Why is Bitcoin being blamed for power cuts across Iran?

Faced with public protest over chronic power cuts and escalating corruption, Iranian officials have targeted energy-intensive cryptocurrency mining farms. But are they just a scapegoat?

If the region’s worst Covid-19 sanctions and rape charges were not enough, Iran has been hit by power cuts and worsening air pollution – with the country’s upstart Bitcoin mining industry being cited by the government.

Burdening the energy-intensive business of “farms,” officials have sought to halt mining operations until further notice, in an effort to alleviate electricity shortages in urban and rural areas.

On Wednesday, the state-owned electricity company Tavanir announced that the Iranian-Chinese Bitcoin mining farm will be temporarily closed in Rafsanjan in the southeastern province of Kerman. The decision came after the licensed operation allegedly consumed 175-megawatt hours (MWh) of electricity.

Mohammad Taghi Karrubi, a reformist activist, tweets earlier this week, while Bitcoin farming in Iran could generate billions in revenues in excess of oil exports, it comes at the cost of corruption and power cuts borne on the Iranian people.

Inadequate electricity supply and deprivation of natural gas at power plants have led to the burning of dirty products such as Mazut for home heating power generation, which has put large cities in dense smog.

Alireza Kashi, a spokesman for Mashhad Electricity Distribution Company, stressed that those who control the power grid have had no alternative to power cuts because if intermittent cuts did not occur, it would lead to power cuts wide.

Some Iranians in the crypto space dismiss the government’s claims, claiming that cryptocurrency mines are getting their scapegoat for a much deeper problem.

Omid Alavi, CEO of Vira Miner, a mining solutions company, believes that miners shoulder the responsibility for power cuts unfairly, as mining does not account for a significant percentage of the country’s overall electricity capacity.

“Only 300 MWh of electricity is used for mining out of 60,000 MWh of electricity generated in Iran. That’s a very small amount, ”Alavi told TRT World, citing the Ministry of Energy’s own numbers. Illegal mining is estimated to be between 100 and 300 MWh.

A small Graphics Processing Unit (GPU) farm used for mining Ethereum.

A small Graphics Processing Unit (GPU) farm used for mining Ethereum. (Vira Miner)

An electrical distribution board that comes with mining boxes to distribute electricity between mining devices.

An electrical distribution board that comes with mining boxes to distribute electricity between mining devices. (Vira Miner)

Alavi’s highlights this winter season led to a surge of domestic gas use for home heating, and the temporary closure of not only mining farms but industrial zones across various cities. He remembers a friend who works in the cement business whose factory also had to close.

Ultimately, Alavi feels the government is using the current crisis to prey on public ignorance of cryptocurrency mining to shift blame away from the need to upgrade Iran’s outdated grid network.

“Iran’s electricity grid has many problems. The equipment is very old, we need to create new power plants, ”said Alavi. Iran’s subsidized electricity sector has long been plagued by mismanagement.

Mining, he said, “forces the government to have to think about investing more to change the network voltage, transformers and cables.”

Moreover, Alavi thinks that it is better to concentrate uses in a few areas than spread them and have to cater to new users, and that is what crypto mining presence has done.

The government collusion has involved illegal operations as well.

According to local media outlet Tasnim News Agency on Sunday, 45,000 Bitcoin machines had been confiscated as part of the authorities’ extended confrontation. The engines had reportedly been using 95 megawatts per hour of electricity at a reduced rate, said Tavanir chief Mohammad Hassan Motavalizadeh.

Over the past 18 months alone, Iranian authorities claim to have closed 1,620 illegal cryptocurrency mining farms that together consumed 250 megawatts of electricity.

Mining operations found to be using subsidized electricity receive a large fine.

For Alavi, high tariffs and regulations are stifling the crypto industry.

He says the rate at which the energy ministry sells gas to miners is much higher than the price sold to power plants. If you are a miner, you have to pay $ 0.04-0.09, while industrial tariffs are priced under $ 0.01. Another 20 per cent tariff is slapped on future imported mining equipment.

There are currently 24 legal farms operating in the country, Alavi said. Mining licenses are issued by the Ministry of Industries and Mines.

When he started mining five years ago, Alavi started with Ethereum and Bitcoin before unofficially launching his company Vira Miner in 2017 to facilitate the establishment and servicing of industrial mining farms and to provide consulting services to foreign investors.

It was a very lucrative time before the government began regulating space in 2019.

Now, because of the high tariffs, “nobody wants to invest in large-scale mining in Iran,” Alavi states. Mining farms are scattered and mostly underground mines, he added.

Furthermore, he suspects that the allegation that the government has targeted thousands of illegal farms that have emerged nationwide is overstated.

“People may only buy one or two machines and the government sees it as a farm.”

The long arm of regulation

Cryptocurrencies, such as Bitcoin, are issued based on a consensus mechanism whereby people called “miners” perform “mining,” which involves using high-power computers to authenticate “blocks” and verifying transactions entered into a decentralized ledger of ‘ r the name of the blockchain. For each new block created, miners receive a block reward and the ability to issue new tickets or coins.

Mining farms are usually large spaces that house several computers dedicated to mining one or more cryptocurrencies. These farms use a large amount of energy, and air conditioning is needed to prevent overheating. As a result, locations with cold winters and cheap electricity are attractive mining locations.

This photo by the New York Times definitely shows a Bitcoin mining site at a farm outside Tehran.

This photo by the New York Times definitely shows a Bitcoin mining site at a farm outside Tehran. (Press TV via NYT)

For Iranian crypto miners, the country’s subsidized electricity costs – as low as $ 0.006 per KWh – were a huge incentive. The promise as a hedge against inflation in Iranian rule also made it an ideal destination for mining digital currencies such as Bitcoin.

In a short space of time the mining business became popular in the Islamic Republic, as Chinese and Russian companies worked in partnership with local entrepreneurs to set up Bitcoin farms.

Due to a lack of regulatory oversight, the industry was conducted illegally, as miners used smuggled equipment from other countries such as China, Alavi said.

Then in 2019, in the face of a smoke regime of economic sanctions imposed by the United States, Iran lowered its restrictions on cryptocurrencies in a bid to curb economic isolation and combat hyperinflation, becoming one of the first countries to recognize and license mining as a legitimate industry. .

Sensing an opportunity to exchange for the Bitcoin bonanza and bring it under their sights, miners would have to sign up for government-provided farms at higher than public electricity rates.

Since regulations came into force, over 1,000 mining licenses have been approved. But the government has also become wary of big spikes in the use of electricity by mining farms.

In 2019, authorities closed two mining farms following a power surge and seized 1,000 Bitcoin machines from two abandoned factories in the central Yazd Province. Iran’s deputy energy minister suggested illegal crypto miners set up their rigs in schools and mosques to take advantage of cheap electricity and make the power grid “unstable”.

This undated photo provided by the Police News Agency, shows boxes of machines used in Bitcoin seized mining operations by police in Nazarabad, Iran.

This undated photo provided by the Police News Agency, shows boxes of machines used in Bitcoin seized mining operations by police in Nazarabad, Iran. (News.police.ir via AP)

Alavi says that an environment of increased government scrutiny and compliance protocols has weighed down miners and made it much more difficult to operate.

In the meantime, exchanges remain unregulated. Arzdigital founder, one of Iran’s leading cryptocurrency media outlets, Hamidreza Shaabani told TRT World that it is still not possible to get a license if you are a crypto exchange, even though it is more than a year since mining licenses were issued.

Shaabani believes that while the mining environment is becoming competitive, it is too early to say whether the recent flow of legal farm closures will lead to further centralization.

‘The bitter taste of inflation’

On the consumer side, the allure of cryptocurrencies has remained strong for many in a country driven by political and economic difficulties. A shrinking economy and the devaluation of the rule have prompted citizens to seek sanctuary in cryptocurrencies.

According to Shaabani, “a very small percentage of Iranian interest in this area is the use of digital currency to avoid sanctions. Interest remains high because many have suffered from the “bitter taste of inflation” he said.

Shaabani sees two main groups in the Iranian market who have been attracted to the blockchain and digital currency space: those who want to protect their money’s worth and those who simply have a interest in the technology or need to transfer money worldwide world.

“It is interesting to note that more than 80 per cent, or more than 60 million Iranians, have access to high-speed internet, so their movement towards emerging industries is high,” he adds.

Digital tokens like Bitcoin provide an alternative for a population cut off from global trade and international banking channels. Since 2018, the US Treasury has charged several Iranians for using cryptocurrencies to violate the sanctions regime.

In a bid to give further control over the industry, Iranian lawmakers recently approved legislation to redirect cryptocurrencies to central bank financing mechanisms for import transactions.

Shaabani worries that the Central Bank of Iran is trying to monitor emerging crypto businesses in regulated space – much like global regulators – to the detriment of the industry in the long run.

Amid fears of a capital outflow due to the pandemic, the government is seeking to tighten rules on cryptocurrency smuggling and foreign exchange laws to protect against further depreciation.

Although the government has announced plans to develop its own central bank digital digital currency (CBDC) – the “crypto rial” – there is no significant progress yet.

Source: TRT World