The former Soviet republic of Georgia, which occupies picturesque mountain valleys and rugged ridges of the southern Caucasus. It has roughly the same population as the state of Connecticut. It is known for being the birthplace of Joseph Stalin, as well as being one of the oldest wine regions in the world, for its rich and eclectic cuisine. And, more recently, for hosting the third largest crypto mining operation in the world.
Georgian government’s new blockchain
In addition, it is estimated that 5% of households in the nation are engaged in or invest in the cryptometry. Already in 2016, the Georgian government was the first to create an operating system for registering property rights driven by a blockchain, which by mid-2018 had housed more than 1.3 million electronic documents. State officials are now looking to move all government records to distributed accounting books.
It sounds like Crypto Buff’s dream, right? For a small nation, however, the place in the first row of fintech pioneers comes at a cost. A single entity, the software and hardware provider Bitfury, based in the US, is responsible for much of the current crypto momentum in Georgia. The cheap electricity and the laxity of regulation were the points of sale that attracted the mining giant to the Alazani valley. The possibility of negotiating tax exemptions and obtaining favorable loan conditions made him stay. Critics assume that it was necessary for Bitfury to reach a secret agreement with some of the most powerful people in the country to obtain these privileges, and now the agreement benefits a very small circle of interested parties, while threatening the energy security of the nation.
The warm welcome
Bitfury Group was founded in 2011 by the Latvian entrepreneur Valery Vavilov. Whose biography on the company’s website mentions his first-hand experience with the challenges arising from the collapse of the Soviet Union. Although the company is incorporated in San Francisco, the natives of the post-Soviet space are strongly represented among its leaders. Apparently, the Bitfury С suite was quite familiar with the challenges and opportunities that the region presents, as well as the ins and outs of doing business in the area.
Vavilov came to Georgia for the first time to discuss business in 2013. In July 2014, the first 20 megawatt Bitfury data center emerged in the eastern Georgian city of Gori. In December of the following year, a significant expansion almost tripled the company’s mining capacity in the country. As Bitfury deployed its 16 nm ASIC chips in a new facility in the area called Gldani, within the limits of the capital, Tbilisi . This outpost became the first resident of the newly developed Industrial Free Trade Zone. Which was designed to attract technology companies through advantages such as the 18% VAT exemption. The company purchased 18 hectares of land for a symbolic price of 1 lari, which is equivalent to a fraction of 1 USD. The new data center had a new patented cooling technology. Its computers were submerged in non-conducting fluid tanks as they ran to seal the block.
When Bitfury arrived in 2014, the Georgian Co-Investment Fund, linked to the richest person in the country and former Prime Minister Bidzina Ivanishvili, provided the company with an installation subsidy of USD 10 million. Although both Bitfury and representatives of Ivanishvili have repeatedly stated that the loan has been repaid even before the Gldani plant opened, rumors that the billionaire remains one of the main beneficiaries of the project never abated.
The two entities maintained connection with each other
In any case, the two entities still maintain at least one management connection with each other, since the member of the board of directors of Bitfury, George Kikvadze, holds a high level position in the Co-Investment fund.
The relationship between the government and the mining giant progressed rapidly, and in April 2016 Valery Vavilov and the President of the National Public Registry Agency made public their plan to create a property registration system driven by a chain of blocks. The following year, Georgia made history by becoming the first nation to implement the technology of distributed accounting books to secure and validate government records.
In February 2018, Bitfury announced that it was selling the Gldani data center to Chong Sing Holdings, a Fintech company based in Hong Kong, citing the need to continue its successful expansion in the Asian market of both hardware and software solutions of software. However, within a few months the installation was again under the control of the original owner. Amid falling prices and increasing regulatory pressures in China, Chong Sing hastened to cover the risks and reduce the exposure to cryptoactives. Bitfury was able to recover Gldani’s facilities at a discount. Despite the persistence of the bear market, the company continues to make profits and remains optimistic about Bitcoin in the long term.
The Bitcoin dream
Whether it was because Bitfury raised the profile of the mining company or that people were able to decipher it in spite of everything, ordinary Georgians have had their fair share of the crypto craze. Hundreds of thousands of platforms joined the race before the market dropped sharply, taking mining’s share of Georgia’s electricity bill to an astonishing 10 to 15 percent range. In spite of the government’s low regulation position in general, friendly with the regulations, towards the end of 2017, the financial authorities worried about the magnitude of the gold rush. And had to remind the Georgians that the Bitcoin was not yet a currency of legal tender, and recommended to be careful when betting your sustenance in crypto.
The Bitcoin exuberance of the nation at the peak of the great bull run was understandable. It seemed that the combination of the opening of the state to crypto and the cheap electricity available in all areas would generate prosperity. Working people rushed to remote areas of the highlands where electricity subsidized by the state was available for free. A political party emerged that proclaimed its ambition to go ahead with the idea of creating a national cryptocurrency. Which would allow all citizens to benefit from the set of unused resources of the country.
However, with the prices of crypts in free fall, the future of mine rangers and limes looks much darker. Where Bitfury can still reap the rewards of massive economies of scale, cutting-edge technology and tax breaks, Bitcoin hunters with platforms in their garages are less and less likely to make a profit. And as the cryptosue gives way to the harsh reality, the question becomes great again. Is the blockchain development model that the Georgian leadership is looking for in the long term sustainable?