Bit by bit to Crypto Bit

Analysis18.06.2018Paata Sheshelidze - President of New Economic School – Georgia

Crypto ATMs

Looking for a fast and easy way to buy and sell Bitcoin and Litecoin in Tbilisi, Georgia?

Two automated teller machines (ATMs), manufactured by the Prague-based company General Bytes, are available in central areas of the Georgian capital; namely at restaurants near 26 May Square and Liberty Square.

According to the managers of the operating companies, support for Bitcoin cash will be added soon and other cryptos like Bitcoin Cash and Ethereum will also be integrated in the future. This comes as no surprise.


Learning about Cryptos

Cryptocurrencies have become increasingly popular in Georgia during recent years, because they are viewed as an investment opportunity as well as the future of money and free e-commerce which basically reflects global trends.

Special courses are currently offered in Tbilisi and other cities across the country for those who want to expand their knowledge of cryptocurrencies. Members of the Georgian crypto community often host experts from the US and EU countries to provide educational programs on this topic, while enthusiasts organize local and international conferences and seminars on cryptos. Several universities and brokers offer formal and informal classes to teach trading cryptos. In addition, many Facebook groups and other cloud-based forums are intensively sharing their experiences and knowledge. Meanwhile, Georgia’s media is open for discussion on cryptos. Academia, as in many other countries is divided between crypto optimists and skeptics. Bankers appear afraid. Programmers have already exited. Politicians are keenly observing. Libertarians are happy to see cryptos as it shows prospects of a more private means of exchange.

The New Economic School – Georgia (NESG) is a society for the dissemination of economic knowledge and ideas of liberty. Established in 2001, it was first to organize several lectures on cryptos, particularly about Bitcoin back in the summer of 2012 during the “Lessons of Liberty” camp, held in Bazaleti, which was organized in cooperation with Friedrich Naumann Foundation for Freedom and other partners. Since then, NESG has been the leading Georgian voice in defense of the use of cryptos.


Crypto Mining

However, those who prefer to look for profitable opportunities tend not to waste their time on sophisticated academic discussions and policy debates. 

Rather, they do business - mining.

Those people made Georgia an active part of the worldwide boom in cryptocurrencies.

According to a Global Cryptocurrency Benchmarking study carried out by the Cambridge Center for Alternative Finance[1], in 2017 Georgia was ranked second after China in terms of energy consumption for mining cryptocurrencies (60 megawatt).

There is no precise statistics about the number of miners and value that they have mined. In addition, different categories of people are engaged in a range of businesses from small to giant: from university students and monks from the Georgian Orthodox Church on one side to consumers of 40MW electricity international mining software and hardware producing company BitFury[2] on the other. It had recently been reported that the BitFury group, which controls about 15% of the world’s mining, is going to sell its new Tbilisi-based data center to Chong Sing Holding[3], a Chinese company registered in Hong Kong. The details of the deal have not been made public yet.


Easy-to-do Cryptos

To mine cryptocurrencies, computing power is necessary. Initially, a few years ago it was possible to mine using an ordinary personal computer. However, as the number of transactions and miners increased worldwide, the algorithms became more complicated, thus requiring more electrical power for calculations. As such, simple office computers are no longer practical. Rather, for special miners, a fast computing device is needed. Therefore, only “industrial-scale mining” is today profitable, which has resulted in computing farms and factory-like “data centers”.

There are few factors which make dealing with cryptos easy in Georgia for any investor – local or foreigner.

First: doing business in Georgia is relatively easy. For instance, benefits include fast registration, no capital requirements, simple taxation, a low tax burden, low corruption, no minimum wage, no labor permits including foreigners, and minimal licensing. As such, the country ranks high in the World Bank’s Ease of Doing Business and other economic freedom measuring indexes.

In the case of crypto mining things are even simpler and easier. Once an individual becomes a “miner”, they can start mining practically anywhere, needing only access to electricity; thus, there are no technical limits, no licensing, or any other sort of regulations. 

Only a profit-loss calculation drives the mining business. There are no extra burdens.

Second: Large mining companies usually prefer countries with cheap electrical power and/or developed technologies. Georgia is attractive due to its cheap electricity, especially in rural areas and in special free industrial zones like in Kutaisi and Tbilisi, Georgia’s two biggest cities. The electricity tariff in Tbilisi is 16.1 tetri (about 5.4 cents) per 1kW/h (for commercial consumers who receive power at high voltages). There are lower tariffs in the country’s rural areas, while in some mountainous regions consumers receive electricity free of charge.

In addition, the registered companies operating in the free industrial zone (FIZ) are exempt from value-added tax (VAT) as well as from corporate income and property taxes. They are exempt from paying VAT when purchasing electrical power, which makes it 18% cheaper for them than otherwise, since they are considered here as exporters. This means that FIZ-registered companies have an advantage over unregistered home miners.

Third: There are no import tariffs on computing engines and other related equipment.

Forth: Fiber-optic-cable-based internet connection is sufficient, stable and affordable.BitFury, one of the world’s leading mining companies started operating in Gori, Georgia through a USD 10 million loan provided by the Co-Investment Fund, founded by the Georgian ex-Prime Minister, Bidzina Ivanishvili. The second data center was built later in Tbilisi, at an empty plot located in the Gldani district. The Georgian government allotted 18 hectares of land to the company, charging it a symbolic price of one Georgian lari (about 0.31 euro cent), where FIZ was then located. However, cryptos are mined elsewhere also (Kutasi’s FIZ does the same and also can receive land or capital for a symbolic price for future investment). The presence of BitFury and the support received from the Co-Investment Fund actually boosted interest in other forms of crypto mining.

All the aforementioned helped to advance Georgia to become one of global centers of industrial-scale mining.


Crypto Regulation

There are no regulations regarding cryptocurrencies in Georgia. As such, the exchange thereof is considered purely voluntary. Buyers can pay using cryptos for anything if the seller is willing to accept them. Transactions using cryptocurrencies are not subject to taxation. However, it is neither a legal means of payment nor a valid form of payment to the state.

The use of cryptocurrencies has become so widespread in the country that the National Bank of Georgia (NBG) even issued a special statement in December last year, warning citizens against the risks associated with the use of cryptocurrencies – price fluctuations, fake cloud miners, crypto markets and so on.

NBG noted: “Its circulation isn’t governed by law and there is no agency that can assist citizens regarding problems related to a cryptocurrency or protect them against the risks thereof’”.

There have been discussions already on the legalization of cryptocurrency transactions; however, as of yet no formal steps have been taken. 

At the same time, the Georgian government is eager to use software which supports cryptos.


The Technology behind Cryptos

The process of crypto mining is supported by open-source blockchain technology - an alternative system of information flow between members of different networks. It has a decentralized database whereby all members have the same and equally valid copy of information and require collective verification for any modification. Blockchain can be used for exchanges of any kind – whether physical property titles, service contracts or financial instruments. The technology offers high traceability, security and speed, because there is no central point of possible failure, dictate and voluntarism.

Since April 2017, the Georgian government and the BitFury Group launched a project to register land titles via a private blockchain, which is a tamper-proof ledger, and to then make those transactions verifiable using Bitcoin’s public blockchain.

It is the first time that a national government has used blockchain to secure and validate official actions. In the long run, the project should allow citizens and companies to use a smartphone application to acquire and transfer property titles within a short period of time and at limited cost.

The current property-transfer process is manual; applicants can spend up to a day waiting in line at a public registry and pay between $50 and $200 to complete a transaction. Blockchain-based digital processing could significantly decrease the cost of this governmental service and even eliminate it in some areas.

An additional benefit of using blockchain to keep track of property ownership is that insiders, too, could be held in check by everyone; it would be that much harder for government employees to manipulate information without legal authorization. As such, it would limit the appetite of policy bosses and reduce dependence on government political interference.


The Future of Cryptos

Representatives of the World Bank noted that “Georgia is a well-developed country in terms of crypto currency – including Bitcoin manufacturing and Blockchain technologies, and moreover, the country is one of the leaders in this regard worldwide”[4]

However, the future of cryptos in Georgia is very much dependent not only on the commitment of the Georgian government to continue its form of ’blockchainization’, which essentially means the privatization of its functions and trust toward economic freedom. This, in turn refers to the maintenance of an attractive environment for mining, but also includes other countries’ acceptance of Georgian digital registration of ownership titles and other blockchain-based services.

At the same time, the mining of cryptocurrencies in Georgia is linked to the global demand for Bitcoin and other digital currencies: A drop in the value of cryptos will thus render mining expensive.

The current “easy-to-do-mining” policy could speed up the concentration of miners in Georgia; however, an increase in the demand for electricity, without adequate investment in the energy sector and rising supply, could eventually run the country into an electricity deficit. An early sign of such a development was the first increase in consumer prices of electricity since the beginning of 2018. 

Denationalization, the elimination of price control and the full commercialization of the energy sector is an essential precondition for the smooth and socially responsible development of crypto mining in Georgia. 


Lesson of Cryptos

Cryptos, first of all, are innovative technological solutions for decentralized verification of physical and financial transactions.

It is not only an economizing tool, but a liberating one as well.

The intellectual concept is linked to ideas of denationalization of money and noninterference in doing businesses. Thinkers like Mises, Hayek, Friedman, Rand predicted and predesigned such development. Meanwhile, it is seamlessly linked with the liberal vision of the necessity of a limited government and widening spaces for voluntary choice.

This could lead to more secure property rights as well as to a non-inflating and non-manipulated media of exchange, especially in parts of the world where the rule of law is weak and abuse of power high.

The Georgian government’s intention to use blockchain technology, in order to allow a certain degree of privatization or de-concentration in its own functions and to keep an “easy crypto mining” policy, gives hope that Georgia will preserve high economic freedoms, advance competition, reduce bureaucracy and corruption, and limit the opportunities for political manipulation.