Kazakhstan Tightens Regulation for Miners, Looks to Develop Broader Crypto Industry

Kazakh legislators approved a bill last week that will introduce corporate tax for bitcoin miners as well as restrictions for the industry’s energy consumption nationwide.

The law, dubbed “On Regulating Digital Assets in Kazakhstan,” was one of three pieces of crypto-related legislation approved by the country’s lower house, known as the Mazhilis, last Thursday, according to the parliament website. The bill now heads to the Senate for discussion and another round of voting. The legislation came to the table only in recent months, but the central Asian nation had been struggling with power shortages since at least fall 2021.

If the Senate also approves the bill, the president has to sign it for it to become law. The Senate might vote on amendments, in which case the bill will be sent back to the Mazhilis.

Kazakhstan saw a massive influx of crypto miners from neighboring China after Beijing banned the industry in May 2021. At that time China was the world’s largest bitcoin mining hub.

It didn’t take long before Kazakhstan’s electrical grid, much of it a legacy of Soviet times, started crumbling under the new load. On top of the miners’ demand, technical failures in interconnection lines and power stations greatly exacerbated the situation, such that Kazakhstan, which until 2021 was a net power exporter, now sometimes imports energy from Russia.

Read more: Kazakhstan’s Crypto Miners Face New Regulations After Contributing to Power Shortages

Kazakhstan’s grid operator, KEGOC, cut off electricity to crypto mines in January for several months, while a campaign to crack down on illegal mining has been ongoing.

CoinDesk learned about details of the legislation from people who are involved in the discussions and in local media.

Power allocation

According to current discussions, the bill will allocate about 500 megawatts (MW) to miners. On top of that, miners that have registered with the government will only be able to buy power from the grid when there is an excess.

The guaranteed volume is small compared to Kazakhstan’s total mining industry. Officials estimate around 1,000 MW-1,200 MW of electricity is consumed by crypto miners in Kazakhstan.

The 500 MW cap is essentially a guarantee to miners that not all operations will be shut down, said Azamat Akhmetzhanov, press secretary of the Kazakhstan Association of Blockchain Technologies, a local industry group. But it simply isn’t enough – even as many miners have already left the country – said Didar Bekbau, founder of local mining firm Xive.io.

This solution might solve Kazakhstan’s energy problems and power outages, but it remains to be seen exactly how the surplus will be calculated, Akhmetzhanov said.

“Maybe the energy industry must change, because now the government regulates tariffs and doesn't create incentives for building new power generation organically,” Bekbau said.

Those that are connected to renewable energy providers may not be subject to the requirement of only buying when there is a surplus, said Bekbau.

Under the new law, miners will also only be able to buy grid power from KOREM, a state-owned enterprise that administers the day-ahead energy markets, according to local media site reports. In day-ahead markets, energy is traded for delivery within the next 24 hours of any given time. Miners will be able to buy in free market conditions on KOREM at wholesale prices, without any price restrictions or controls, local media reported.

Worsening economics

Crucially, the bill enshrines that miners have to pay corporate tax. Preferential taxation benefits that some could enjoy as high-tech firms in a special economic zone have already been withdrawn, said Akhmetzhanov and Bekbau.

President Kassym-Jomart Tokayev signed into law a tax hike for miners' electricity usage in August, which is set to take effect at the start of 2023. The bill doesn’t change this hike, but it ensures that miners pay corporate taxes and can’t use the special economic zone to avoid an increased rate.

It looks like miners will have to pay double tax, making them less competitive globally, Bekbau said, who thinks that the electricity tax should be eliminated. The blockchain association's press secretary however believes that the bill just ensures that the corporate tax will be "calculated in more detail."

Miners might also be forced to sell three-quarters of their mined crypto locally through government-approved exchanges, starting in 2024. For Bekbau, that is not great news for the miners.

The “liquidity problem shouldn't be solved at the expense of miners,” who should be able to choose where to sell their coins, he said.

But Akhmetzhanov thinks that it might be good news for Kazakhstan. Once the exchanges receive liquidity, “With good management and a far-sighted strategy, they will be able to enter the top 30 trading platforms in the world,” the press secretary said.

“The government wants more control and taxes,” said Bekbau, adding that the legislation could bring miners’ costs to 26 Kazakh tenge per kilowatt hour (kWh), roughly $0.055/kWh. That price is relatively competitive internationally, but in a crypto winter that has already caused the mining industry to be reeling in pain, it will likely send many miners underwater.

The law also stipulates two new licensing categories; one is for miners that own and operate infrastructure, and one for those that simply host their mining machines in facilities run by other companies, local media reported.

All in all, the new legislation might discourage investors. Already, “trust is shaken, many investors left Kazakhstan and canceled expansion plans,” Bekbau said.

Read more: Kazakhstan’s Crypto Miners Face New Regulations After Contributing to Power Shortages