Kazakhstan crypto mining fortunes falter as regime unplugs internet

From the Editor’s Desk

Dear Reader,

As Beijing took a sledgehammer to China’s cryptocurrency mining industry last year, many data center operators packed up their servers and headed abroad with a sense of optimism about their prospects elsewhere.

Among those who fled to neighboring Kazakhstan, however, a sense of buyer’s remorse may be kicking in following a shutdown of the internet ordered last week by the country’s embattled authoritarian government.

No risk, no reward, right? Well, yes. But trading one country ruled with an iron fist for another run in a similar fashion is a gamble in the best of times — as crypto miners who bet on the benevolence of the autocratic Kazakh government have found out to their cost, having been forced to consider using pricey satellite data connections to keep their operations running.

To be fair, political risk is (or should be) a factor in any business decision — especially in an industry with as many enemies as crypto mining. And although a few hundred environmental protesters rallying in upstate New York last year may not constitute quite the same threat level as a regime that unplugged the internet to save itself from its own citizens, those risks are real.

As Forkast has chronicled, the crypto industry as a whole has faced hostility across society since its very beginnings — from the nabobs of Wall Street to Nobel laureate economists, and pretty much everyone else without skin in the game.

But no part of the sector has encountered such impassioned public criticism as mining, thanks to continued heavy reliance on the burning of fossil fuels to feed its gargantuan energy needs. As mining increasingly comes under attack on these grounds, the foundations of the entire crypto ecosystem are imperiled — and will remain so until miners clean up their act.

The luckless Chinese miners in Kazakhstan may not have seen their recent misfortune coming. Their counterparts in other countries have no such excuse.

Until the next time,

Angie Lau,
Founder and Editor-in-Chief
Forkast

Forkast.Insights | What does it mean?

Bitcoin mining is heading into 2022 with a reputation for ruining national grids. In China, energy shortages preceded Beijing’s clampdown on mining operators. In Iran, officials in May last year blamed power outages in Tehran and elsewhere on BTC miners. Lebanon and Kosovo suffered similar problems. 

The list of countries refusing to take in miners effectively ejected from China last year is growing, a development that should be on the radar of investors and developers alike. If miners have nowhere to go, they don’t contribute to the Bitcoin hashrate, which determines the difficulty level of mining. Although the Bitcoin network can dynamically adjust the difficulty rating, hashrate is directly correlated with Bitcoin’s price.

According to Ben Caselin, head of research at crypto exchange AAX, since miners are rewarded in Bitcoin, raising the hashrate and incurring higher costs wouldn’t make sense as the fiat value of the reward remains the same.

Yet perhaps the more pressing concern for Bitcoin developers should be why they are doing so little to address the issue of the network’s energy usage? In Bitcoin’s code repository, where developers suggest improvements and upgrades, there is not one mention of energy concerns or alternative ways of securing the network, even though plenty of alternatives exist. 

If Bitcoin’s price sinks this year, it will only have itself to blame.

Forkast.Insights | What does it mean?

The rise of Changpeng Zhao, or “CZ,” as he is commonly known, to the top of the biggest money pile owned by one person in the crypto industry comes as Binance encounters regulatory problem after regulatory problem in jurisdictions around the globe. 

Binance adopted an approach favored by many other tech companies: ask for forgiveness, not permission. Uber, for instance, ignored employee rights for years, Facebook violated data privacy laws all over the world, and Binance has tried to outmaneuver regulators by creating subsidiaries and convoluted corporate structures. 

Several months ago, it appeared that Binance had drawn some lessons from its regulatory woes as it went on a compliance hiring spree, floated the idea of replacing CZ with a new chief executive, and sought to hire upwards of 300 staff in Singapore in a move that appeared to suggest it might set up a headquarters in the city-state. 

Since then, however, Binance has withdrawn its application to operate a crypto exchange in Singapore and announced that it is shutting down its token business there. It has also run into more regulatory trouble in the Canadian province of Ontario. 

Regulators need to ask themselves whether Binance’s practices are simply the price of innovation in a fast-growing industry — or unwelcome, damaging conduct that needs to be reined in. 

Forkast.Insights | What does it mean?

In the run-up to the Beijing Winter Olympics starting on Feb. 4, at which China’s much-anticipated CBDC is expected to make its debut on the international stage, the new digital yuan is getting no shortage of attention in crypto circles. Although experts suggest a full nationwide rollout of e-CNY is now unlikely to occur in time for the games, Beijing is sparing no efforts to flex its tech innovation muscles by allowing e-CNY payments in as many settings as possible.

Popularizing e-CNY is understood to be a top priority for the PBOC, a major component of which is putting ubiquitous private payment systems Alipay and WeChat Pay in their place below the supremacy of the state. Several important issues are in play.

First, new mobile payment rules — introduced by the PBOC in November to extend state control of the use and classification of payment collection barcodes — could boost digital yuan distribution, dealing a blow to the Alipay and WeChat Pay private payment duopoly, which has fallen out of favor with the authorities. 

Second, the PBOC has taken advantage of Alipay and WeChat Pay’s massive user bases by allowing e-CNY users to bundle digital yuan wallets with their existing accounts on the two platforms. Although the number of e-CNY transactions has surged dramatically over the past year, they still pale in comparison with private electronic payments, as pointed out by analysts at brokerage China Merchants Securities.

In addition, privacy concerns remain, and the central bank must take them seriously. PBOC Governor Yi Gang said in November that a ​​delicate balance “needs to be made between privacy protection and crime prevention.” Although the authorities have repeatedly claimed that they have introduced laws to protect data and that the e-CNY system collects only minimal personal information — and supposedly much less than existing payment service providers — Beijing’s record on privacy, surveillance and human rights in general is hardly reassuring.