Bitcoin in the Steppes: Geopolitics behind Crypto Mining in Kazakhstan
In the steppes of northern Kazakhstan, to the south of Ekibastuz, a medium-sized city bordering a huge open-pit coal mine, lies the country's most powerful cryptocurrency mining farm. The thousands of processors inside, whose needs can reach 180 MW of electrical power, are connected to high-voltage power lines in Pavlodar province, the energy hub of Kazakhstan. The region concentrates most of the country's electricity production thanks to powerful coal-fired power plants strategically placed near the immense deposits of this resource, once built to supply the industrial centres built by the Soviet authorities and still connected to the Russian power system with which electricity is frequently exchanged in both directions.
In these steppes, battered by icy winds in winter, smothered by the blazing sun in summer, and benefiting from surplus electricity that can be sold at a preferential price, the country's first cryptocurrency mining facilities were established around 2017 (Rusinovich, 2023). This activity, which is an essential and very material part of digital currencies such as Bitcoin, uses computer power to secure the transactions of some cryptocurrencies. Calculations are usually carried out by special processors, whose owners are automatically remunerated by the cryptocurrency protocol in return. As the value of some of these digital currencies has risen over the last decade, mining has become increasingly lucrative, and a rationalisation of the location and organisation of this activity has emerged, leading in particular to a concentration of computing power in areas that have the needed characteristics. With its cheap – and highly carbon-dependent - electricity available in large quantities and its cold, dry climate that can be used to reduce the cost of cooling the machines, northern Kazakhstan, like neighboring Siberia (Estecahandy and Limonier, 2021), has become an attractive area for the development of these infrastructures.
In May 2021, Beijing announced the ban of cryptocurrency mining activities on Chinese territory, where the vast majority of Bitcoin computing power was installed (estimated between 60% and 80%), and this redrew the global mining map. While hundreds of thousands of processors have crossed the Pacific Ocean to find refuge mainly in North America, especially Texas and Georgia, a very large part has also been relocated to Siberia and Kazakhstan. The energy surpluses in the north of Kazakhstan provided the ideal location for large mining companies, and the massive resale of machines by players formerly based in China but who could not afford to relocate their operations led to an explosion in the supply of processors in parallel markets in Kazakhstan, creating a kind of informal version of the Digital Silk Road. As a result, mining in the country has developed in a variety of scales and forms. Large-scale mining facilities emerged in the north in refurbished old factories or in adapted buildings near power plants that could withstand the harsh climate. In the south of the country, where availability of electricity is insufficient and the power network is shared with Kyrgyzstan and Uzbekistan, mining was more sporadic and developed on a smaller scale. In just a few months, Kazakhstan’s energy consumption exploded (+8% in 2021, up from 2% annually before), so much so that power cuts and restrictions had to be introduced as early as late summer 2021. On 25 January 2022, a few days after the violently suppressed riots in Almaty which left 230 people dead, a blackout paralysed the entire south of Kazakhstan as well as neighboring Kyrgyzstan and Uzbekistan.
The massive and rapid development of mining in this region has brought several regional problems to the fore. First, the explosion of this energy-hungry alternative digital activity has highlighted the dilapidated state of Kazakhstan's power generation and distribution infrastructures, whose poor functioning seems only to be accelerated by mining. Secondly, a not insignificant part of cryptocurrency mining has been connected to the electricity grid in an opaque or illegal way, through the corruption of actors with privileged access to electricity, so that electricity consumption cannot be measured and controlled. For example, agricultural businesses growing crops in greenhouses were selling their surplus electricity to undeclared cryptocurrency miners (FMA RK, 2022) and undeclared mining farms have been installed within special economic zones that offer low electricity prices (Anti-Corruption Service, 2022). Finally, the Tokayev presidency's intention to regulate and monitor crypto mining activities from the beginning of 2022 is a visible extension of the country's internal political accounting. Indeed, Kazakhstan's public institutions have taken the trouble of publicly naming some of the people associated with the irrational development of mining and linking them to the energy problems that affect the entire population. These figures all belong to the political and economic network developed under the aegis of the former President Nursultan Nazarbayev (1991-2019), which the new presidency is trying to drive out of crucial sectors of the country. For example, several farms were developed by Alexander Klebanov, an oligarch who owns a number of energy infrastructures in the north of the country, and Bolat Nazarbayev, the former president's brother. This tangled web of geographical characteristics and political networks of actors leads to the complex geopolitics of cryptocurrency mining in Kazakhstan. Furthermore, the energy issues that have emerged with the mining of cryptocurrencies play an important role in the regional diplomatic exchanges and geopolitical stability of Central Asia. Since April 2023, mining has been regulated by a law supposed to tax the income of miners and control the electricity consumption of farms. Even as this law is taking time to be implemented and enforced, costly requirements are likely to be met only by the biggest players in the industry, which could lead to a monopoly situation in the sector. However, the use of electricity (sometimes bought from Russia) channeled through obsolete infrastructures that have barely been renovated since the Soviet era can perhaps be rationalised.
References
Anti-Corruption Agency of the Republic of Kazakhstan, “Деятельность "Серых" майнеров пресекли в Алматинской области [Grey miners cracked down in Almaty region]”, February 21st, 2022. https://www.gov.kz/memleket/entities/anticorruption/press/news/details/330125?lang=ru
“Bitcoin Mining Map”, Cambridge Bitcoin Electricity Consumption Index, Cambridge Center fo Alternative Finance. https://ccaf.io/cbnsi/cbeci/mining_map
Estecahandy H., Limonier K. (2021), “Cryptocurrencies and processing power in Russia: a new strategic territory in eastern Siberia?”. Journal of Cyber Policy, Januarfy 2nd, Vol. 6, n°1, p. 68-80. https://www.tandfonline.com/doi/abs/10.1080/23738871.2021.1939746
Financial Monitoring Agency of the Republic of Kazakhstan (FMA RK), “По пресечению незаконной майнинговой деятельности [On cracking down on illegal mining activities]”, March 15th, 2022. https://www.gov.kz/memleket/entities/afm/press/news/details/340913?lang=ru
Rusinovich D. (2023), Geopolitics & Bitcoin Mining, Cryptocurrency Mining Group - I&D Media und Project Advisory GmbH, Berlin. https://cryptocurrencymining.group/wp-content/uploads/2023/05/ID_Market_Insights_Geopolitics-BTC-Mining-230512.pdf
Hugo Estecahandy is a PhD candidate at the French Institute of Geopolitics, where he studies the geographies of cryptocurrencies and mining industries. He is a member of GEODE – Geopolitics of the Datasphere research project.