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Svaneti on the Bitcoin world map

Tuesday, 25 January 2022 13:53 hits 837 times

One January evening, when the price of Bitcoin reached USD 42000, "Mtis Ambebi" received a call from Buzzfeed, looking for contact details of several residents of Upper Svaneti, including a priest. Called wanted to dig deeper into an unbelievable story. 

On New year's eve, after two weeks without electricity, Svans gathered in the church of St. George in Mestia took an oath to turn off crypto minters.

In three weeks since the situation has been the same. Energy consumption still overloads the network, creating a potential energy crisis.         

In Upper Svaneti, where electricity is free to compensate for the damage done by the Enguri dam and other power plants, energy consumption drastically increases, occasionally damaging the old network. Both the government and "Energo Pro Georgia" blame mining farms.

Locals agree miners agree on the existence of miners. However, they argue that a peasant owning a potato field and two cows cannot afford a device worth USD 3000.

"Do you know why we took an oath? "Energo Pro Georgia" blames us, telling us to deactivate miners. We, the people, know everything. We turned off miners. However, it did not lighten the load because they have the majority of miners that are still active" - Malkhaz Paliani says they wanted to show other turning miners off would not resolve the issue. 

"Energo Pro Georgia" is responsible for fixing the issue, but they complain that locals refuse to let them set individual meters, even physically threatening their representatives. However, neither local police nor the Ministry of Internal Affairs reacts to those claims.

In December 2020, police confiscated miners from hotel "Banguriani," consuming enough power for 4-5 villages. Soon 600 and 2000 miners were removed from villages Idliani and Khaishi.

We addressed the Ministry of Internal Affairs, asking for the investigation results, but according to the practice, they refused to respond unless we sent them an official letter. 

 

How to fix the issue?

 The Minister of Economy and the Chair of Georgian National Energy and Water Supply Regulatory Commission (GNERC) have different views. Natia Turnava does not think police should be involved, whereas Davit Narmania is confident that it cannot be resolved without police.

Dato Tchipashvili, coordinator of the financial institute monitoring program at the environmental organization "Green Alternative," thinks it is a matter of will, not abilities: "Every village, every house from Ushguli to Idliani should be checked to reveal who loots the electricity."

Another suggested way is to set electricity meters and limit household consumption.

Alex Sudadze, a certified expert of cryptocurrencies, recalls when he was invited to Upper Svaneti for advice.

"To resolve the issue first, we need to acknowledge it. I have seen that network, built in 1987. It may already fall apart, especially given the unexpected load.

One miner requires 1kWh or more. Furthermore, they have miners released in 2016 that should be replaced every three years".

The birth of Bitcoin

In January 2009, when Satoshi Nakamoto created blockchain technology and "wrote" the first Bitcoin, the world was busy with other events. Israeli forces were attacking the Gaza strip; the US was preparing for the inauguration of Barack Obama; Serena Williams was about to conquer the Australian Open, and Georgia was trying to escape the shock of the war with Russia. Mestia was not yet a major tourist destination for the country. Upper Svaneti was attempting to introduce its tourist potential to the world. None of the parties knew that blockchain would become the first global business chain, and Bitcoin would turn into the most expensive digital currency. 

You give the cashier a note or card to buy coffee or eggs – a simple picture of our everyday life. Digital currency is similar, with a significant distinction – it does not have a real-world equivalent. Neither government nor financial structures can control it, making transactions significantly faster and easier.

Bitcoin is the most famous digital currency. At the beginning of 2009, it was worth USD 0.00.

I'll pay 10,000 Bitcoins for a couple of pizzas. Like maybe two large ones, so I have some leftover for the next day", - wrote Laszlo Hanyecz, a programmer from Jacksonville on Bitcointalk in 2010. He paid an equal of USD 41 for two pizzas. In January 2022, it would have cost USD 420 000 000.

There are two ways to own a cryptocurrency – buying or producing. You can purchase it online. Creating, on the other hand, requires specific hardware and software. The process is called mining. Unlike traditional mining, computers solve complex math problems to gain the "reward." Gradually problems get more challenging, and "reward" decreases.

The higher the prices go, and more people start to mine, producing Bitcoin becomes more difficult. If initially, regular computers were enough, now you need a designated device with several graphic cards and integrated schemes to mine.

 

Georgia on the map

Several factors determine the best places for crypto business – property rights and regulations, cheap electricity, fast internet, and cold weather to cool down the gear.

Liberal regulations cheap electricity helped Georgia to find a place on the map. Then one of the biggest companies in the field entered the scene. 

The Bitfury Group is one of the biggest mining technology providers in the world. The Netherlands-based company operates in 20 countries. Bitfury made Georgia one of the leading countries in terms of crypto mining.

Latvian Valery Vavilov founded the company. Executive Vice Chairman George Kikvadze was a member of the advisory board in The Georgian Co-Investment Fund established by Bidzina Ivanishvili.

In 2015 Bitfury loaned USD 10 000 000 from The Georgian Co-Investment Fund and opened the first office in Gori. Later the loan was replaced with a new one from The Bank of Georgia. The company refused connections to the former prime minister and an actual country's ruler. The same year, Bitfury purchased 18ha of land from The Ministry of Economy. The area worth of GEL 1 850 000 was purchased for a symbolic price of GEL 1. Bitfury opened another office there. 

Georgia became one of the first countries to introduce blockchain technology in property registration. Blockchain is a decentralized database; entries cannot be altered, deleted, or otherwise manipulated. In addition, unlike traditional databases, blockchain is safe from destruction and cyberattacks, as the data is stored in tens of thousands of computers worldwide.

In 2017 the first Georgian electronic exchange coinmania.ge and cryptocurrency "Golden Fleece" were created.

No data shows how much electricity is consumed to mine cryptocurrencies in Georgia because miners are not registered. Therefore, we can only calculate the energy consumed by direct customers.

According to the Electricity Market Operator of Georgia (ESCO), direct customers consumed 3554.5m kWh. Among them are crypto businesses.

 

 

Regulations

Law of Georgia on Free Industrial Zones frees companies operating in the zone from property tax, value-added tax, and profit tax. Therefore cryptocurrency producers use these possibilities. It is also profitable in regions where the price of electricity is low. The crypto haven is Abkhazia, with its free electricity. They have been combating the issue for the last couple of years but to no avail.

A simple internet search will show many websites naming Georgia among the best countries for mining. Even though internet speed is not great, climate, law, and electricity prices make up for it.

According to the 2019 decision of the Ministry of Finance of Georgia:

  • Crypto exchange is exempt from value added tax;
  • Individual entrepreneurs' income from the crypto exchange is exempt from income tax.
  • Supply of processing speed (power) for obtaining crypto assets:
  • Supply of processing speed (power) for obtaining crypto assets is considered an electronically delivered service from a VAT point of view. The place of rendering service is viewed as the place of registration or management of the person receiving the service. Accordingly, if the receiver of the power is registered outside of Georgian territory or does not have the place of management or permanent establishment in Georgia, supply of the processing speed (power) shall not be subject to taxation by VAT.
  • In case the receiver of the power is registered in Georgia, or it has the place of management or permanent establishment in Georgia, the supply of the processing speed (energy) for obtaining the crypto asset shall be subject to VAT.

There is no standard of cryptocurrency regulations. For example, it is legalized and taxed as a business in Israel.

Many countries limit cryptocurrency on different levels. China, a former field leader, prohibited mining in January 2022. Recently the same decision was made in Kosovo. In addition, 42 more countries limit mining and using crypto. The Central Bank of Russia and the top EU regulator also speak of limitations.

Cryptocurrencies are often called virtual money that leaves physical traces. 

It is impossible to calculate the exact energy needed to mine Bitcoin. Different devices require different cooling systems. Besides, there are many unregistered miners. According to Cambridge University, a bitcoin consumes 137.65 tWh a year, the same as Argentina, or Google, Apple, Facebook, and Microsoft combined. According to digiconomist.net a single bitcoin transaction requires enough energy for an American household for 74 days.

According to the research, mining can accelerate global warming and make following the Paris Agreement impossible.

Energy consumption was named a reason for the prohibition by the Chinese government. They gradually implemented regulations. A share of the US drastically increased. Many miners were moved to Kazakhstan and Russia.

 "Chinese businessmen bribed politicians, and unregulated policy led the country to where they are now. Then they started with miners, who were forced to move from one province to another. After the complete ban, they overfilled Russia and Kazakhstan. Now they are on the brink of a collapse as well. Look at how cleverly Israel manages the situation. If a government can put everything in its place, it can become a great possibility for us" - Alex Sudadze is confident that China's absence creates new chances for us. It can also serve as a lesson to learn.

"China was late to acknowledge the problem. We should combat it before it turns into a brawl, and villages and people damage each other. 

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