In light of the sudden changes in the crypto mining situation in Kazakhstan with the restrictions on Bitcoin computational processes by the Chinese government that escalated into the recent strict measures implemented in June 2021, Kazakhstan's bitcoin mining has dramatically surged into third place on the global market.
In order to further its advantage on the global mining market, Kazakhstan has started its actions towards the creation of relative advantages in mining conditions while also maintaining close control of the situation.
In this article, we would like to describe the recent developments in the legislation of the Republic of Kazakhstan on the matters of cryptocurrency and digital mining, as well as to shed the light on the opportunities of registering in the Astana International Financial Centre ("AIFC") for foreign crypto miners.
It is important to draw your attention that the legal regulation of cryptocurrency and digital mining is still in the process of development in the Republic of Kazakhstan, and this article as of the date of publication is solely based on the recent developments and current legislation of the Republic of Kazakhstan.
1. Why register in the AIFC?
1.1. The AIFC as an international hub for development of the digital asset market
The AIFC is a financial hub located in the Republic of a Kazakhstan. It is a special territory defined by the Constitutional Statute of the Republic of Kazakhstan. The main objective of the AIFC is to ensure a friendly ecosystem for foreign investments and secure independent regulation. This special territory operates on Common law framework secured by the independent Court headed by Chief Judge Lord Mance and other British judges.
Since its establishment in 2017, the AIFC became a centre of attraction for crypto mining companies, which was facilitated by an official legalization in 2020. For instance, such large players as Bitfury, Powerry, Minebest and others registered their legal entities in the AIFC jurisdiction to guarantee the Rule of Law.
Kazakhstan possesses a considerable amount of cheap electricity in Central, Northern and North-Western regions and has a sharply continental climate characterized by a cold and windy weather, which are one of the main fundamental conditions for data centers and mining farms operation.
Miners have an opportunity of benefitting from favorable weather conditions, cheap electricity and legal status by opening legal entity in the AIFC and operating data centers in Kazakhstan or contracting mining hotels for hosting.
1.3. Legal status
In July 2020, Kazakhstan officially recognized Bitcoin as a digital asset that could be accounted as any other commodity. The AIFC Fintech rules allow establishment of crypto exchanges and building other regulated activities based on digital assets.
1.4. Developments in the regulatory regimes for digital assets and mining
The significant improvements in Kazakhstani regulatory regimes for mining and digital assets were achieved. As such, the legislation of the Republic of Kazakhstan established a legal regime for mining and cryptocurrency. To date, there are 17 mining farms that currently officially operate in the territory of Kazakhstan.
At present, the Ministry of Digital Development, Innovation and Aerospace Industry of the Republic of Kazakhstan together with the AIFC and the Kazakhstan Association of Blockchain and Data Center Industry are in the stage of drafting the blockchain technologies and crypto industry regulations that would allow to achieve the smooth operation of crypto exchanges in the AIFC territory.
In addition, due to the increased demand from mining companies, in 2021, certain amendments to the Tax Code were presented with the introduction of a tax for digital mining in the amount of 1 tenge (0.00232 USD) per 1 kW/h from January 1, 2022. This legislative decision should not be interpreted as an obstacle for the new miners migration to Kazakhstan, but rather as another step towards legalization of crypto mining and data centers (mining farms), which is considered as a necessary measure taking into consideration the restrictive control over miners around the world.
As such, in order to obtain a special permit or license to carry out digital mining in the Republic of Kazakhstan, the following has been established:
- A company must obtain permission for the import of encryption (cryptographic) equipment from the National Security Committee of the Republic of Kazakhstan;
- A company must notify the Ministry of Digital Development, Innovation and Aerospace Industry of the Republic of Kazakhstan about the planned activities (before design) for the construction of data centers.
To point out, Kazakhstani legislation does not have any rules or restrictions governing operations with hash rates. Therefore, operations with hash rates are legal in Kazakhstan.
However, please kindly note that Kazakhstani legislation characterizes cryptocurrency as a form of property, not a financial instrument or means of payment. The Kazakhstani law prohibits the issue and circulation of cryptocurrency in Kazakhstan.
1.5. IT park Astana Hub for Bitcoin mining activities
The AIFC has established the IT park for Bitcoin mining activities providing 0% tax regime (CIT, VAT, salary taxes 0%)for data centers who registers and resides in the IT park Astana Hub under the premises of the AIFC (only royalty of 1% of the annual turnovers has to be paid).
1.6. Aspects of electricity price and the percentage of clean energy
While establishing a legal status to data mining is a crucial and vital element for attraction of new investors, the low electricity prices in Kazakhstan are one of the most significant factors in this regard.
Since cryptocurrency mining farms consume considerable amounts of electricity and bitcoin mining rewards decreased by 50 percent in May 2020, finding cheap sources of power is particularly essential. Besides being cheap, Kazakhstan's electricity prices are not subject to high volatility and mostly remain stable during the year in comparison to prices in China that are subject to regular seasonal changes.
Uninterrupted availability of electricity in Kazakhstan is also another reason that makes it one of the most appealing destinations for data mining. Consequently, one of the world's biggest mining centers managed by Enegix company is planned to be opened in Ekibastuz, Kazakhstan.
To date, there are 116 power facilities that produce renewable energy in the Republic of Kazakhstan, with an installed capacity of 1685 MW, which accounts for 3% of the total electricity produced. Since there is no need for electricity transportation and storage, most electricity consumption comes from the mining industry allowing to rapidly develop the industry. Construction regulations and experienced contractors can assist miners to set up a turnkey mining farms within 3-4 weeks.
Kazakhstan intends to increase the share of renewable energy in total electricity production to 6% in 2025, to 10% by 2030, and by 2050, alternative and renewable energy sources should account for at least half of all energy consumption according to Kazakhstan's obligations on Low-carbon and Climate-sustainable Development under the Paris Agreement. At present, around 20% of energy is a natural gas, which is cleaner than coal, since gas mainly is a by-product of oil extraction.
Furthermore, apart from 0% tax regime for crypto miners and a mild construction regime for mining farms construction, Kazakhstan has a very reliable power grid system operating on several reserve sources of energy.
1.7. Opportunities for Chinese crypto miners
The Chinese authorities prohibit crypto miners to make exodus from China, but Chinese miners often inquire our Team on registration and relocation issues in the AIFC. There are several listed mining firms that are already operating and could be checked through the economic activity codes of the registered legal entities: 62032 – information and communication equipment management activities, 63111 – hostings and related activities.
1.8. Government support
Although this new field has generally been welcomed, the novelty of the industry as well as the lack of a clear and determined regulatory environment led to uncertainty within some government agencies towards security and viability of the cryptocurrency market.
However, nonetheless, the recent developments in Kazakhstan's crypto industry proved otherwise, and as was indicated earlier, in 2020, the new amendments to the legislation of legitimized mining and digital technologies were established. Such key definitions as "cryptocurrency", "digital asset", and "digital mining" were also initiated into the Law of the Republic of Kazakhstan "On Informatization". In addition, this Law stipulates that only asset-backed cryptocurrencies can legally operate in Kazakhstan, except in cases that will be introduced later. Therefore, although unsecured cryptocurrencies are not officially legal, it is still not clear whether the government will impose a complete ban on unbacked digital currencies such as Bitcoin.
In general, the current developments signals the interest of Kazakhstan in this industry, which could be seen in the establishment of the new legal regulation that provides a clearer legal framework for the circulation and operation of digital assets and legitimized mining. As part of the vision of Kazakhstani government, this was initiated with the aim of attracting high-tech industry investments for promotion of economic growth and diversification.
1.9. Bank Accounts for Cryptocurrency in Kazakhstan
The Kazakhstan Association of Blockchain and Data Center Industry informed that crypto exchanges registered in the AIFC might shortly start operating with local banks which would allow their clients to openly and officially work with cryptocurrency. Such an opportunity is planned to be realized after the launch of the pilot project of the AIFC with second-tier banks.
According to the intended outline, in order to get on the crypto exchange, an investor is required to be the legal account's owner in one of the banks registered with the AIFC. From this account, the entrepreneur will have the opportunity to buy a cryptocurrency, transfer money, and carry out various operations with it on the exchange market.
The AIFC pilot project is estimated to last for one year for the purposes of Kazakhstani government to assess and evaluate the benefits and risks of digital assets. Although the circulation of digital currency in Kazakhstan is currently prohibited, it is projected that the ban on cryptocurrency in Kazakhstan might become less categorical or might even be cancelled after the successful completion of the pilot project.
1.10. Kazakhstan doubles mining investment 1
Kazakhstan is planning to double its digital currency mining investment, and is continuing to develop its central bank digital currency (CBDC). The feasibility and opportunity of introduction of the CBDC tenge by the Central Bank of Kazakhstan is currently being demonstrated, and the AIFC intends to assist in a trial and establishment of a legitimate ground for Kazakhstan to implement its digital currency.
The AIFC's covenant includes smart contract, crypto categorizations, and digital wallets. Kazakhstan earlier has already developed a way to store cryptocurrency and distribute it to normalize the procedures via a proficient platform. In June 2020, Kazakhstan adopted a development plan for blockchain and digital technology.
What do I need to do to register in the AIFC?
We believe that our specialists' experience and knowledge may be of great help to the organisations that are planning to register in the AIFC. The registration of the company in the AIFC takes about 3-5 business days upon the preparation and receipt of all necessary documents.
Our team has an extensive experience in provision of legal services on the registration of a company in the Astana International Financial Centre (AIFC), including all post-registration services.
Once the company is registered, we will be happy to act as a legal counsel in connection to its ongoing activities in the Republic of Kazakhstan. Contracting for hosting could also be done with the assistance of our Team through the AIFC, which operates as a "one stop shop" for foreign investors.
About GRATA International
GRATA International is the largest independent Kazakhstani law firm, and one of the leading law firms in Central Asia and the Caspian Region. GRATA has provided a wide range of legal services in these regions for almost 30 years.
250 professionals in 19 countries advise major international and local ?rms, funds, banks, insurance ?rms, construction companies, mining and crypto mining companies, airlines, light and heavy industry companies, telecoms, pharmaceuticals and others.
GRATA International is recognized as one of the leading law ?rms in all jurisdictions where it operates by major international legal ranking agencies: The Legal 500, Chambers Global, Chambers AsiaPaci?c, IFLR1000, Who's Who Legal, Asialaw Pro?les and award of China Business Law Journal.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.