Kazakhstan, the country that failed to keep miners: how government policy is driving miners away

After the influx of Chinese miners in 2021, Kazakhstan became one of the world’s leading players in the Bitcoin hash-rate share.

Many companies deployed equipment in the country and invested in data centres. Among them Bitmain, The9, BIT Mining Limited, Canaan — and this is by no means an exhaustive list.

It seemed that Kazakhstan could become a global mining hub. Until recently, the authorities signalled support.

In 2020, President Kassym-Jomart Tokayev urged attracting more companies and investments into the country — he said that by 2025 the volume of investment into the mining industry should have risen to 500 billion tenge.

However, as miners relocated, conditions in the country began to change.

We examine why Kazakhstan, which had just begun to become the mecca for the mining business, risks losing it all.

Taxes, electricity and “grey miners”

In June 2021, Tokayev signed a law introducing an additional levy on cryptocurrency mining — 1 tenge per kWh. The rules took effect on 1 January 2022.

Then authorities explained that the move was intended to bring miners into the legal fold, and the tax burden was described as “symbolic.”

The initiative did not substantially dampen business interest in Kazakhstan. As ForkLog reported, in the summer there were many inquiries about placing equipment and constructing facilities (at the time of writing, Enegix declined to comment). Even after the law was passed, major players continued to develop their business in Kazakhstan.

However, after only a couple of months another problem emerged — authorities considered that cryptocurrency mining activity imposes too heavy a burden on the power grids.

In September, then-energy minister Magzum Mirzagaliyev proposed to limit the consumption volumes of mining data centres in the event of electricity shortages.

According to the October document, the system operator of Kazakhstan, whose functions are performed by KEGOC, was given the right to suspend or reduce electricity supplies to miners in the event of a shortage, and to prevent emergencies.

Speaking of the need to regulate mining, the president asserted that so-called “white” miners would continue to operate without restrictions. In practice, it was they who bore the brunt.

While legitimate miners had been grappling with power problems for months, equipment continued to be imported and connected in the country, its operation not appearing anywhere. ForkLog spoke to Din-Muhammed Matkenov, founder of the BTC KZ data centre that hosts mining equipment, who said:

«They can completely cut us off; sometimes within a day we receive 30% of capacity, sometimes up to 100%, but not for long. It’s very unstable and predicting profits is very difficult.»

BTC KZ operates three data centres in the north of Kazakhstan, in Ekibastuz. Their capacities are 50, 30 and 20 MW, employing more than 30,000 mining devices.

Matkenov said that when deciding to build data centres in Kazakhstan, the government openly urged investors to invest in the country because of cheap electricity and its surplus in the north. He noted that only in the early stages did the company invest $9 million in the business.

The founder of BTC KZ also noted that in the country one can buy any amount of equipment and connect it anywhere — the state cannot restrict such miners because it does not control them:

«They can disconnect us, unlike the “grey” miners in the form of small Chinese players who connected in small volumes within cities. They cannot be restricted because the system operator, the state, do not see them.»

In the National Association of Blockchain and the Data-Centre Industry of Kazakhstan, the problem of “grey” mining has repeatedly been highlighted. In a letter to the president (available to ForkLog), the organisation emphasised that the exact number of such miners is unknown, but preliminary data suggests they consume around 1,400 MW of electricity.

«Nevertheless to date, not a single illegal market player has borne full responsibility for their activities, while official players have been left without electricity since September 2021».

ForkLog has asked KEGOC, the presidential administration and the Astana International Financial Centre for comment, but had not received a response at the time of publication.

Internet shutdown in Kazakhstan as another challenge

In early January 2022, mass protests erupted in Kazakhstan. On January 5, the internet was completely shut down nationwide.

According to experts, initially local authorities attempted to block access to messaging apps and websites selectively using DPI equipment. It is used in Russia as part of the sovereign internet law. However, fully blocking access to the network with DPI was not achieved.

«It failed because in Kazakhstan DPI is used not for sovereign internet filtering but for analysis and prioritisation of traffic. For blocks you need special software, sometimes special hardware, and training, which simply did not exist in Kazakhstan», — said the Roskomsvoboda technical director.

Ultimately authorities ordered operators to block the channel for transmitting traffic entirely, a Forbes source familiar with the situation told. A second informant, close to the mobile operator Kcell, said the organisations of blocks were conducted by the Committee for National Security of Kazakhstan without operator involvement.

In the Ministry of Digital Development, outages were explained as an attempt to prevent “coordination and planning of actions by terrorist groups.”

Earlier, ForkLog reported on methods of bypassing blocks during the Belarusian blackout in 2020. Yet, in the event of a full network outage as occurred in Kazakhstan, any countermeasures are largely useless.

According to Top10VPN, the cost of the outage for Kazakhstan exceeded $429 million.

Miners were not spared. In just a few hours from the start of the blocks in Kazakhstan, Bitcoin’s hash-rate MRP fell by 12%, as mining farms located in the country were suddenly shut down. Problems with network access persisted for several more days. During this period, the mining industry in Kazakhstan did not operate at full capacity — farms ran only 2 to 5 hours per day, ForkLog told the Kazakh Blockchain Technologies Association.

“The internet shutdown finished off many who kept equipment here — investors and companies. For them, it was not a good signal, and many began looking at other jurisdictions”, said Alan Dordzhiev, head of the National Association of Blockchain and the Data-Centre Industry of Kazakhstan.

Stopping power supply for miners

After internet access resumed, mining farms briefly returned to normal operation.

At the end of January all legally registered miners in Kazakhstan received a letter from KEGOC notifying of a suspension of electricity supplies until the end of the month.

According to the Ministry of Digital Development’s website, as of 31 December 2021, 135 organisations had officially notified ongoing mining activity or its start, and 11 companies reported providing infrastructure for mining cryptocurrencies.

Later the restriction was extended; at the time of writing, supplies had not resumed. They were fully suspended at least until 28 February.

The outages were attributed to a “tense balance between electricity supply and capacity.”

Meanwhile, according to an anonymous source, some companies continue to receive electricity, presenting usage as other businesses — for example, greenhouse operations.

Last year, miners began leaving Kazakhstan due to power issues. BitFuFu started relocating to the United States, closing its data centre for 2,500 devices, and Xive.

Yet at that time most miners hoped for change and had no plans to leave the country. Now they are seriously weighing relocation, according to the blockchain associations.

The decision to relocate was also taken by BTC KZ, ForkLog said Matkenov:

«We are currently close to bankruptcy, and clients are trying to find other countries for relocation».

Among the main jurisdictions miners are considering for relocation are the United States, Norway, Argentina and Russia.

The persisting regulatory uncertainty in Russia does not overly scare Kazakh miners — as BTC KZ noted, if crypto activity is banned, a clear tariff will likely be set for mining, and it would probably still operate.

New taxes, a “cleansing” of miners and an uncertain future

In February, President Tokayev ordered raising the tax on cryptocurrency mining. Initially it was planned to raise the electricity tax for miners from 1 to 5 tenge per kWh. In addition, authorities were considering the possibility of introducing a monthly tax on equipment amounting to 10 MRP.

Later the Ministry of National Economy proposed raising the mining tax not by five times but by ten times.

To bring miners “out of the shadows,” the president also instructed identifying all mining farms and developing rules introducing licensing such activity. Authorities and law enforcement have already begun to carry out “measures aimed at clearing the electricity market of shadow digital mining entities,” the Ministry of Energy said.

The National Association of Blockchain and the Data-Centre Industry told the president that introducing additional taxes is unlikely to affect illegal miners and will only worsen the situation for officially registered businesses:

«With the current outages of “white” miners from the country’s power system, raising taxes on the sector is meaningless».

The association noted the difference between miners and data-centres on which such activity is based.

BTC KZ said that if additional taxation is introduced, mining in Kazakhstan will become unprofitable given the cost of electricity from abroad: MRP would rise to >25 tenge plus a 5 tenge tax. At such prices, mining is unprofitable even if Bitcoin trades above $42,000. We are relocating; let taxes be levied on uncertain sources.

A 5–10 tenge tax increase would simply be unaffordable for the business, the Kazakhstan Blockchain Association of Technology said. They also noted that the government acts in a fragmented manner — each state body voices its own proposals, without market consultation:

«It’s a one-way game, played by rules that have not been discussed with anyone».

The industry associations propose various options to resolve the situation — for example, legislative changes to create a market for balancing capacities and green energy or a revision of current electricity-supply rates from Russia to Kazakhstan.

They call for forming a working group with business representatives to jointly explore development options for the sector in the country.

But it is unlikely that authorities, already moving ahead with the proposed regulatory trajectory, will substantially revise their stance. And even if they do, restoring market trust—already eroded—will be extremely difficult to achieve.

«Everyone was saying we had a surplus, come invest, they gave guarantees. And in one month they simply came up with a law and imposed strict restrictions», said BTC KZ.

Companies that invested multi-million sums under these terms and now face power suspensions, additional taxes and new regulatory initiatives, are unlikely to feel secure.

All of this leads to a bleak forecast: Kazakhstan, which in a short time rose to the forefront of Bitcoin mining, risks losing its position before it has solidified it.

Author: Alina Saganovskaya.

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