Issue 5, 2019. October-November

   

GEORGIA BETTING BIG ON CRYPTO - BUT HOW IS IT PLAYING ITS CARDS?

Big Cryptocurrency Players have helped Georgia become an unlikely pioneer of RELated technologies.
as the country enters new terrain and cryptocurrency continues to gain a foothold in the global economy, there are A number of questions looming on the horizon about how digital currency will continue to develop in the country - or won't.


In the last five years, Georgia has become a leading miner of cryptocurrencies across the world, with BitFury's Tbilisi data center alone accounting for 15% of the world's mined Bitcoins.

Now Georgia may be poised to overtake China as the capital of cryptocurrency mining-though not exactly by design.

With plans to digitize the yuan, the Chinese government started to crack down on cryptocurrency trading exchanges and mining companies in January of 2018, prompting an exodus of miners out of the country.

Now, China's central state planner, the National Development and Reform Commission, has announced plans to ban cryptocurrency mining, which it included in a list of 450 wasteful and hazardous activities slated for elimination.

While China tightens its reins over the crypto industry, Georgia continues to observe developments. Since the arrival of some of the first cryptocurrency prospectors in 2014, Georgia has not introduced measures in relation to the taxation or regulation of cryptocurrency production or its use.

Georgia now finds itself pioneering new terrain, with which comes new challenges and obstacles.

Georgia's crypto-Klondike rush

Foreign prospectors have been fairly successful at mining in Georgia.

One of the world's largest cryptocurrency mining companies has set up shop in a warehouse just on the outskirts of Tbilisi. BitFury, which also has offices in world capitals such as Washington D.C., Dubai, Hong Kong, Seoul, Moscow and Tokyo, initially set up shop in Finland in 2014.

That same year consistent drops in cryptocurrency prices made mining in Finland less viable.

It was then that BitFury turned its gaze eastward-towards Georgia.

Drawn by the liberal business environment, a $10 million loan and an 18-hectare plot given to them for the symbolic price of a single lari, BitFury opened its new Tbilisi data center in July 2014.

Given a fresh start in Georgia, BitFury was able to equip the new data center with a two-circuit cooling system to make energy expenditure more efficient. When Bitcoin prices fell and energy prices increased, many independent Georgian mining operations tanked. BitFury, however, was able to ride out the storm.

Today there are currently 30 large mining companies located in free industrial zones in Kutaisi and Tbilisi, the creation of which coincided with the opening of BitFury. These zones lure foreign investors with the promise of exemption from taxes on electricity.

Lone miners, however, have had a more difficult time.

In early 2018, 22-year-old student Nika Beselia connected his computer to Siacoin mining systems in his bedroom. After watching "everyone else get rich" he researched cryptocurrency mining on reddit and convinced his father to invest in three Siacoin A3 miners - for $4,500 a piece.

Two weeks later, Siacoin dropped from seven cents to three, causing the price of the A3 itself to drop by more than half.

Still, Nika persisted, mining approximately 250,000 coins even as the Siacoin dropped practically to zero.

Now his A3s collect dust in the closet.

When the Siacoin didn't recover, Nika "stopped seeing a future in mining." He switched off the A3s and froze his coins.

The Digital Economy Association of Georgia (DEAG) estimates that about 35,000 people like Nika have engaged at one point or another in cryptocurrency mining in Georgia.

"Anyone can do this, all you need is a strong enough computer and the necessary software," says DEAG
President Giorgi Shervashidze. "Electricity costs run about 300 lari a month."

For many prospectors, however, the search for digital gold has been in vain. When the cost of cryptocurrency plummeted in 2018, mining became no longer viable for independent miners: the cost of electricity outweighed the value of cryptocurrency itself.

"In 2018, cryptocurrency prices plummeted - some losing as much as 70 per cent of their value. That put many private miners out of business and made mining less attractive to newcomers," says Shervashidze.

Impact

The effect of Georgia's top mining companies on the country's total energy consumption has been enormous.

TBC Capital reports that seven percent of Georgia's annual electricity consumption goes to cryptocurrency mining. BitFury's figures show that their plant alone uses around 28 million kWh of electricity per month (with seasonal fluctuations), equal to almost three percent of the country's monthly energy consumption.

When this data was published back in early 2018, the company noted:

"Within 3 years we have invested $140 million in Georgia and have employed 180 people, 100% of employees are local citizens, and the average salary of employees of the mining center is 2,500 GEL.

"We did not enjoy any privileges in obtaining electricity - the Tbilisi Free Economic Zone...operates according to the same rules and laws as other economic zones in Georgia."

So far in Georgia, like BitFury, "the majority if not all crypto operations are related to the extraction of cryptocurrency, not cryptocurrency operations", Chairman of the Association of Banks of Georgia Alexander Dzeneladze notes.

But there are two sides to every coin - and Georgia stands to gain much from the flip side.

In addition to its mining operations, BitFury, the self-proclaimed "leading full service blockchain company," is exploring a new frontier: the development of blockchain software.

In 2017, BitFury helped the government to become the world's first to use a blockchain-based database to secure public records. Like cryptocurrency, these records are now encrypted on a distributed blockchain, which secures them from hacking and tampering.

Now the government is teaming up with Input Output HK Ltd to complete the transition of the education system to the Cardano blockchain in order to make the verification of diplomas more efficient and reliable.

"Since the Soviet Union, Georgia has had a problem with fake diplomas," says Alex Sudadze, founder of Bitcoin embassy in Georgia. "It's a big problem for our country, but blockchain will make it clear and transparent who has an original diploma."

Concern and enthusiasm

The new frontier of cryptocurrency has state and private actors mobilized - in somewhat opposite directions.

First off, crypto-economies have yet to be proven fool-proof, and a number of governments are starting to take action.

One of the primary concerns for governments is the anarchic and volatile nature of independent cryptocurrencies, which governments can neither trace nor use monetary policy to control.

Indeed, cryptocurrencies fluctuate in a much more volatile manner than Fiat currencies, making them ill suited for credit-based monetary economies of production.

Data collected from CoinDesk shows the Bitcoin real exchange rate experiences 10 to 30 percent single-day fluctuations.

The National Bank of Georgia echoes concerns about the volatility of cryptocurrencies.

"Digital currencies are subject to intense fluctuations in value, which means that consumers are vulnerable to losses. Though the currency is regulated in some places, the industry of digital currency is still in the early stage of development," the NBG told Investor.ge.

The only legislative response to date to the growth of cryptocurrency and related operations in the coutnry appeared on June 28, 2019, when the Ministry of Finance declared mining pool companies would be subjected to a value added tax of 18 percent.

However, this only concerns companies who pool the efforts of individual miners. It does not tax neither individual miners nor major players to taxation, nor did the act concern the usage of cryptocurrencies in Georgia.

Director Giorgi Akhvlediani of Coinnetic Exchange, a Georgian platform for trading in digital currencies, says that most Georgian banks are hesitant to work with cryptocurrencies, and as a result cryptocurrencies are slightly more expensive in Georgia.

Though cryptocurrencies have become more accessible to Georgians through his exchange, he claims thattha banks' lack of willingness to work with cryptocurrencies has been an issue.

"One of the main problems today is that the banks do not favor cryptocurrencies and do not cooperate with companies associated with them," he says.

Another small crypto-capital, Malta, is working to address this issue through legislation to provide a framework for the sustainable and controlable development of the crypto industry. Last year the parliament approved three bills regulating the industry based upon the principles of market integrity and consumer and industry protection.

While the anonymity of Bitcoin poses other concerns, Georgian cryptocurrency pioneers are confident that such problems are not specific to cryptocurrencies, and with regulation can be avoided.

According to Giorgi Shervashidze, founder of AISI COIN, cryptocurrencies are no more anonymous than
cash.

"It is often said that many transactions in cryptocurrency are used to finance illegal activities or money laundering, but I suppose this is even less than 1 or 2% of all operations," says Shervashidze.

Akhvlediani agrees with others who have argued that the issue of identification can be solved.

He predicts customers will be required to "present identification documents as one would at a bank" in order to buy and spend cryptocurrency.

This has already happened in the EU, where parliament voted in favor of a bill requiring crypto exchanges and wallet providers to verify customer identity.

Andrew Thornhill, founder of Tbilisi cryptocurrency startup Spotcoin, which issues its own cryptocurrency and operates an online exchange, agrees crime can be prevented in Georgia with a little bit of regulation:

"Everyone wants rules," said Thornhill for an interview with NPR. "I'm a digital revolutionary, not a digital anarchist."

Though the exact future of cryptocurrency remains uncertain and unpredictable, digital money, whether in the form of cryptocurrency or something else, is in all likelihood here to stay. The race towards digitalization has already begun, and Georgia has been given quite the head start.

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