Kazakhstan’s Love of Bitcoin Undimmed by ‘Crypto Winter’

With 'fully legal' cryptocurrencies, the country hopes to compete in the big leagues of global finance

EKIBASTUZ, Kazakhstan—A bank of transformers hums and crackles by the entrance to BTC.kz's data center on the outskirts of Ekibastuz in northeastern Kazakhstan. It is hooked up to a network of overhead cables that stretches for thousands of kilometers across the empty steppe. Billows of steam from two immense power plants stand over the landscape, which is flat and sepia all the way to the horizon.

For a few years, facilities like these put Kazakhstan at the vanguard of the cryptocurrency business, elevating a country with a tiny technology industry to a leading player in what some believe to be the future of money.

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But now the data center is being gutted. Bare wiring hangs from the upper gantries like creepers. ASICs—specialized bitcoin mining computers—have been stacked up in the corridors. A pair of engineers are methodically unplugging machines and packing them in cardboard boxes to send back to their owners in China and the U.S. On some of the racks, metal fittings have already collected a patina of rust. The heat of the central processing units and the roar of the fans usually make bitcoin mines unbearably loud and hot. But it is silent, and the workers' breath condenses in the air.

Bitcoin mines are banks of hundreds or thousands of computers dedicated to guessing a 64-digit number in order to win some cryptocurrency. Turegeldy Turanov, a stocky man in his 20s, wrapped in a body warmer against the cold, has built three mines in Ekibastuz, raising the steel-framed barns and pouring the concrete. But he has cut more than half his staff, and this mine, which hosted 10,500 machines on behalf of clients from Asia and North America, will "simply shut down," he said. Across town, he is consolidating his operations into another facility, which is running at a tiny percentage of total capacity, using power imported from Russia, which is only available from midnight to 8 a.m. and on weekends.

Kazakhstan's bitcoin boom flared out in the spring of 2022, after the government abruptly cut miners off from the national grid. The industry had grown from a handful of prospectors in 2017 attracted by cheap electricity to the world's second-largest by mid-2021. A ban on crypto mining in China last June drove many miners to move their equipment to Kazakhstan. Local estimates put the total power usage of bitcoin mining at more than 1.5 gigawatts by late 2021, two-thirds of which was from illegal, "gray" miners.

Bitcoin mining is incredibly energy intensive. Globally, the industry consumes more electricity in a year than Argentina. In Kazakhstan, the surge pushed the energy grid to beyond capacity, leading to localized blackouts. The power shortages, and the corruption that enabled them, added to a long list of grievances, which exploded in massive protests in January. More than 200 people were killed in a violent crackdown on demonstrators.

"If crypto becomes enmeshed with your domestic financial system, the more exposed you're going to be to offshore collapses like FTX."

Stephen Diehl, cryptocurrency critic 

But within months of shutting down the bitcoin mines, the Kazakh government set out to convince another group of rootless crypto players to settle in the country. The government has announced a series of initiatives to attract crypto exchanges, investors and startups to Astana, believing that crypto could be the key to kick-starting its finance and tech sectors. Government officials say they see crypto as a way to leapfrog other financial centers, which have wavered over how to regulate the industry.

The plan is ambitious, involving training for thousands of developers, a regulatory free zone, and "full legal recognition" for crypto—hinting that the government might allow currencies not only to be traded, but spent in the country. But, with the crypto markets in turmoil following the implosion of the industry's third-largest exchange, FTX, the plan is also a risky one that could expose the country's banks and consumers to the industry's notorious volatility.

"A crypto asset can vaporize in a minute," Stephen Diehl, a prominent critic, told Nikkei Asia. "If crypto becomes enmeshed with your domestic financial system, the more exposed you're going to be to offshore collapses like FTX."

A home for crypto

The Astana International Financial Center (AIFC) is a manufactured hub for a manufactured city. Astana—known as Nur-Sultan from 2019 until earlier this year—is a metropolis of 1.5 million people that was dropped on top of a backwater town in the industrial northeast of Kazakhstan in the mid-1990s.

"In crypto ... everyone is at the same stage, we have some chances to compete."

Assylbek Davletov, adviser to AIFC

On the right bank of the Ishim River the old steppe town still shows through, Siberia-meets-suburbia districts with wide streets, sidewalks of frozen mud, breeze block houses behind high fences, and the squat, mule-shaped micro 4x4s and robust hatchbacks that are favored on cold frontiers. But the city's more modern left bank is jammed with the trappings of a scratch-built global city: a giant presidential palace framed by a pair of gold towers; sprawling parks arranged in geometric shapes; a glass pyramid designed by Norman Foster; a shopping mall (also a Foster) shaped like a nomad tent, with a miniature amusement park and fiberglass dinosaurs on the top floor.

The previous administration, under President Nursultan Nazarbayev, envisioned the city as an economic and cultural heart for Eurasia, a pivot between China's manufacturing centers and Europe's consumer markets. Like other nations looking to move beyond commodity exports, Kazakhstan's government established an international financial center, importing British judges to preside over a common law legal system. But the country's location, while advantageous for the logistics business, offers benefits for global finance. It has struggled to differentiate itself and to compete with more established centers. Today, the Expo area, a conference venue-turned business park centered around a 100 meter-high green glass marble, which hosts the AIFC and the Astana Hub tech incubator, still feels barely half-occupied.

In crypto, the government saw an opportunity to steal a march on other jurisdictions and finally get the AIFC moving. "We understood that we cannot compete with the big existing developed markets," Assylbek Davletov, an adviser to AIFC, told Nikkei. "But in crypto ... everyone is at the same stage, we have some chances to compete."

Kazakhstan is not the only country that has tried to set itself up as a home for crypto. As the sector grew, established and aspiring financial centers around the world opened up experimental regulatory spaces and welcomed investors and exchanges. Often, though, they ended up tightening the screws after concluding that they need to focus more on protecting consumers from wild price movements. Cryptocurrencies are "a betting market rather than an actual financial market," according to Mike Wardle, CEO of Z/Yen, a financial services think tank that studies financial centers.

Last year, Hong Kong, an early home to several crypto exchanges, restricted trading in cryptocurrencies to professional investors with more than $1 million in their portfolios. The Monetary Authority of Singapore, which also runs a "regulatory sandbox" that welcomed crypto businesses, advised retail investors to avoid cryptocurrencies in 2021, and heavily restricted crypto advertising. Singapore placed the world's largest crypto exchange, Binance, on an alert list in December 2021. In October 2022, the MAS proposed further restrictions, including an end to margin lending by crypto exchanges and a ban on buying cryptocurrency with credit cards.

Of the larger centers, only Dubai has held the line on welcoming crypto, and has given licenses to many of the industry's largest players. Even so, 95% of crypto trading still takes place offshore, and many of crypto's main promoters remain philosophically and practically opposed to state supervision.

Kazakhstan's appeal to the industry is based around giving it an interface with the mainstream financial system, by creating legal, transparent ways to exchange crypto for fiat currency, or to spend crypto directly on goods and services, according to government officials. The government has opened a "regulatory sandbox" loosely similar to Singapore's for companies within the AIFC, from which they can offer services.

While regulating decentralized finance "sounds like an oxymoron," according to Binur Zhalenov, CEO of the National Bank of Kazakhstan's Payment and Financial Technologies Development Center, which oversees the central bank's crypto initiatives, there is a broad understanding in the sector that for cryptocurrencies to become more than a niche, speculative product, they have to become a means of exchange in the real world. That gives regulators leverage. "The only thing that we can really influence is crypto-to-fiat gates," Zhalenov told Nikkei. "[At] the end of the day, the true adoption of crypto can only occur when regulators and this whole industry can find balance."

Bitcoin, which is by some distance the most liquid cryptocurrency, is only legal tender in two countries, El Salvador and the Central African Republic. El Salvador's bet on bitcoin, fronted by its president, Nayib Bukele, extended to the state investing more than 5% of its national reserves in the currency, which subsequently lost more than 60% of its value.

Kazakhstan is not proposing to follow El Salvador's example, although officials told Nikkei that retail adoption of cryptocurrencies, including ways to pay for goods and services directly from crypto wallets, is likely to underpin the industry. That carries risks, John Hawkins, a lecturer in finance at the University of Canberra and a former economist at the Hong Kong Monetary Authority, said. "If you make it easier, and almost encourage people to put their money into crypto, then you're making yourself more vulnerable when the price of crypto plummets."

The price of bitcoin has fallen from more than $68,000 to less than $17,000 in the 12 months to November.

For Kazakhstan, this is a calculated risk. Officials from the ministry of digital development, AIFC and the central bank all said that they see cryptocurrency trading as just a gateway to a far larger opportunity.

At the central bank, Zhalenov is overseeing the creation of a digital version of Kazakhstan's currency, the tenge, based on the blockchain, a technology that allows networks of computers to store and verify information that formerly had to be stored in a single ledger. Central bank digital currencies, or CBDCs, are being explored worldwide, including in China, where a digital version of the yuan has been in a trial phase since Oct. 2020.

At a basic level, the blockchain could allow central banks to issue digital currencies that are secure and substantially more traceable and transparent than cash. But they also open up new possibilities for how banks and governments can issue and control money. Zhalenov said a government could issue "programmable money" that could be transferred only to certain people, or spent in certain ways. For example, state subsidies or benefit payments could be issued so that they can only be used to pay for basic necessities. With programmable money, Zhalenov said, fiscal stimulus would cease to be a blunt instrument.

The blockchain has potential outside of the financial sector, too. Although conversations about blockchain technology tend to be dominated by cryptocurrency, there are many other potential applications, from smart contracts to supply chain management. "All the cryptocurrencies are blockchains, but not all blockchains are cryptocurrencies," Aidana Kaskyrbek, who heads the Blockchain Center at Astana Hub, told Nikkei. The technology will be the basis of the "metaverse"—the more immersive, almost physically manifested iteration of the internet envisioned by some in the tech industry—which will enable new ways to make supply chains transparent and improve cybersecurity, she said.

Kaskyrbek trained as a coder, and worked on fintech projects for commercial banks, but her first job in crypto was as a repair technician for bitcoin mining computers. Astana Hub is now working with universities and Binance, the world's largest cryptocurrency exchange, to develop courses on blockchain, with the aim of training 12,000 engineers over the next few years. While the distributed nature of Web3, as the blockchain-enabled internet is known, industry means that companies may not settle in Kazakhstan, the country can still export skills, and Astana Hub offers tax breaks for freelancers who set up their businesses there, she said.

Around 100 companies involved in bitcoin mining were deregistered from Astana Hub earlier in 2022. Many had used the incubator's tax breaks to import mining equipment.

A regulatory "sandbox"

By far the most significant player in Kazakhstan's nascent crypto ecosystem is Binance, the world's largest cryptocurrency exchange, which is registered in the Cayman Islands. The company's CEO, Changpeng Zhao, known as "CZ," visited Kazakhstan in May and met President Kassym-Jomart Tokayev. Binance has signed agreements to advise law enforcement on sanctions and money laundering investigations, and with the ministry of digital development on developing crypto asset regulation. As a major participant in the regulatory sandbox, it has a major voice in writing the rules of the road for the industry in Kazakhstan. It is helping to write blockchain training materials for Astana Hub and local universities, and has discussed establishing a venture capital fund to support local startups.

The company opened an office in Astana in August, and hired Zhaslan Madiyev, the former first vice minister of digital development, as its general manager.

In an interview in Astana, Madiyev said that Kazakhstan's high-level support for crypto was a major incentive for Binance. But, he said, the company is not planning "to centralize decision making" in Kazakhstan; rather it wants to help build "a hub that gives an impulse to the development of the industry that will accumulate knowledge and expertise in terms of regulation and working with the regulatory authorities."

Asked over the years where his company's headquarters is, Zhao has said either that it does not have one, or that it is based wherever he is. Legally, the company listed as being based in the Cayman Islands, a tax haven. The company was founded in China, but moved to Japan in 2017 after Beijing banned crypto trading. It soon opened an office in Malta in response to increasingly strict regulations in Japan, but was never officially regulated there, according to the Maltese authorities. Over the last few years, Zhao has popped in other financial centers, including Hong Kong, Singapore and Dubai, each time leading to speculation that the company was about to establish a permanent base.

"A lot of Russians are looking for other ways to move their fortunes. So that's why a lot of people tried to enter the crypto industry."

Talgat Dossanov, co-founder of Intebix

The company's reluctance to settle down is understandable. Even open-minded regulators have tended to put dramatic restrictions on what services exchanges can offer. When the U.S. authorities banned Binance from operating in the country in 2019, it opened a new subsidiary able to comply with American regulations. The difference between the two is stark. Binance U.S. offers users access to only around 10% of the 500 assets that are tradable on its main platform, has higher fees, and does not offer some higher-risk options, like margin trading, where customers essentially borrow funds to bet more on crypto.

Operating out of regulated centers means that exchanges need to run background checks on their clients to make sure they pass screening aimed at squelching money laundering and terrorist financing, and to make sure they are not on sanctions lists. "Being regulated means we have to reject about 90% of clients," Talgat Dossanov, co-founder of Intebix, a crypto exchange based in Kazakhstan, told Nikkei.

Dossanov gave a different interpretation for the current surge of interest in Kazakhstan's crypto infrastructure—what local businesspeople and politicians euphemistically call the "geopolitical situation."

Russia's full-scale invasion of Ukraine in February, and the international sanctions that followed, prompted an exodus of companies, capital and people from Russia. Russian-headquartered tech companies that had international operations and clients have had to emigrate or establish overseas subsidiaries so that they can continue to take payments. Some, such as InDriver, a ride-hailing company that operates across Eastern Europe and Asia, came to Kazakhstan. More than 100,000 Russians fled to Kazakhstan in September, in order to avoid conscription. Many have also tried to move their money offshore using crypto.

The European Union banned crypto companies from providing services to Russians in October, having previously imposed limits on cross-border transfers. That has left Russians looking for other places to store and liquidate their assets.

"A lot of Russians are looking for other ways to move their fortunes. So that's why a lot of people tried to enter the crypto industry," said Dossanov of Intebix, a crypto exchange based in Kazakhstan. "We have a lot of registrations from Russian nationals and Belarus nationals." Dossanov said Intebix does due diligence on its clients, does not accept anyone whom it regards as politically exposed.

China's periodic tightening of its rules on crypto trading also presents an opportunity for Kazakhstan, which could, theoretically, pick up business from Chinese traders who can no longer legally operate at home. The country's geography could once again play in its favor.

"It should be a good moment," Dossanov said. But he hesitated. Recent events have shown that the crypto world does not always behave rationally, and there is often another crisis waiting around the corner.

Free-for-all

Kazakhstan has stuck to its crypto plans throughout a roller coaster year in the market, which has seen the collapse of several major investors and a crisis of confidence in Tether, the largest of the "stablecoins"—cryptocurrencies that are pegged to hard currencies. "We believe actually that a crypto winter is a healthy measure to clean the industry from fraudsters et cetera," Zhalenov said in early November.

But the implosion of FTX and the humiliation of its founder, Sam Bankman-Fried, one of the industry's most prominent figures, is a crisis of greater magnitude.

"I think everyone will benefit from better regulation of the crypto industry, apart from Ponzi-like projects and other malicious actors."

Larisa Yarovaya, University of Southampton

The exchange collapsed after it emerged that customer funds had been used to cover trading losses at its owner's crypto hedge fund, Alameda Research. That sparked a run on the exchange, and the value of some currencies, or tokens, it had backed, plummeted. The ensuing bankruptcy proceedings and legal cases have revealed a number of questionable accounting and compliance practices. Bankman-Fried has been charged with fraud and is awaiting extradition to the U.S. from the Bahamas, where the company has its headquarters.

The crisis has shaken the government of the Bahamas. The collapse has also called into question the due diligence done by regulators in crypto-friendly jurisdictions, like Dubai, which awarded FTX a license to provide trading.

The FTX crisis has demonstrated that the crypto industry needs to accept regulation, experts said. But that does not necessarily mean that new centers like Kazakhstan will be able to differentiate themselves by offering a halfway house between strict control and free-for-all.

"I think everyone will benefit from better regulation of the crypto industry, apart from Ponzi-like projects and other malicious actors," Larisa Yarovaya, an associate professor of finance at the University of Southampton and an expert in crypto regulation, told Nikkei. "If the current financial centers move towards tighter regulation, but more peripheral ones keep crypto unregulated, it will simply attract the worst players to these 'newer' centers. By following such tactics, countries will not differentiate themselves, but they will set themselves up for failure."

After FTX collapsed officials in Kazakhstan stopped responding to messages from Nikkei Asia about the country's crypto initiatives. A person with knowledge of the government's thinking on crypto said that, while it is very unlikely that the whole project will be abandoned, the new year could see some introspection.

"I would imagine that given the extensive involvement of Binance in Kazakhstan's Web3 ecosystem, there might be more questions around the safety of such exchanges," he said.