Ukrainian cryptocurrency mining driven underground

Ukrainian cryptocurrency mining driven underground
In Ukraine bitcoin mining has been driven underground
By Fabrice Deprez in Kyiv June 26, 2018

Unlike real mining, creating bitcoins is not an underground activity, but the legislative fog surrounding the business and the aggressive tax and security forces have driven it into the dark in Ukraine in one of the few sectors where the war-wracked country has the potential to be a world leader.

When officers from Ukraine’s security service barged in the flat of Anatoly Kaplan –the founder of Forklog, a news website focused on cryptocurrency and blockchain and based in Odessa– in December 2017, he quickly realized he had an option that many others in the country’s industry did not have: going public.

“It’s easier for a media, if it’s not working we can just move somewhere else. Others don’t have that option,” Kaplan told bne Intellinews. The SBU accused Forklog of being used by a criminal group to change bitcoins into hryvnia’s, despite the news website having no such functionality. Kaplan is now fighting the charges from Israel.

Since the price of bitcoin exploded in 2017, Ukraine has been booming with cryptocurrency and blockchain projects. But the frantic development of the local industry is hampered by legislative confusion and cases of pressure from law enforcement agencies, which has pushed most of the industry in the shadows.

In hiding

Since 2017, Ukrainian media have reported an increased number of cases against people or companies involved in the cryptocurrency business. In August 2017, Ukraine’s security service seized 200 computers in a Ukrainian institute used to illegally mine bitcoins.

The raid on Forklog, in which several hard drives containing cryptocurrency were seized, was not the first of its kind but attracted more media attention because Kaplan denied the charges. In March, Ukraine’s Prosecutor Office and the SBU claimed to have dismantled 400 crypto farms that were being used to finance separatist entities in the eastern part of the country.

Such cases have contributed to make Ukrainian crypto miners “extremely paranoid” while scaring away potential investors, a source closely involved in the country’s cryptocurrency industry told bne Intellinews. “All the big miners are hiding now,” he added, declining to be named because he is not supposed to talk to the media.

Reasons for miners and cryptocurrency traders to remain quiet are numerous, according to Kaplan and others industry insiders. Uncertainty about cryptocurrency’s legal status in Ukraine –not illegal, but not clearly recognized either– is one, making even those willing to be in the open unsure of the proper way to navigate the country’s bureaucracy.

Pressure from law enforcement is also a real issue that stems from wide-spread corruption combined with the largely irregular nature of the industry. “A lot of miners don’t pay for electricity for example, or they will have imported their hardware illegally,” claims Kaplan. Under-the-table deals with local energy companies or straight up electricity theft can turn miners into easy target for corrupt law enforcement agencies. “Many prefer to just pay,” Kaplan says.

Ukraine’s potential as a cryptocurrency success story is real, thanks to Europe’s cheapest electricity as well as a qualified IT workforce. But with most of the country’s cryptocurrency actors keen to stay in the dark, there is no official or reliable data about the size of the sector.

Legislative blur

Ukraine’s authorities have been enthusiastic about the potential of blockchain but remain wary about cryptocurrency, keeping it in a legislative blur that also contributes to hamper its growth in Ukraine, experts argue.

“We know that cryptocurrency in Ukraine is not illegal,” Artem Afian, Managing Partner at Juscutum, a Ukrainian law firm specialized in the IT sector, told bne IntelliNews. “But the main problem is that, though we know what it is not, we still don’t know, legally speaking, what it is.”

For people involved in mining or trading cryptocurrency, this legislative confusion has very concrete consequences. “For example, many businesses aren’t sure how to pay taxes, or they know that trying to pay taxes will mean even more problems for them, so they simply don’t,” Afian says.

In March, the Minister of Economic Development said the government was planning to include the mining of cryptocurrency into the official state register of economic activities. “By adding the crypto mining sector to the classifier, we will bring it out of the shadow economy and collect more budget revenues” Minister of Economic Development Stepan Kubiv said in a press release. But some doubt this will be enough, while other attempts at legislating have remained unsuccessful so far.

Others remain optimistic. In a busy industrial area on the outskirts of Kiev, Oles Slobodeniuk showcases Hotmine, a start-up where a dozen people work on finding new ways to efficiently mine cryptocurrency. Further down the building, ventilators and racks of processors are lined up in a noisy room. “It’s just a showroom,” Oles says, though he admits the mining of bitcoin makes about half of his company’s revenue, with the other half coming from the sale of mining equipment. Slobodeniuk started working in the cryptocurrency business in 2013 and has since become one of Ukraine’s biggest bitcoin advocate. Neither the difficult legislative context nor the fall of the bitcoin’s prince in 2018 has been able to faze him: “Bitcoin is profitable,” he says, and “will be. And of course it’s legal. Mining bitcoin is just mathematics. You can’t ban mathematics.”