Crypto mining in emerging markets: Energy bottlenecks and mining bans instead of the hoped-for windfall

China bans crypto competition and focuses on digital yuan
Kazakhstan and Russia will become the most important locations for crypto miners after the USA
Russia wants to ban cryptos – Kazakhstan and Kosovo are struggling with energy shortages

In the past year, China has repeatedly criticized cryptocurrencies. First, the country announced that it wanted to take action against climate-damaging mining and thus against the mining farms – and at the same time wanted to ensure the stability of the renminbi. Just a few weeks later, a statement from the People’s Bank of China said all cryptocurrency-related transactions were illegal. Foreign online services that allow the Chinese to access digital currencies are also not allowed. China’s critical stance on cryptocurrencies is not new. In addition to the high energy consumption of mining, i.e. the digital production process of crypto assets, another reason for China’s dislike might be the digital yuan – its own state-controlled digital currency – the use of which China wants to boost.

Miners migrate to the USA, Russia & Co

After the environment in China, where most of the cryptocurrencies were mined, had changed for the miners, they were looking for a new crypto Eldorado. Many found their fortune in the USA, which benefited most from developments in China and became the most important location for crypto miners worldwide. But Russia has also set itself the goal of bringing the world’s mining resources to the country with the largest area, according to a project announcement by the Russian Association of the Crypto Industry and Blockchain (RACIB) last year. And so Russia rose to number three of the most important mining locations, right behind – as many probably didn’t know for a long time – China’s neighboring country Kazakhstan. As the Frankfurter Rundschau reported, according to the University of Cambridge, which compiles an index on Bitcoin energy consumption, almost 20 percent of the global Bitcoin computing power was provided by Kazakhstan in mid-2021. In Europe, Kosovo tried to lure the miners into their own country and hoped for a windfall.

Crypto mining brings problems

However, the euphoria in the emerging countries, which had previously been happy about their new role as the most important mining locations, did not last long.

In January, the Central Bank of Russia released a report calling for a ban on crypto trading, including crypto exchanges, and cryptocurrency mining. The reasons given by the Russian monetary authorities included, among other things, that cryptocurrencies were only used for speculative purposes, had all the characteristics of a Ponzi scheme, were often used for money laundering, drug trafficking or extortion and threatened financial stability, the well-being of citizens and the monetary sovereignty of the state. “Potential risks to financial stability associated with cryptocurrencies are much higher for emerging markets,” the Handelsblatt quoted from the central bank’s report. In addition, energy-intensive crypto-mining harms Russia’s green agenda and endangers the energy supply.

The mood also changed in the new crypto Eldorado Kazakhstan, where extremely low electricity prices attracted miners. As BTC-ECHO reported, the problems associated with crypto mining were already being felt before the riots earlier this year. At the end of 2021, the government had already carried out regional power cuts, among other things due to the failure of coal-fired power plants. The energy shortages also prompted the government to throttle the electricity supply to the miners. According to BTC-ECHO, experts observed a churn trend as a result of these developments. This accelerated even further due to the internet failures in the course of the bloody clashes at the beginning of 2022. Earlier this year, the global processing power of the Bitcoin network fell sharply, Reuters reported, when an internet shutdown in Kazakhstan during an insurgency hit the country’s fast-growing mining industry. According to the Frankfurter Rundschau, at the beginning of January the government in Kosovo imposed a ban on crypto sharpening in order to reduce power consumption. Shortly thereafter, the police even confiscated more than 250 crypto computers. The devices consumed as much electricity as 500 households, Finance Minister Hekuran Murati said. “We cannot allow some people to be illicitly enriched at the expense of taxpayers,” Murati said.

As the BBC reported in early January, the government in Kosovo also imposed a crypto mining ban at the end of December last year – albeit only temporarily for 60 days. The country’s largest coal-fired power plant was shut down at the end of 2021 due to a technical problem, forcing the government to import electricity at high prices. While mining was previously particularly interesting because of the cheap electricity prices in Kosovo, problems arose here because prices were rising and the Balkan state was faced with power outages and energy shortages. The government said security services would identify and target the sources of cryptocurrency mining, according to the BBC. According to The Guardian, since the mining ban in Kosovo, police and customs officials have carried out regular raids and have already confiscated hundreds of devices. As The Guardian reported, citing Facebook and Telegram groups, numerous miners from Kosovo also offered their devices for sale, sometimes at bargain prices, or relocated to neighboring countries.

Crypto Mining: Curse or Blessing for Emerging Markets?

As developments in Kazakhstan and Kosovo show, the high energy demands associated with crypto mining may be amplified with the amount of miners who have migrated out of China and found attractive locations in emerging markets problems – such as the energy bottlenecks mentioned – which possibly outweigh the advantages or the hoped-for windfall. Emerging countries should therefore first be clear about whether they can cover the high energy demand at all or whether mining could endanger the country’s electricity infrastructure. Alongside this, they should be aware of the potential risks to financial stability that come with cryptocurrencies and – much like Russia is doing right now – weigh up whether to take them.

Peter Marggraf, CEO of Crypto Supply GmbH, sees a solution to the energy bottlenecks in Georgia’s initiative to liberalize the electricity market. There, high economic growth, lower electricity prices and increased mining activities had caused energy requirements to rise significantly in 2021. Marggraf explained to BTC-ECHO: “On the one hand, energy producers now have to state exactly how much electricity they can produce with their systems. On the other hand, the large energy consumers also undertake to comply with the specified consumption. With the concept, one can both generate and Estimate and harmonize fractures better.” If Georgia manages to successfully implement this plan, mining could actually turn out to be a financial blessing there – and according to Marggraf this is a concept that could also be applied to other emerging countries.

Editorial office finanzen.net

Image sources: Wit Olszewski / Shutterstock.com, Parilov / Shutterstock.com