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Future of Finance: The rise of State-backed Crypto-mining

According to Iran Daily, the Iranian government amended its regulations on cryptocurrencies to allow them to be exclusively used for funding imports, at a time of increased pressure on the country’s FX reserves. The move is illustrative of a tendency among a number of Petrostates like Russia, Kazakhstan and Venezuela to support through energy subsidies. the development of a homegrown crypto-currency mining. It could allow these countries to hedge and ultimately to significantly lower their exposure to the US dollar and US financial institutions. The Iranian move also shows that crypto-mining is an emerging global industry in its own right which has moved from being considered as an outcast to being treated as a strategic asset.

After months of internal debate among various factions of the Iranian government, with the Ministry of Energy intensely cracking down on cryptocurrency miners, accused of taking advantage of the country’s cheap, subsidised power, the Iranian government made a turnaround and officially recognised cryptocurrency mining in August 2019. In January 2020, Iranian financial regulators licensed over 1,000 crypto mining operations in the country, acknowledging the exponential growth of local crypto mining farms, while clamping down on illegal operations. The government’s latest move comes after the country’s President, Hassan Rouhani, announced that Iran should develop a crypto currency strategy  to counter US sanctions. The new license regime bears resemblance with the restrictive regulations imposed on the country’s non-oil exporters that must surrender their foreign exchange earnings to Iran’s Central Ban at an inflated official exchange rate which is far above the effective exchange rate (As it faced a severe hard currency shortage in the wake of renewed US sanctionsIran returned to a multiple exchange rates currency regime)

According to Iran Daily, the amount of cryptocurrency authorised for each miner would be determined by the level of the subsidized energy used for mining and based on instructions published by the Ministry of Energy. The government directive mentions that “the gas fuel tariff required by the applicants using electricity produced outside the network of the Ministry of Energy is calculated at the average price of 70% Rials of exported gas at the exchange rate of Nima system and the liquid fuel tariff is calculated at the average price of Rials exported liquid fuel at the exchange rate of Nima system”.  A few months later, the government softened its stance and decided to grant an almost 50% discount on electricity supplied to licensed crypto mining farms through the national power grid. As part of additional incentives, some of the country’s power plants decided to auction their surplus electricity exclusively to crypto miners. 

According to the University of Cambridge’s Centre for Alternative Finance (CCAF), Iran held in April 2020 the sixth position globally in bitcoin mining, as measured by its share of the total bitcoin hash rate *. But the outlook is not that rosy. Crypto mining is an energy intensive activity and in countries where energy is predominantly derived from fossil fuels it translates into a heavy carbon footprint which the country has so far ignored. Things might change in the future whenever Tehran ratifies the Paris agreement (Iran is among a small group of seven countries that have joined the agreement but have not ratified it yet). Perhaps more importantly, the country’s miners lack access to the sophisticated equipment (e.g. ASICS devices) needed to significantly increase their hash rate in order to keep up with the competition in China, which overwhelmingly dominates this industry, as well as with competitors in the United States, Russia, Kazakhstan and Malaysia, in what looks as a global war of attrition in which access to high technology is much more important than access to low cost energy. 

Source:Cambridge Bitcoin Electricity Consumption Index

The hashing power is estimated from the number of blocks being mined in the last 24h and the current block difficulty. More specifically, given the average time T between mined blocks and a difficulty D, the estimated hash rate per second H is given by the formula H = 2 32 D / T

Among Petrostates, Venezuela is the latest to follow the example of Iran and to legalize the crypto mining industry, as reported by local industry news site CriptoNoticias last month. Venezuela’s love affair with cryptos started when President Maduro announced the launch of the Petro in February 2018. The Petro is a stablecoin backed by the Venezuelan crude oil, making it the first crypto-currency officially launched by a government. The country even boasts a National Superintendency of Crypto Assets and Related Activities (SUNACRIP). Very much like in the Iranian case, the Venezuelan government’s turned around and pledged support to the crypto mining industry in an attempt to  salvage an economy in limbo, as a result of US sanctions, enduring corruption, political gridlocks, the impact of COVID-19 pandemic and the collapse of oil prices. 

Alexandre Kateb

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