Kazakh Interest in Cryptocurrency Surges—Will Economic Changes Follow?
Cheap electricity prices and favorable local sentiment has sent cryptocurrency miners flocking to Kazakhstan. Questions of regulation and Kazakhstan’s unique economic model could slow this trend.
By Alex Clark, Analyst
As countries around the world race to understand and even control cryptocurrency, digital currencies that have become one of the most volatile asset classes, Kazakhstan stands out as an unlikely outpost fueling bitcoin and the broader cryptocurrency speculation. According to Reuters, Kazakhstan currently accounts for 6% of all cryptocurrency mining and the government wants to attract 300 billion tenge worth of investment to further expand mining operations. After all, the more Kazakh citizens who mine — and subsequently own bitcoin — the more control over the asset’s price the country will gain.
However, with breakneck advances in the broader digital economy over the last few decades, few consider the complex webs of data centers, transmitters and other structures underwriting it all, and the economic and environmental implications. The industry’s massive growth in Kazakhstan has been spurred by cheap energy prices. For example, the Ekibastuz mining facility in Kazakhstan which has the potential to produce 4% of Bitcoin’s global hashrate (computing operations per second involved in creating bitcoin globally) will require 160 workers, and host up to 50,000 rigs — the computers on which users perform computing operations to verify transactions (known as hashing) to effectively create cryptocurrency — and it will consume enough energy to power 180,000 homes. Given the availability of cheap surplus electricity, local miners are in lowest 5% of electricity cost compared to the rest of the world. According to forex, these low energy prices are an issue of supply far exceeding demand in the sparsely populated country, where excess electricity capacity is exported to neighbors like Uzbekistan. Attesting to Kazakhstan’s advantages, the prosperous former Soviet republic has attracted miners from all over the world, with China, Japan and other Asian countries fueling an investment boom which will accumulate to USD 738 million flowing into local crypto operations over the next three years. This massive surge in investment has led observers to seriously consider whether Kazakhstan could leave its number four spot to become one of the top 3 miners of cryptocurrency globally, which are the United States, Russia, and China as of April, 2020.
Despite the country’s ambitions, cryptocurrency in Kazakhstan could prove controversial. Its nature as an unregulated, decentralized currency renders it a challenge to the sovereign economic authority of governments and their central banks. India, for example, is in the process of trying to completely ban all interactions with crypto currency-possession, issuance, mining, trading and transfering. While Kazakhstan appears to be going in the opposite direction, it has also considered banning all crypto activity in the past. Moreover, the government’s regulatory approach lacks consistency and causes uncertainty for the sector. For instance, despite announcing that crypto mining would be tax-free, the government moved to implement a 15% tax on crypto miners in response to the adverse economic consequences of the COVID-19 pandemic.
Questions of crypto regulation are especially prescient for Kazakhstan as it attempts the hard task of diversification beyond its oil and gas dependent economy. To succeed, the Kazakh government needs to craft a consistent regulatory framework balancing government control over cryptocurrencies with individuals and businesses involved in mining. Further determining how Kazakhstan will approach cryptocurrency can offer insights into how Kazakh policymaking might approach other economic challenges, from diversification to managing the fallout from the COVID-19 pandemic, and whether Kazakhstan’s framework can inspire other Central Asian economies looking to benefit from cryptocurrency. This article will examine Kazakh media coverage of cryptocurrency to assess whether Kazakhstan’s government could harness a new frontier in banking and finance to deliver economic progress and diversification along with rising living standards.
This article will examine Kazakh media coverage of cryptocurrency to assess whether Kazakhstan’s government could harness a new frontier in banking and finance to deliver economic progress and diversification along with rising living standards.
Inconsistent Policies and Regulations Threaten Progress
Like many governments, authorities in Nursultan have been unsure how to interpret cryptocurrency as prices of Bitcoin, Ethereum, and other forms of cryptocurrency continue to rise astronomically despite limited understanding of how underlying fundamentals relate to value. Debates are still centered around whether bitcoin can be assigned any inherent value given the service it provides or whether all value simply comes from the eyes of the beholder.
Swept by the tide of growing mainstream popularity, 2014 onwards, Kazakh government interest in the technology surged, both positive and negative. For example, in 2014 the National Bank of Kazakhstan threatened to label bitcoin “a form of financial pyramid scheme.” Moreover, in early 2018, Daniyar Akishev of the National Bank of Kazakhstan raised the possibility of banning all cryptocurrencies in Kazakhstan, citing tax evasion and money laundering as justifications to ban all cryptocurrency operations including mining. However, later in 2018, Kairat Kaliev of the government-backed Astana International Financial Center, advocated for regulating as opposed to banning cryptocurrency. In a major step forward, the government declared the mining process tax-exempt in late 2019 arguing that it is a “purely technological process” as opposed to commercial activity, after which mining was eventually legalized in June 2020. However, this recent accommodation is under strain with the Kazakh government backtracking on tax exemption benefits for miners. In the face of the COVID-19 pandemic, new taxes on mining totalling 15% were announced in August 2020, while also mandating that miners formally register their activities with the government. Indeed, 2020 was a critical year, marking government commitment to some form of regulation.
With large scale projects underway, such as the USD 23 million Ekibastuz mining facility in Northern Kazakhstan, and the government anticipating USD 738 million of crypto investment over the next three years, digital money arguably has a bright future in Kazakhstan. However, uncertainty and even hostility to miners could in part stem from the fact that Bitcoin and other crypto currencies are inherently designed for people to send money without the interference of Central Banks, regulatory authorities, and other nodes of centralized financial-political power. Kazakhstan’s government has walked a fine balance between openness to foreign investment through bodies such as the Astana International Financial Center while emphasizing the strong role of the state in political and economic affairs. As the new cryptocurrency revolution puts this model, of an open economy combined with strong state control, to the test, Kazakh media sentiment can reflect the government’s mixed signals, providing a better picture of which governing elites prefer and distrust bitcoin.
As the new cryptocurrency revolution puts this model, of an open economy combined with strong state control, to the test, Kazakh media sentiment can reflect the government’s mixed signals, providing a better picture of which governing elites prefer and distrust bitcoin.
Media’s Interest in Cryptocurrency is up by over 800%
The most notable trend in cryptocurrency coverage in Kazakhstan is the massive spike in interest which took place in 2017. In 2016 the average number of articles that mentioned cryptocurrency as a share of all articles published by four leading media sources was 0.0095, while this figure was 0.117 for 2017, which represented an increase in the media’s interest in the subject by over 1000%. While this spike could be partially attributed to local developments such as the government’s 2017 announcement to launch their own cryptocurrency, it was also part of a global cryptocurrency craze as the price of bitcoin skyrocketed from roughly USD 1,000 in January to USD 20,000 by December.
The four media sources this article examines provide useful, relatively impartial economics and business news to help local investors. Individual trends from these sources reflect various characteristics of Kazakhstan’s development model and provide an idea of what future cryptocurrency legislation could look like. For example, Kapital has the most number of mentions of cryptocurrency and since 2018 noticeably outpaced other outlets in terms of cryptocurrency interest. Owned by a Kazakh media conglomerate, Musan Group, which itself is headed by Kazakh entrepreneur Sanzhar Mustafin, we can discern that at least some in Kazakhstan’s media elite are eager to embrace cryptocurrency in the long-term, which could influence government policy in a positive manner. In contrast, state-owned Kazinform consistently trails all other news sources in terms of cryptocurrency coverage and, worryingly, mentions fell precipitously into the single digits after 2018. While this does not necessarily indicate government hostility given the recent legalization of this financial product, this comparative ambivalence from Kazakhstan’s official news organization could translate into a less productive environment for crypto miners relative to other countries.
While this does not necessarily indicate government hostility given the recent legalization of this financial product, this comparative ambivalence from Kazakhstan’s official news organization could translate into a less productive environment for crypto miners relative to other countries.
What Can Media Sentiment Tell Us About the Government’s Future Plans for Cryptocurrency?
Despite a massive surge of interest in cryptocurrency since 2017, sentiment has consistently remained somewhat positive since 2014. State-owned Kazinform was the only news source to report very positive sentiment scores, reaching a record high of 1.07 in 2017. Kazakh news sources acknowledge the long-term staying power of cryptocurrencies in the global financial system. As a result, analysis and reporting on cryptocurrency has been somewhat favorable over the years. Simultaneously, Kazakh media is also sensitive toward the state’s perspective, with inconsistent policies and shifts in the regulatory approach adversely impacting positive sentiment.
For instance, articles on Forbes Kazakhstan predicted a USD 50,000 price minimum for bitcoin, (a price it reached in February 2021) while weighing its risks and opportunities. Others on Kapital compare and contrast the value and long term prospects of different crypto currencies. However, coinciding with mixed signals regarding cryptocurrency from the Kazakh government in the late 2010s, positive sentiment toward cryptocurrency declined markedly in Kapital from 2017 onwards, indicating reduced favourability. Moreover, even as the Kazakh government advocated increased cryptocurrency investment in June 2020, state-owned Kazinform’s media sentiment toward cryptocurrency declined by roughly 50%, perhaps the most notable development. This mixed media sentiment likely reflects government opinion and, thereby, complicates future large-scale projects like the Ekibastuz mining facility.
Implications for Kazakhstan and Central Asia At Large
Kazakhstan has taken many key steps to make cryptocurrency mining integral to its economic and technological development. The USD 25-million Ekibastuz mining facility is perhaps the most prominent manifestation of the crypto craze in Central Asia’s economic hub. Intuitively, it makes sense for Kazakhstan to make a foray into the crypto space. Large mines consuming cheap electricity translate into jobs and diversified economic growth given the resources needed to build and maintain the vast physical infrastructure behind digital currency. With economic diversification both essential and difficult, Kazakhstan’s government has a strong incentive to leverage its low electricity prices and bring in new waves of crypto miners. Kazakhstan, with its oil and gas-dependent economy, has made efforts at diversification in the past, through bodies such as the Astana International Financial Center, and cryptocurrency could represent a new, albeit unconventional, step in this process.
However, whether or not Kazakhstan will truly seize this opportunity remains to be seen. It has taken positive, proactive steps from launching its own digital currency to announcing a tax and regulation structure last year. At the same time, authorities have been skeptical, and media sentiment also paints a mixed picture given its sensitivity to the state’s inconsistent perspective. with government sources being less favorable than private media towards crypto. Either way, as foreign investment into the cryptocurrency sector as well as miners flow in, Kazakhstan stands poised at a potentially game-changing crossroads. With a governance philosophy that embraces economic dynamism, the cryptocurrency revolution could be an optimal next step for a still uncertain Kazakhstan.
