Hans Timmer, the World Bank’s Chief Economist for the Europe and Central Asia regions, spoke to Forbes Georgia in a little more detail about cryptocurrencies and blockchain technologies.
With 5.0% growth in 2017, and a projected growth of 4.5% in 2018, Georgia should take full advantage of new digital technologies to innovate and improve its services, says a new World Bank report entitled Cryptocurrencies and Blockchain: Europe and Central Asia Economic Update.
Blockchain technologies are widespread in Georgia, thanks to a highly supportive environment for technological innovation and the mining of cryptocurrencies. As the world’s third largest miner of cryptocurrencies, Georgia is home to one of the largest mining companies in the world, and surveys indicate that up to 5% of households in the country are engaged in cryptocurrency mining or investment.
“While many countries in Europe and Central Asia are experimenting with blockchain technologies, Georgia is at the forefront in mining of cryptocurrencies,” said Hans Timmer, World Bank Chief Economist for Europe and Central Asia, at the report’s launch in Tbilisi.
“Georgia’s prevalent use of cryptocurrencies is driven largely by tax exemptions and low electricity prices. Going forward, therefore, it will be important for the government to ensure financial oversight, protection of consumers, and tax administration.”
The mining of cryptocurrencies has had a major impact on electricity consumption in Georgia, turning the country from a net exporter to a net importer of electricity. Estimates of the share of Georgia’s electricity demand devoted to cryptocurrency mining range from 10 to 15%. Per capita electricity consumption in Georgia in 2016 was almost three times higher than in countries with similar levels of per capita income.
A multi-billion-dollar industry today, cryptocurrencies continue to evoke widely divergent views, says the report. The extreme volatility of cryptocurrency values raises doubt about their viability as an alternative to legal tender, while the increasingly high electricity costs associated with mining cryptocurrencies are cause for concern.
The underlying blockchain technology, however, is being adopted more broadly, with several governments in the region already experimenting with blockchains to digitize and streamline public services, in order to make them more secure, transparent, and efficient.
“Blockchain technologies are putting competitive pressure on private financial sectors, while also triggering creative ideas and approaches within governments,” added Mr. Timmer. “At the same time, they have introduced a range of policy challenges for countries.”
Some of the key challenges include ensuring financial oversight and combatting money laundering, tax evasion and illicit transactions. In addition, governments need to address the massive use of electricity involved in the mining of cryptocurrencies, while determining how much they should support start-up companies that specialize in blockchain technologies.
The report finds that economic growth has been strong in Europe and Central Asia, the fastest growth in a decade. However, reduced unemployment and rising inflation indicate that growth in the region will likely decelerate going forward.
The author of this research, Hans Timmer, the World Bank’s Chief Economist for the Europe and Central Asia regions, spoke to Forbes Georgia in a little more detail about cryptocurrencies and blockchain technologies.
Mr. Timmer, it is nice to have you here with us.
Thanks for having me. It’s always nice to be here in Georgia.
Georgia is ranked among the top mining countries worldwide. What does it mean to be among the top and is this designation something we should be proud of?
First of all, it means that there is a lot of mining here. The top country is China. After that, it’s Georgia, the U.S and then Sweden. It is shifting to other countries as well at the moment – countries where the electricity is cheap like Iceland or Canada. I think it is something to be proud of because it is not only the mining of cryptocurrencies, it is a lot of activity in blockchain. There’s a lot of innovation going on – both in the private sector and in the government. It is good to be prepared for all the new developments. But this designation also comes with challenges. One of the challenges is the huge use of electricity in Georgia because of the mining and so that has to be addressed at some point.
As you mentioned in your report, as well as in your presentation – electricity consumption is increasing dramatically. How problematic can it be for a small country like Georgia?
There are a couple of challenges. The first challenge is whether the prices that are being paid for the use of electricity cover the marginal costs. Often there are long-term contracts with low prices, but as demand has increased, Georgia has now shifted from being a net exporter to a net importer of electricity so the marginal costs are higher and whether you get those costs back with those long term contracts is a question that needs to be asked. There are areas in Georgia where electricity is free – in the mountainous areas – for good reasons, because people don’t have a lot of money to pay for the electricity. But now you see that people from cities are coming in. They are renting rooms and using them for mining cryptocurrencies. That is not what you want, so that’s one big problem with the cost. Another problem is the future planning of the capacity for electricity. This is a demand that is quite uncertain if you try to look years ahead. It’s quite possible that this activity moves to other countries and it’s quite possible that the cryptocurrency market will change dramatically. That means that it’s very difficult to plan. For the government, it means that when they guarantee the future demand in public and private partnerships, they have to be very careful about liabilities, and then there is always the challenge this poses to the environment. In many countries including Georgia, we try to help the countries become more energy efficient and this is not an efficient industry.
According to the report, 15% of consumed energy comes from mining. Where does this number come from? Based on what research and calculations did you get this statistic?
The report says that it’s around 15% because it’s not certain. There are two ways to try to calculate this figure. One is trying to measure how much [energy] is actually being used, but you can only do that by looking at the big mining companies – for example in Gori and here in Tbilisi, so that’s already a big part – almost 7% of total electricity demand. Then you have a couple of big companies in Kutaisi. You can add it up, but then you have not measured the personal use. That’s very difficult to measure. We are doing it also from the other side, we are looking at the overall demand increase and whether we can explain that by increasing income. In just 2015 and 2016 the demand increase was so large that it couldn’t by far be explained by income increase, and so, if you take that unexplained part in the macro data it comes to 15% of total electricity use. So, we feel pretty confident that it’s in that order of magnitude.
The National Bank of Georgia has talked about regulations. How important is it to establish regulations for miners and the industry itself?
It’s more about regulating the industry rather than the miners. The electricity use by the miners could be addressed by creating a different kind of energy market, where the prices react more quickly to changes in demand. What the central bank is talking about is the regulations on cryptocurrencies, the transactions using cryptocurrencies and the new financial products… We think that in the long run it will be necessary for the cryptocurrency market itself. As for the existing banking industry, ultimately what you want is a level playing field, so that the same kinds of regulations hold for both industries. That means that if you have regulations for anti-money laundering or tax evasion, it shouldn’t only be applied to one part of the system, it should also apply to the other parts. And so, that is what the central bank is working on, to see what can be changed and broaden the regulations that not only apply to the banking sector but also to the nonbanking sector – and that is a good thing. Although in the beginning, you of course want a lot of freedom for new innovations and new developments, but ultimately your end-goal is that you want to create a level playing field.
Georgia is ranked among the top-three worldwide, as this industry is very popular in the country. However, one of the issues that keeps coming to surface is trust in cryptocurrencies. There are many opinions on this. Can you offer some clarity on the subject?
If consumers invest [in cryptocurrency] then it’s ultimately their responsibility. They make the decision. So, they should get all the information that is available from all kinds of sources. If you do that than you come to the conclusion that this is very risky sector. There has been a lot of volatility in the past. It is very likely that there will also be a lot of volatility in the future as well, and there’s no guarantee that the value of cryptocurrencies will continue to go up. It can drop sharply or it can rise sharply. So, it’s a risky environment. In the case of a sharp adjustment in the value of cryptocurrencies, where people have invested with borrowed money for example, they may not be able to repay their loans. People will ultimately turn to the central bank for help, and that’s the reason why they feel responsible, and that’s the reason why they gave warnings about investing in cryptocurrencies.
My final question is still about some major players on the local crypto currency market – for example BitFury. I know about two or three representatives of the local market who are investing millions in this field. From your point of view, what does it mean to have such a big, worldwide player like BitFury on the local market, and at the same time what are the conditions that will keep them here? We don’t want them to move from here to Iceland or to Canada, where electricity costs might be cheaper than they are in Georgia. Does this present a dilemma for the country?
I think what you really want to keep in Georgia and what you want to develop in Georgia are the innovative activities. That means small blockchain companies that are thinking of new applications, new ways of creating financial instruments and faster ways of bringing those instruments to individual people. There are lots of opportunities there. These are the kinds of activities that you want. It might be that these activities are attracted because BitFury started here with mining, but it’s not necessarily the mining activity that you want to keep in Georgia. You want to keep the applications in Georgia and for that you want a very vibrant private sector. Not necessarily with big companies, as often it’s the small companies that are very innovative. You also want the government to be experimenting with applications and the government is doing that.