World Bank: Why Is the Poor Central Asia Becoming the New Center of the Global Cryptocurrency?
Europe-Central Asia crypto currency mining active mining
About 10 years ago, when the cryptocurrency first appeared, the scale of blockchain activities in Europe-Central Asia was still very small. Since the end of 2016, many countries in Europe-Central Asia have provided fertile soil for cryptocurrency and blockchain technology. At the end of 2016, cryptocurrencies were used more frequently in the region, especially in large-scale cross-border transfers, while investment in blockchain technology surged. Many countries’ governments have begun experimenting with blockchains to improve their services.
Early Bitcoin was used to gamble or buy non-products on a dark network
In regions with a cold climate and low power costs, cryptocurrency mining has boomed. The Russian energy company EN+Group is preparing to supply electricity to cryptocurrency miners at five plants in Siberia. The electricity available to miners will far exceed the existing mining capacity in the region. En+Group attracted a group of Chinese miners. Mining in China currently dominates the global market, but the environment provided by China gradually loses its appeal.
The exploitation of cryptocurrency in Iceland is also booming. It will use more electricity for mining instead of supplying electricity to all its residential buildings. Armenia will establish a 50 MW mining pool. Slush Pool is a bitcoin mining pool with a market share of approximately 7%. Many participants come from all over the world and it is currently operated by Satoshi Labs, a mining company in the Czech Republic. KnCMiner is a bitcoin mining hardware manufacturer who produces cutting edge ASIC miners in Sweden and then we have also other mining pools in Russia.
Georgia has one of the world’s largest bitcoin mining companies (BitFury) and many similar small companies. BitFury is building more facilities in Canada, Iceland and Norway. It controls about 10% to 15% of Bitcoin mining globally.
Because of tax deductions and low electricity prices, exploitation of cryptocurrency is very common in Georgia. In fact, since 2009, the growth in electricity consumption per capita in Georgia has been the fastest across Europe and Central Asia.
Comparison of Average Consumption of Electricity between 2000–2009 and 2010–2014 in Europe-Central Asia
BitFury, one of the world’s largest bitcoin mining companies, built a 20 MW data center in Gori (the capital of Georgia’s Shida-Kartli region) and a 40 megabit in Tbilisi (the capital of Georgia). The mining facilities of the tile are financed by the Georgia Co-Investment Fund.
The phenomenon of rapid increase in electricity consumption per capita in the country is at this time. Tbilisi’s mining facilities are located in a free industrial zone with daily income of 250,000 to 400,000 U.S. dollars. BitFury recently sold the facility to its Chinese partner, AsianChong Sing Holdings. Currently, BitFury is building other mobile data centers for sale to other investors. Other companies have established mining facilities in the free industrial zone of Kutaisi (the third largest city in Georgia).
Many local families work in the mining pool. Surveys show that as many as 5% of Georgia’s households participate in cryptocurrency mining or investment.
These mining activities have had a significant impact on electricity consumption, which has transformed Georgia from a net exporter of electricity to a net importer. The proportion of Georgia’s electricity demand for cryptocurrency exploitation is estimated to be between 10% and 15%, and this figure may be higher because small-scale mining activities are difficult to notice.
In 2016, the average electricity consumption per capita in Georgia was 3,343 kWh, almost three times higher than in countries with similar per capita income levels. Even after changing the state of the country’s history of high electricity consumption (probably because of the supply of cheap hydropower), its energy consumption in recent years has remained staggering.
Between 2014 and 2016, its per capita energy consumption increased by 655 kWh, of which only 65 kWh may be due to increased income, and about 590 kWh of energy consumption is still unexplained, which accounts for the energy of the country. 18% of total demand. Since the introduction of Bitcoin in 2009, the unexplained portion of the country’s electricity demand is still rising.
Comparison of Average Electric Power Surplus Consumption between 2000–2016 and Average Residual Consumption from 2000–2009
Of course, the exploitation of cryptocurrency also increased revenue. Georgia’s cryptocurrency mining revenue is likely to contribute a few percent of its GDP, even if these revenues are not registered as part of it (if registered, it is likely to be listed as export earnings). What can be observed is that it consumes and imports not only electricity and computer parts, but also more general consumption from mining revenue. This growth is similar to the increase in consumption caused by large inflows of remittances. The income from the cryptocurrency is likely to be converted into fiat currency on foreign exchanges, and then part of the legal currency is transferred back to Georgia.
The exploitation of cryptocurrency investment opportunities may attract direct investment from abroad. It is too early to conclude that there will be spillover effects in other economic areas, because it may inspire other innovation activities and it may also crowd out investment in other activities.
These mining activities demonstrate the dynamic response of entrepreneurs in the region to new opportunities. They herald the development of other applications of the technology. However, due to the excessive use of electricity by these companies competing for exploitation of cryptocurrency rights, this has become a growing problem. With the development of these markets, the most pressing challenge now is how to adapt and mitigate the growing power demand of miners if the mining sites change or stay in the current model, and prepare for the future decline in demand.
There are many ways to deal with these challenges. The cryptocurrency community is looking for more efficient ways to update blockchain technology. Governments are reconsidering their tariff policies; in order to reduce energy use, they need to increase their electricity bills, or establish more market-based mechanisms to determine electricity prices. If it is not controlled, the use of electricity may increase before it finds alternative sources of energy, thus causing long-term damage to the environment. In addition, if the demand for electricity driven by cryptocurrencies collapses, the financial investment in power plants (contingent liabilities, that is, the contingent liabilities of cooperating with the private sector to develop new power plants) may threaten public finances.
Reasons for more activities related to cryptocurrencies and blockchains in Europe-Central Asia
There may be several reasons:
First, in the eastern part of the region, the market-based financial sector is relatively new and not yet fully mature. Insurance and capital markets are underdeveloped. Land registration and real estate cadastre can still be improved. Blockchain technology may help fill these gaps.
Second, the banking industry’s exposure to fragility after the transition in 1991, the global financial crisis in 2008, and the collapse of oil prices in 2014 have weakened people’s trust in financial institutions. The degree of dollarization in the eastern financial sector in the region is relatively high, reflecting the public’s lack of trust in the legal currency. This has led to very low local bank deposits and consumers are looking for other ways to invest their savings.
Third, banks dominate the financial sector throughout the region. There is very little risk capital that does not require collateral. New forms of financing can help technology start-ups that have the potential to grow rapidly in a highly competitive global market.
Small countries in the region have a favourable business environment and therefore are conducive to the introduction of new financial instruments based on blockchain technology. The tokenization allows small startups to raise funds in the global market, and these start-ups lack easy access to financing. Emerging countries in the Baltic States and several other small countries, including Georgia, have already issued love in Western Europe. These examples are instructive to other economies in the region. These economies have long been dominated by state-owned enterprises, mainly through the non-tradable sectors to achieve economic growth.
For many of these economies, the challenge is how to unlock new growth potential in areas of global competition. The new P2P technology provides access to these markets. More specifically, activities on the blockchain network automatically place participants in international competition.
Fourth, there is strong demand for new cross-border transfers. The amount of remittances in the region is large; the transaction costs associated with it are high. There is also a large part of the region’s illicit financial flows related to money laundering, tax evasion and circumvention of capital controls or sanctions.
Fifth, the governments of the region provide a wide range of services. They supervise and improve the social security system, and most of them play a comprehensive role in medical care, pensions, and education. People are constantly asking for more efficiency and transparency in these services. Many governments are working to achieve these goals.
The European Commission has funded a blockchain observatory to encourage the development of blockchain technology and help formulate policy recommendations, particularly on smart contracts and policy recommendations for improving government services.
Lithuania has opened a blockchain center to incubate start-ups and collaborate with similar centers in Melbourne and Shanghai. In addition, the Central Bank of Lithuania has provided a one-year sandbox environment for the development of new digital financial technology startups. Estonia is exploring opportunities to use blockchain technology for medicine, and Georgia is studying the possibility of supporting smart contract applications. Serbia and Tajikistan are working with the United Nations Development Programme (UNDP 2018) to test remittances on the blockchain. Azerbaijan is experimenting with applying digital IDs to blockchains in banking. The Riksbank (Sweden’s central bank) is considering launching its own digital currency.
Sixth, governments in the region are looking for ways to reduce the power of large technology companies and increase privacy. Compared with the governments of other regions, the governments of the region are limiting the natural monopoly of technology giants. When technology companies get some data, people in the area have strong privacy concerns. The open source performance of the blockchain structure breaks this monopoly of data. Several governments and the European Commission are studying whether it is possible to use new technologies to reduce the power of large digital network companies.
It is still unclear which experiments will have lasting effects. The impact of disruption may come from applications that are very different from the initial design of the blockchain. Testing of blockchain technology has promoted innovation and competition among private companies and governments. For this reason alone, the trial of blockchain technology is worth supporting.
Will Central Banks in Europe-Central Asia issue cryptocurrencies?
In Europe-Central Asia, central banks are exploring the possibility of issuing cryptocurrencies for several reasons.
First, the use of traditional cash is steadily declining.
Second, cryptocurrencies provide a viable alternative to digital copying of the original features of cash in digital format. Like cash, cryptocurrencies allow anonymous P2P transactions without intermediary involvement.
Third, the demand for tokens linked to the legal currency is increasing. These tokens can be used like cryptocurrencies, but their value does not have the disadvantage of high volatility. Converting actual coins and banknotes into digital tokens with the same legal protection and the same stable prices as all currencies issued by the central bank seems to be a natural development trend. The transparency of the central bank’s digital currency transactions can facilitate the systematic execution of monetary policy.
People are seriously concerned about central banks issuing cryptocurrencies. The crypto tokens issued by the Central Bank can not only replace cash, but also replace the electronic payment system operated by commercial banks. Commercial banks can already provide electronic accounts, mobile money and value cards. These systems can be uploaded and used offline.
The Swedish Central Bank is exploring the possibility of providing electronic accounts and value cards directly to the public. The idea is to manage these cryptocurrencies in the central bank’s central register. This proposal to replicate existing tools in the private sector stems from the perception that the government has a legal obligation to provide public means of payment. However, this may weaken the traditional financial intermediary role of commercial banks, which converts liquidity liabilities into long-term assets. Central banks cannot afford to pool their liquidity liabilities to finance their investments.
If the central bank chooses blockchain technology to manage decentralized digital transactions, it will compete more directly with cryptocurrencies. Its advantage is to provide a more stable token. However, the system will be fundamentally different from earlier cryptocurrency protocols. The central bank’s money supply will be endogenous — so as to link its value with the legal currency — and the seigniorage tax will accumulate in the central bank. There is no doubt that such a system will become a blockchain requiring permissions, only preselected servers can participate.
Source: This article is an exclusive compilation of the World Bank, which is compiled by the “Chain Institute” (WeChat public ID: chainlab2018).