How cryptocurrency mining froze a Kazakh city

How cryptocurrency mining froze a Kazakh city
Any decent historical account of crypto mining should include an entry on the Ekibastuz GRES-2 coal-fired power plant. / Mountins13, cc-by-sa 4.0
By Nizom Khodjayev in Astana March 8, 2023

To digital currency enthusiasts the term “crypto winter” speaks of a prolonged cryptocurrency bear market, but to Kazakhs in the know it will for ever be associated with the plight of a city hit by power outages during minus-30 degree Celsius weather.

Many media outlets and observers have in the past two years noted the quick rise and sudden death of Kazakhstan's crypto mining boom. The demise came under the weight of heavy government regulation made urgent by the country’s energy needs. The Central Asian nation saw its electricity grid over-strained by an influx of crypto prospectors, many of whom hurriedly moved on to Kazakhstan from China when Beijing introduced unsparing crypto crackdowns amid its own difficulties in various provinces with power shortages.

However, the news of the catastrophic city-wide power outage that hit Ekibastuz, in northeastern Kazakhstan’s Pavlodar Region, in late November—an outage that for many was not resolved until at least mid-December, with parts of the city’s power and heating systems still undergoing repairs to this day—was at first often contextualised as simply within the Kazakh government’s track record of such failures. There was no mention of crypto-mining. 

Yet in hindsight, with the crypto surge over, it's clear that energy-thirsty crypto mining probably inflicted damage on Ekibastuz both before and after the boom. 

The outage

As mentioned, the energy stoppage in Ekibastuz continued into December and, even after power was restored, at least 17 apartment buildings remained without heating. News items on repair works—namely, to the combined heat and power plant in Ekibastuz and to city homes damaged by the calamity—are still appearing to this day. 

Cryptocurrency mining is renowned for being "energy thirsty" (Credit: Anita Evans Hunt, cc, MIT License).

After events in Ekibastuz, the authorities served warning that Astana could move to nationalise struggling energy firms. Politicians had been shaken by a full-blown crisis. President Kassym-Jomart Tokayev sacked the regional governor in charge of Ekibastuz, but likely only as a manoeuvre to redirect blame. And he instructed Prime Minister Alikhan Smailov to study the issue of nationalising problematic energy assets, according to a Facebook post from presidential spokesman Ruslan Zheldibay. 

Kazakh authorities often attempt to take populist initiatives, such as with calls for nationalisations, to demonstrate the government’s apparent awareness of the issues. It’s all part of an attempt to divert responsibility from officials’ own roles in difficulties that have come to pass. 

Kazakhstan’s ageing Soviet-era infrastructure often leads to disruptions in electricity provision. The government said in October that around 65% of regional power grids were in a poor state of wear and tear. The frustration with the grid stands in contrast to Kazakhstan’s status as a net energy exporter.

The rate of power outages became especially stark last year amid the influx of cryptocurrency mining firms to Kazakhstan that started in 2021. 

The Kazakhstan Electricity Grid Operating Company (KEGOC), a state-owned company, even introduced scheduled blackouts throughout late 2021 to prevent a system overload amid the spike in crypto-mining.

In 2021, Kazakhstan was considering the possibility of importing electricity from Russia in order to compensate for the strain on the grid caused by the crypto-mining, but with the ongoing war in Ukraine this became an increasingly unlikely possibility with the country attempting to reduce its economic reliance on its traditional ally.

The crypto boom

By the middle of 2021, the crypto mining industry in Kazakhstan had expanded from hosting a small group of prospectors drawn from around 2017 by cheap electricity to having the second-largest crypto sector in the world. In October 2021, Kazakhstan accounted for a remarkable 18.3% of the world's hash rate.

In the spring of 2022, Kazakhstan's bitcoin boom peaked after the authorities abruptly disconnected miners from the grid. 

By late 2021, there were local estimates showing bitcoin mining in Kazakhstan was consuming more than 1.5 gigawatts of power, where two-thirds of that came from illicit miners or “grey” miners.

Heating or a higher hash rate? No-one put it to the vote in Ekibastuz (Photograph of a crypto mining farm in Iceland. Credit: Marco Krohn, cc-by-sa 4.0).

No wonder the grid was overloaded. Isolated blackouts spread. The lack of power supplies was even seen as a major contributory factor to raw tensions that spawned widespread public demonstrations in January 2022, culminating in the "Bloody January" countrywide political unrest that saw at least 238 individuals killed, according to the official account. 

Following the unrest and more energy blackouts, the government moved to effectively shut down the cryptocurrency mining boom. Access to the electricity grid was restricted. Even mining operations run by relatives of individuals in power were cut off from the electricity network.

Miners gradually began to leave Kazakhstan, leaving their operations empty and abandoned. Ekibastuz went from having a high concentration of functioning crypto-mining enterprises, drawn by the vicinity's high level of electricity generation based on its traditional coal mining output, to being full of empty mining operations by the end of 2022. 

Crypto parasitising off heating energy? 

According to an article published by Kazakh news website Exclusive.KZ, residents of Ekibastuz noticed that issues with heating supplies for their apartment buildings significantly worsened after local power and heating authority Teplokommunenergo got a new chief. Azat Sarpekov took the helm in the winter of 2021-2022. Under Sarpekov, reported Exclusive.KZ, the main thermal power plant supplying heat to the city began directing energy capacities to “acquiring crypto-profits”.

The website also claimed that employees of the thermal power plant anonymously admitted to journalists that they were engaged in “imitating” work at the power plant. 

And in April of 2022, around the same time that the energy ministry alerted the public to difficulties at the power plant, Exclusive.KZ noted that investigative journalists had discovered a mining farm on property of Teplokommunenergo. Whether Sarpekov faced any action amid the discovery is unclear—but in September, he was appointed deputy governor of Ekibastuz, the news outlet said. 

In early December, with residents of the city still enduring unheated homes, a top Ekibastuz heating plant official, Sergei Vidlog, was found dead in his car.

Whether his death was down to suicide or perhaps even foul play remains unclear—Vidlog’s body was found in his car in a garage on December 4.  According to RFE/RL’s Kazakh Service, police attributed Vidlog’s death to a suicide that took place “after a falling-out with his wife”.

Given information shared by Exclusive.KZ, questions arise pertaining to Vidlog’s death. The mismanagement of the plant and energy infrastructure was already a major scandal, as Kazakh social media framed the situation as a greater failure involving the central government. But surely any possibility of the disaster being a near direct result of individuals in power mining crypto would have caused an even bigger uproar. 

The situation also raises questions about all the “abandoned” crypto-mining farms—initially set up by foreign firms—that appeared in and around Ekibastuz. Were some of them taken over by individuals working for local authorities? Did mining operations simply continue instead of being halted as intended by the government? 

Whatever the true sequence of events, the necessity of limiting crypto-mining in Kazakhstan was underlined.

As things stand, Kazakhstan has seen its global hash rate fall to 6.4% (down from the 18.4% peak) since the first quarter of 2022, reducing the carbon emissions of the nationwide power network by 10%, according to ClimateTech vice chair Daniel Batten. And due to Kazakhstan being 87.6%-fossil fuel dependent, less mining in the Central Asian nation results in a higher proportion of clean energy in the Bitcoin energy mix. 

The country is unlikely to again become a top player in the cryptocurrency mining world unless it manages to properly address the issue of transitioning much of its energy sector to renewable energy. Or perhaps crypto might ride again in Kazakhstan if the ex-Soviet state builds an expected nuclear power plant. 

Or not.

Following the collapse of the Bahamas-based FTX cryptocurrency exchange and hedge fund last year, a scandal that occurred around the same time as the Ekibastuz affair, Kazakhstan is in fact now considering a further tightening of crypto-mining regulations.