Kazakhstan’s crypto mining crisis caused a global panic, as the price of Bitcoin witnessed a sudden drop as a result of the country’s internet shutdown. But will Kazakhstan’s crypto mining crisis relocate Bitcoin miners?

What happened in Kazakhstan and why does it affect Bitcoin’s price?

The chaos in the Central Asian country was caused by violent protests that were sparked by rising fuel costs. Hundreds of people were injured and many died. Nearly 8,000 people were detained during the protests, which left 164 dead. The protests were called terrorist aggression by President Kassym Jomart Tokayev.

On Wednesday, January 5, the general disorder led to a complete telecommunication cut, including the internet, and left the Kazak Bitcoin miners offline, leading to an even bigger crisis in the crypto-financial space. The national internet blackout has now become the main focus of the entire world. 

Russia sent paratroopers to Kazakhstan on Thursday in order to put down the countrywide rebellion that broke out after violence spread throughout the former Soviet Union. State television reported that 13 security personnel had been killed by rioters in Almaty’s main city. Police claimed they had killed many of them.

Bitcoin mining in Kazakhstan

What is Bitcoin mining?

Mining is an energy-intensive computing process that creates new coins and keeps track of all transactions on the blockchain. 

By computing these complicated mathematical puzzles, the computer (aka miners) validates and accomplishes the proof-of-work (PoW) mechanism, which stands at the core of the Bitcoin network. Although Bitcoin isn’t the only cryptocurrency that uses the PoW consensus mechanism, it is the first and most valuable digital asset that a computer can create. 

Why mine Bitcoin in Kazakhstan?

You might not be aware, that in 2021, Kazahstan ranked for about 18% of the total hash power of the Bitcoin network. The cheap electricity from the Asian country has become the target for all the miners that needed to relocate, after China’s ban on crypto mining in July 2021. 

According to the Cambridge Centre for Alternative Finance, Kazakhstan is the second-largest bitcoin mining country in the world in 2021, following the China ban on cryptocurrency mining.

Kazakhstan has coal mines, which provide an abundant and cheap supply of energy. This is a significant incentive for miners to compete in low-margin industries where the only variable cost is energy. 

It’s important to understand that as blockchain networks get more developed, the puzzles that the miners need to solve get more complex and require more specialized (and expensive) equipment. For this process to make sense and be advantageous for the miner, it needs it factor in all the costs of the operation, and the one thing that you’ll need regardless of what equipment you use is electricity. 

And electricity doesn’t cost the same everywhere on the globe. 

Another aspect for which Kazakhstan represents a great location for building a massive crypto mining centre is the country’s less strict attitude towards building. This is good news for miners who have to build physical structures in a short time.

Is Kazakhstan back online?

According to Alan Dordjiev of the Kazakh National Association of Blockchain and Data Center Industry on Monday, January 10, the situation has “almost been resolved” and crypto mining data centres are back.

Internet connectivity has been restored in large part throughout the country, Dordjiev stated. Interruptions continue to take place in Almaty (the country’s capital and largest city), where protests have raged for the past week. However, crypto mining regions are “totally okay,” he stated.

NetBlocks, an Internet watchdog, stated last week that multiple providers losing connectivity simultaneously “indicates that there is a centralized kill switch.”

It is difficult to predict how long the internet will be able to continue to function. The internet in the country has been restored multiple times over the last few days. However, these periods are briefly and unpredictable, affecting different providers and regions at different times. Toker stated that the intermittent network could not support cryptocurrency mining and has implications beyond human rights.

But Kazakhstan’s miners endured many power shortages in the past few months since miners have been vacating China. 

Since September, electricity restrictions have been in effect for Kazakhstan-based miners. This is because the country’s grid has struggled to cope with increasing demand. This prediction was correct as the grid has reduced power for mining operations due to shortages, thereby limiting their ability to generate bitcoins.

In the end, it’s expected that the majority of miners will move to more favourable and sustainable jurisdictions, where they’ll have fewer disruptions.

Valereum, a blockchain company, send a proposal to purchase the Gibraltar Stock Exchange (GSX). The local regulators are reviewing the proposal.

This would mean that the British overseas territory could host the first integrated bourse in the world, where both traditional bonds and major cryptocurrencies like Bitcoin, Ethereum, Stellar and more can be traded.

This is a bold move in a small territory of 33,000 inhabitants, where the financial industry accounts for approximately a third of Gibraltar’s £2.4bn economies.

The enclave could be a global hub for cryptocurrency if everything goes according to plan. However, if the control mechanisms set by the small group of regulators fail, it could cause reputational damage and eventually diplomatic sanctions that could threaten its economic health.

Large states have banned crypto investing, but not Gibraltar

While many countries, including China and the UK, have banned or openly warned against investing in crypto assets, Gibraltar has defied the trend. It has committed to formalizing the regulation of cryptocurrencies to help ensure the territory’s future status as a financial centre.

This comes as Gibraltar is trying to get rid of its reputation as a tax haven. The government has sued a Spanish newspaper to try to restore its global standing.

Albert Isola is Gibraltar’s minister of digital, financial services, and public utilities. He says that although Gibraltar was once a tax haven, it has since reviewed its tax policies. He says that crypto regulation can help spot malicious actors, while supporting investors.

Isola states,

“If you wanted to do naughty things in crypto, you wouldn’t be in Gibraltar, because the firms are licensed and regulated, and they aren’t anywhere else in the world.”

Gibraltar has licensed blockchain and crypto companies before

Gibraltar’s regulator approved 14 blockchain and cryptocurrency firms for its licensing program. This attracted Richard Poulden, the ex-Sirius Minerals chairman, who chose Gibraltar to host Valereum’s crypto-exchange project. He claims that Valereum is trying to harness a crypto sector worth approximately $3.5 trillion (£2.6 trillion), which is roughly equal to the total value of all listed companies on the London Stock Exchange.

Poulden is the chairman and CEO of Valereum. It is based in Gibraltar. The company focuses on technology that can link mainstream currencies like the dollar and the pound with crypto assets.

However, reorganizing an exchange with only three employees will prove difficult. It will also require a change to Gibraltar’s regulations regarding how crypto will be traded on the Gibraltar Stock Exchange (GSX). Poulden claims that his company is relying more on technology, rather than people, to eliminate bad actors.

He said that running anti-money laundering checks for cryptocurrencies is not much different than running them on any currency. Using blockchain, it will be much easier to back cryptocurrency funds than it is to locate fiat funds in banks.

It is expected that other countries will follow Gibraltar

Neil Williams, London-based deputy chief of complex crime at Reeds Solicitors, says: “If it’s a success, you’d certainly think that other jurisdictions would look to follow because it’s an ever-increasing valuable commodity.”

Experts warn that Gibraltar could be subject to sanctions from countries like the US if it gives legal approval to crypto companies that – even accidentally – allow money laundering, black-market criminals, or kleptocrats who want the anonymity of crypto assets.

This comes amid concerns at major global financial regulators like the Bank of England over the rapid growth of crypto-assets and potential consequences for investor protection, market integrity and money laundering, as well as the financing of terrorist groups.

Charlie Steele, a partner in Forensic Risk Alliance and former US justice secretary official, a forensic accounting company and consultancy, says that money laundering, sanctions evasion and terrorist financing could be enabled or facilitated by it: “Regulators worldwide, almost all of them really, are approaching it from a position of deep scepticism … so it’s a little outside that strain of thinking for a country to welcome them in to buy a stock exchange.”

Can crypto regulation backfire for Gibraltar?

One month prior to Valereum’s October bid for the GSX, Gary Gensler, the head US Securities and Exchange Commission declared that crypto as an asset was more similar to the wild west. This raises further concerns about criminal funds entering the mainstream financial system.

Insufficient anti-money laundering controls have led to jurisdictions like Malta being grey-listed by the FATF, the world’s money-laundering watchdog. This could have serious consequences for Malta’s economy and is a warning to other countries and territories that might be tempted not to follow regulations.

Singapore had to reverse its approval of Bitget, a standalone crypto-exchange. It suspended Bitget’s standalone crypto exchange earlier in the month due to its promotion of a digital currency that was involved in a high-profile branding dispute. The exchange had used an unauthorised image from K-pop group BTS to maximize its profits.

Steele warns that if it looks like everyone is running to Gibraltar for real regulators, it will not work out well for them.

If sanctions or anti-money laundering rules are broken or evaded they can do a lot of things, including lead international through the FATF to make it hard on Gibraltar. He adds that you’ll be able to see that the FATF has all sorts of measures that will force its members to limit business with that country.

Gibraltar insists it has been paying close attention while welcoming crypto firms. It has consulted on the sector’s regulation for four years, before introducing it in 2018. This helped it secure its reputation as “Blockchain Rock”. They filter through and license firms to eliminate bad actors, according to Isola.

“I don’t see how Gibraltar can have an increased risk. You can run the exact same business in any other European country without supervision, licensing, or regulation. How can regulation make us more vulnerable?,” Isola claims.

He points out that only 14 applications have been approved by the country’s regulator in the past three years. This is a figure that he says speaks to the strictness of the licensing system. 

The Gibraltar Financial Services Commission did not comment on the Valereum proposal.

The rapidly-expanding cryptocurrency exchange Crypto.com, from Singapore, has reached a deal to acquire two trading platforms from IG Group. This would allow it to gain more authority on the highly regulated derivatives markets from the US. 

The $216 million deal with IG Group

On Wednesday, December 1, 2021, Crypto.com agreed to a $216 million deal to acquire IG Group’s stakes in a US futures market and a binary trading platform owned by FTSE 250. Crypto.com bought both North American Derivatives Exchange (Nadex) and Small Exchange from London-based financial services firm IG Group in an attempt to expand its presence in the U.S.

This deal will allow Crypto.com to offer futures and derivatives to US customers.

This is an area that has been difficult for crypto exchanges due to strict regulations regarding the sale of these high-risk investment products to investors. 

Chief executive of Crypto.com, Kris Marszalek, stated that the acquisition will give customers access to a new set of financial tools in addition to their existing offerings. 

North American Derivatives Exchange, (Nadex) is included in the deal. This allows traders to place binary bets on what will happen within a given time frame, such as whether a currency, commodity, or index will rise or fall. This can take as little as five minutes. Options providers often allow customers to increase their chances of winning with borrowed money. This greatly increases the potential winnings and decreases the risk for consumers. 

Customers are informed about their maximum gains and losses prior to the trade being executed by Nadex. IG Group will also be selling its 39% stake in Small Exchange. This futures exchange is geared towards retail traders and was launched last year by Wall Street giants such as Interactive Brokers Group, Phillip Capital, Jump Capital, Citadel and Peak6 Investments.

IG CEO June Felix said: “We’re really excited by this deal, as it delivers a significant return on the previous investments made in Nadex and Small Exchange and enables additional investment across all our businesses.”

Regulatory Issues

According to the groups, the deal is expected to close by the end of the first half of 2022, as it is subject to regulatory approval. 

The exchange stated that both companies would be brought under Crypto.com, but their chief executives will remain. June Felix, chief executive at IG Group, stated that the sales would enable the company to “further hone our focus” on integrating, expanding its options, and future business via Tastytrade (the US brokerage it purchased for $1bn) in January. 

Some crypto groups have found derivatives lucrative but difficult to use because the risky instruments are closely controlled by regulators in many other countries. BitMex, a crypto operator, was ordered by a US federal court to pay a $100m civil fine for providing leveraged crypto trading without authorisations. 

In 2020, the Commodity Futures Trading Commission brought the case against BitMex alleging that BitMex was operating a cryptocurrency derivatives trading site illegally. BitMex stated at the time that they take their “responsibilities extremely seriously” and will continue to engage with regulators all over the globe. 

Crypto.com is a privately owned company with 3,000 employees worldwide. It has seen a 20-fold increase in revenue over the past five years and has also gotten substantial cash. This was due to the boom in trading digital assets.

The crypto offerings are expanding

In terms of both asset prices and product offerings, the crypto market has seen a boom in the last year. 

As rivals fight for market share, deals in crypto have increased. Coinbase Global Inc. announced a deal for Israeli cryptographic-security company Unbound Security and the team from crypto wallet firm BRD. 

Gemini Trust Co. launched a fundraising campaign valued at $7.1 billion.

In October, Cboe Global Markets Inc. re-entered crypto by buying Eris Digital Holdings LLC.