Kazakhstan regulates cryptocurrencies

The multi-billion fraud involving the founder of cryptocurrency exchange FTX, Sam Bankman-Fried, continues to make waves. The affair had a certain impact in Kazakhstan, notably due to the relations that FTX had with local businessmen. The Kazakh government’s mission is to increase regulation of the sector.

The world of cryptocurrency is prone to crazy booms and dramatic crashes. This phenomenon occurred in November 2022, when FTX, the world’s second largest cryptocurrency exchange platform, collapsed in a few days, taking several billion dollars of investments with it. In early November, a Manhattan court found its founder Sam Bankman-Fried guilty of embezzling client money from his exchange, FTX.

At the root of this sudden collapse are revelations about questionable business practices on the part of the company’s management, particularly the director and co-founder, once celebrated as a child prodigy. Under his orders, the hedge fund Alameda Research, which he also co-founded and directed, closely linked to FTX, had invested in Kazakhstan more than a billion dollars (more than 940.5 million euros) from the investments of FTX customers. This had compromised the financial situation of both companies.

The scandal also made waves in Kazakhstan. In recent years, a real cryptocurrency boom has taken place around companies like Alameda Research. In response to these events, the Kazakh government is working to regulate cryptocurrency trading.

Bitcoin fever in Kazakhstan

The orders of magnitude with which Sam Bankman-Fried operated FTX required industrial volumes of electricity and server farms the size of a production shop. These are called mines. Kazakhstan offered the best installation conditions at the end of the 2010s. Cheap electricity and advantageous regulations favored the implementation of numerous projects there.

In 2021, Kazakhstan was the world’s second largest producer of bitcoin. At the height of bitcoin fever, computing centers pumped up to 7% of national electricity production. It was at this time that Sam Bankman-Fried made a significant investment. He arranged for Alameda Research to invest in Genesis digital assets (GDA), a company domiciled in Cyprus mainly active in Kazakhstan.

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GDA was founded in 2017: the Kazakh investor Rachid Mahat, who had an excellent network through his activity on the board of directors of the mobile telephone company Kcell between 2019 and 2021, then Abdoulmalik Mirakhmedov and Andreï Kim, have teamed up with German cryptocurrency specialists Marco Krohn and Marco Streng. This is what the Kazakh media Kursiv describes as “Kazakh track” in the FTX affair.

Massive investments in Genesis digital assets

Sam Bankman-Fried joined the GDA board in 2021. Alameda’s money has flowed into three computing centers operated by GDA in which computers powered by cheap electricity generate bitcoins. These must then be traded on FTX, the Bankman-Fried exchange. At least, that was the idea. At the start of 2022, Alameda had already invested 1.1 billion dollars (1 billion euros) in GDA. The start-up thus became, by far, the hedge fund’s largest investment.

When the cryptocurrency world began to falter in early 2022, the value of mining companies dropped significantly. A gamble that a few months earlier seemed lucrative enough to risk more than a billion dollars, now seemed much less attractive. When in November 2022 the specialized journal CoinDesk revealed that the share capital of Alameda Research consisted of FTT, the cryptocurrency specific to FTX, the situation of Sam Bankman-Fried’s company became even more precarious.

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The out-of-control growth of the sector in Kazakhstan was coming to an end anyway. After the protests of January 2022, during which the electricity supply was criticized, there was no longer any question of making cheap energy available for mining bitcoin. In particular, there was the introduction of a tax on mining projects in July 2022.

The government aims for phased regulation of the sector, combined with integration with state actors such as the Astana international finance center (AIFC), a project of the Kazakh government. According to the AIFC communication, the digital industry still has a bright future ahead of it in Kazakhstan, but it is up to the State to establish a regulatory framework. The laissez-faire policy that attracted Sam Bankman-Fried to Kazakhstan therefore seems to be over for good.

Kazakhstan crypto gold rush ends

Regulatory efforts since 2022 have, among other things, been fueled by the sudden disappearance of FTX. After the CoinDesk revelations, the arrangement linking FTX and Alameda Research found itself in the hot seat and confidence in the liquidity of Sam Bankman-Fried’s companies suddenly evaporated. Consequently, the industry leader and main competitor of FTX, Binance, decided to no longer recognize the FFTs deposited there and these lost all value, leading to the complete collapse of the two former giants.

GDA has moved its computing centers to the United States where the company wants to continue its activity. The company’s web page touts new projects in North America and Sweden. Former board member Sam Bankman-Fried has completely disappeared from the firm’s public face.

President Kassym-Jomart Tokaïev, who met at the end of 2021 with Sam Bankman-Fried as well as other entrepreneurs in the sector, unveiled on February 6, 2023 the most important package of measures that cryptocurrency mining in Kazakhstan has seen. This came into force last January, as Kursiv reported.

New regulation and new investors

Mines will now have to hold operating licenses and will have the right to consume electricity from the Kazakh network only if it has a production surplus. In addition, from 2024, at least 50% of coins produced in Kazakhstan will have to pass through platforms registered at the Astana international finance center. This ratio will increase to 75% in 2025. The AIFC must not only offer an attractive exchange framework, but also allow stronger integration of this still young sector with the Kazakh regulatory authorities, as mentioned by Astana Times.

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It is no longer time for euphoria, but cryptocurrencies will still be talked about in Kazakhstan. Binance, the main competitor of the defunct FTX platform, continues to work closely with the Kazakh government and has high hopes for the country. The company already has a network similar to that of GDA in the past. In October 2022, Jaslan Madiev, until then Deputy Minister of Digital Development, accepted a management position at Binance Kazakhstan.

Currently, the firm founded in China but still without official headquarters, is working on crypto-products coupled with existing national currencies. The Digital Tenge, the crypto counterpart of the national currency, was tested during a pilot project until December 2022 and is now in the starting blocks for launch on the market. The year 2025 should see the large-scale launch of this digital currency.

Daniel Styczynski
Editor for Novastan Deutsch

Translated from German by Arnaud Behr

Edited by Ella Boulage

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