PRC to refrain from investing in cryptocurrencies and reminded that such operations are not protected by law.
Later, Vice Premier Liu He of the State Council said there was a need to combat mining, and local media backed the authorities’ rhetoric, criticising Bitcoin and its mining.
Analysts were quick to talk about miners migrating from China.
Everything I’m seeing indicates an absolutely seismic shift of hashpower out of China and into the world at large. It won’t be elegant or pretty but obviously it’s great for hashrate distribution (& likely carbon intensity)
— nic carter (@nic__carter) May 23, 2021
According to Reuters, the BTC.TOP mining pool and HashCow have already halted operations in China.
Alejandro De La Torre, vice president of Poolin, stated that many miners plan to relocate to other countries. Among the most popular destinations are North America and Central Asia. Namely — Kazakhstan.
According to Slush Pool’s Edward Evenson, owners of mining devices in the 300–400 MW range are planning to move equipment to North American countries, parts of the European Union and Kazakhstan.
For those interested in the #Bitcoin mining news coming out of China
I’ve had 300-400MW of mining machines contact me to help them distribute their machines across NA and some parts of EU. Some have also begun shipping machines to Kazakhstan. ?
— Edward Evenson (@WillHash4Coins) May 27, 2021
Amid the news from China, BIT Mining Limited announced investments of $9 million in a mining centre in Kazakhstan.
ForkLog and Enegix — the largest data center operator in Kazakhstan — confirmed the interest of Chinese miners in the jurisdiction.
According to Yerbolsyna Sarsenova, co-founder and CEO of Enegix, at the time of writing the company had received requests to host more than 200 MW of capacity.
«Earlier Chinese miners were considering relocating only used equipment from older generations, such as Antminer S9. But today things have changed — they are ready to deploy equipment of a newer generation»,
— Yerbolsyn Sarsenova
Sarsenov added that some mining pools not only want to relocate their clients’ equipment but also their own devices to Kazakhstan’s data centres.
In the local Association of Blockchain and Data-Center Industry, officials also noted heightened interest from Chinese companies in investing in Kazakhstan’s industry.
However, according to Association representatives, an obstacle could be the bill under consideration by authorities, which provides for the introduction of an additional electricity levy for miners.
New rules for miners
Kazakhstan began regulating cryptocurrencies in 2020. In law they were defined as unsecured digital assets and recognised as property.
On May 17, 2021, a group of deputies introduced a bill to amend Kazakhstan’s Tax Code. It has already been approved by the Mazhilis (the lower house) and sent to the Senate for consideration.
The bill includes a large number of amendments. One section envisages an additional charge of 1 tenge per kWh of electricity consumed for mining cryptocurrencies. If enacted, the new rules would take effect on 1 January 2022.
«The essence of the charge is to establish an additional tax obligation for entities engaged in digital mining»,
— ForkLog tax expert Aidar Masatbayev.
The authors of the amendments expect that the new taxation will help regulate and control miners’ energy consumption, and also increase budget revenue.
According to one of the bill’s initiators, Albert Rau, the main aim is to bring mining “out of the shadows.”
He called the 1-tenge levy a symbolic price that will help illustrate what the industry looks like in Kazakhstan.
The tax authorities will receive a list of miners from the Ministry of Digital Development, Innovation and Aerospace Industry of Kazakhstan. Yet “reliable data on the number of mining entrepreneurs publicly available yet” does not exist, noted Aidar Masatbayev.
Many analysts criticised the initiative. The introduction of an additional levy could not only reduce Kazakhstan’s economic appeal but also set a negative precedent for foreign investors, ForkLog heard from the Association of Blockchain and Data-Center Industry:
«Given that mining is effectively the export of IT services, imposing additional taxation on the sector could significantly dampen international investors’ interest in not only mining but all Kazakh projects.»
Another risk was highlighted by Alan Dordzhiev? No, by Alan Dordzhiev? The article: Алан Дорджиев: president of the Association. We will translate as “Alan Dordzhiev.” on a press conference:
«This is not about the industry so much as it is about setting a precedent for investors. The mining industry did not ask for government funding or development bank support. All of this was done with private investment money».
The bill’s passage would severely undermine the president’s goal to increase investment in the cryptocurrency mining sector to 500 billion tenge by 2025, the Association said.
In the summer of 2020, authorities said mining farms had already brought Kazakhstan investments of 82 billion tenge, and that number would grow.
According to the minister, as of mid-May 2021 there are 17 mining farms operating in the country.
According to the Association, the mining sector consumes around 4.38 billion kWh per year, with an average electricity price of 13 tenge (incl. VAT). Companies also spend 10-15 billion tenge on wages, construction and purchases of local goods such as cables.
If the bill is adopted, miners would pay about 4.4 billion tenge to the budget per year, the Association calculated. Some investors may leave the country, and Kazakhstan “would instantly lose about 10 billion tenge of investments per year,” said Alan Dordzhiev.
In a ForkLog interview, Association representatives added that since 2018 electricity tariffs have risen several times and that introducing an extra charge for miners “could be a signal for migrating mining data centres to other jurisdictions.”
«This would lead to a substantial reduction in electricity purchases and a drop in jobs in the regions».
The head of BTC KZ, Galim Teleuov, also expressed concern about miners exiting Kazakhstan’s market. He cited Kyrgyzstan investor outflow as an example:
«When there was talk of higher taxes on mining there, many foreign investors left immediately. The mining equipment sold in Kazakhstan’s second-hand market comes from Kyrgyzstan. I think our country should not repeat that mistake».
Thus, experts believe the extra charge could slow the migration of miners from other countries, particularly from China.
«Undoubtedly, introducing an electricity charge for miners could ‘curb’ Chinese miners’ appetite to move to Kazakhstan. We know how sensitive they are to every kopeck of cost»,
— Enegix CEO.
At the same time, the choice of destination countries is not large, he noted.
***
In the Association of Blockchain and Data-Center Industry, Chinese mining companies are awaiting the Senate’s verdict on the bill to decide on their future in Kazakhstan.
Yet officials may ignore business and expert criticism, says tax expert Aidar Masatbayev:
«Based on the experience of prior unpopular bills, a mining tax is likely to be introduced».
Author: Alina Saganskaya.
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