Bitcoin’s latest rescues and scapegoat

TEHRAN – Iran’s capital and major cities plunged into darkness in recent weeks as rolling cuts left millions without electricity for hours. Traffic lights died. The offices went dark. Online classes ceased.

With toxic smoke in Tehran’s air blankets and the country bubbling under the pandemic and other mounting crises, social media has been rife with speculation. Soon, fingers pointed to an unlikely culprit: Bitcoin.

Within days, as frustration spread among residents, the government launched a broad analysis of Bitcoin processing centers, which requires large amounts of electricity to power their specialized computers and keep them cool – a burden on Iran’s power grid.

Authorities closed 1,600 centers nationwide, including, for the first time, those with legal authority to operate. As the latest in a series of contradictory government moves, the conflict has created confusion in the crypto industry – and doubts that Bitcoin has become a useful scapegoat for the nation’s deeper-rooted problems.

Since former US President Donald Trump unilaterally withdrew in 2018 from Tehran’s nuclear agreement with world powers and imposed sanctions on Iran, cryptocurrency has grown in popularity in the Islamic Republic.

For Iran, anonymous online transactions made in cryptocurrencies allow individuals and companies to avoid banking sanctions that have engulfed the economy. Bitcoin offers an alternative to cash printed by sovereign governments and central banks – and in the case of Iran and other sanctioned countries like Venezuela, a more stable place to park money than the local currency.

“Iranians understand the value of such an unlimited network far more than others because we cannot access any kind of global payment networks,” said Ziya Sadr, a Bitcoin expert based in Tehran. “Bitcoin shines here.”

Iran’s generously subsidized electricity has put the country on the crypto-mining map, given the operation’s massive electricity consumption. Electricity goes for around 4 cents per kilowatt-hour in Iran, compared to an average of 13 cents in the United States.

Iran is among the top 10 countries with the largest Bitcoin mining capacity in the world – 450 megawatts per day. The US network has a daily capacity of more than 1,100 megawatts.

On the outskirts of Tehran and across south and northwest Iran, windowless warehouses are hum with heavy industrial machines and rows of computers that squeeze highly complex algorithms to verify transactions. The transactions, called blocks, are then added to a public record, called the blockchain.

“Miners” adding a new blockchain to the blockchain are collecting fees in bitcoins, a key advantage in the midst of the country’s currency collapse. Iran’s rule, which had been trading at 32,000 to the dollar at the time of the 2015 nuclear agreement, has shrunk to around 240,000 to the dollar these days.

The Iranian government has sent mixed messages about Bitcoin. On one hand, it wants to capitalize on the growing popularity of digital currencies and sees value in legalizing transactions flying under Washington’s radar. It authorized 24 Bitcoin processing centers that consume an estimated 300 megawatts of energy per day, attracting tech-savvy Chinese entrepreneurs to tax-free zones in the south of the country and allowing the import of computers for mining.

Boxes of machines used in Bitcoin mining operations seized by police in Nazarabad, Iran.  (AP)
Boxes of machines used in Bitcoin mining operations seized by police in Nazarabad, Iran. (AP)

Amir Nazemi, deputy minister of telecommunications and information, announced last week that cryptocurrency can be “useful” as Iran struggles to cope with sanctions on its oil sector.

On the other hand, the government is concerned about limiting the amount of money sent abroad and controlling money laundering, drug sales and internet criminal groups.

Iranian cryptocurrency miners are known to use ransomware in sophisticated cyber attacks, such as in 2018 when two Iranian men were executed in connection with an extensive cyber attack on the city of Atlanta. On Thursday, British cybersecurity firm Sophos reported that it had found evidence tying crypto-miners in Iran’s southern city of Shiraz to malware that secretly seized control of thousands of Microsoft servers.

Iran is now going after Bitcoin unauthorized farms with frequent police raids. Those who gain authorization to process cryptocurrency are subject to electricity tariffs, which miners complain encourages investment.

“Activities in the field are not practical because of electricity tariffs,” said Mohammad Reza Sharafi, head of the country’s Cryptocurrency Farms Association. Despite the government issuing licenses to 1,000 investors, only a couple dozen server farms are active, he added, because tariffs mean Bitcoin farms pay five times as much for electricity than steel mills and industries others who use much more power.

Now, miners say, the government’s decision to close legally functioning large Bitcoin farms appears to be designed to challenge concerns about the country’s frequent blackouts.

As Tehran went dark last week, a video showing industrial computers wandering away on a huge Chinese cryptocurrency farm spread online like a wildfire, sparking anger over Bitcoin’s thirst for electricity. Within days, the government closed that factory despite its authorization to operate.

“The priority is with households, commerce, hospitals and sensitive places,” said Mostfa Rajabi Mashhadi, a spokesman for Iran’s electricity supply department, noting that illegal farms suck around 260 megawatts of electricity every day.

While Bitcoin mining is straining the power grid, experts say that’s not the real reason behind Iran’s electricity cuts and dangerous air pollution. The telecommunications ministry estimates that Bitcoin consumes less than 2% of Iran’s total energy production.

“Bitcoin was an easy victim here,” said Kaveh Madani, former deputy head of Iran’s Department of the Environment, adding that “decades of mismanagement” have left a growing gap between Iran’s energy supply and demand.

Bitcoin “the energy footprint of mining is insignificant but these problems are not created overnight,” he said. “They just need one spark to spiral out of control.”

A sudden drop in supply or a spike in demand, such as this winter when more people are staying home because of the coronavirus pandemic, can upset a grid balance that draws mainly from natural gas. Authorities said homes had increased their use of heating gas by 8% this year, and said Tehran’s electricity supply company led to “restrictions on feeding the country’s power plants and a lack of electricity.”

Sanctions targeting Iran’s aging oil and gas industry have exacerbated the challenges, leaving Iran unable to sell its products abroad, including its low-quality, high-sulfur fuel oil called mazut. If the dangerous oil is not sold or transported it must be burned quickly – and it is, at 20% of the country’s power plants, according to environmental officer Mohammad Mehdi Mirzai. The smoldering fuels blacken the air, especially when the weather cools and winds carry emissions from refineries and nearby industrial sites into Tehran.

During the power blackouts, dense layers of mountain peaks were covered with pollution and hovering over cities, with readings of dangerous minor particulate pollution spiking to over 200 micrograms per cubic meter, a level considered “unsafe”.

As the government publicized their clashes on Bitcoin farms, miners threw the blame over their energy staggering. Many warned that despite its potential to become a cryptocurrency utopia, Iran would continue to fall behind.

“These moves are damaging the country,” said Omid Alavi, a cryptocurrency consultant. “Many neighboring nations attract foreign investors.”

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