Why is Bitcoin being blamed for power outages across Iran?

If punishing sanctions and the region’s worst Covid-19 outbreak wasn’t enough, Iran has been hit with power outages and worsening air pollution – with the country’s upstart Bitcoin mining industry being singled out by the government.

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

On Wednesday, state-owned electricity firm Tavanir announced the temporary closure of a joint Iranian-Chinese Bitcoin mining farm in Rafsanjan in the southeastern province of Kerman. The decision came after the licensed operation was alleged to be using 175-megawatt hours (MWh) of electricity.

Mohammad Taghi Karrubi, a reformist activist, tweeted earlier this week that while Bitcoin farming in Iran could create billions in revenue exceeding oil exports, it comes at the cost of pollution and power cuts borne on the Iranian people.

Insufficient electricity supply and deprivation of natural gas at power plants has led to burning dirtier products such as Mazut for power generation to heat homes, which has blanketed major cities in thick smog.

Alireza Kashi, spokesman for the Mashhad Electricity Distribution Company, stressed that those managing the power grid have had no alternative to electricity cuts because if intermittent outages did not occur, it would result in widespread power outages.

Some Iranians in the crypto space reject the government’s allegations, claiming that cryptocurrency mines are being scapegoated for a much deeper problem.

Omid Alavi, CEO of Vira Miner, a mining solutions firm, believes that miners are unfairly shouldering the responsibility for power outages, since mining does not account for a substantial percentage of the country’s overall electricity capacity.

“Only 300 MWh of electricity is used for mining out of 60,000 MWh of electricity produced 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.

Alavi highlights this winter season led to a surge of domestic gas consumption for home heating, and the temporary shutdown of not just mining farms but industrial zones across various cities. He recalls a friend working in the cement business whose factory had to also shutter.

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

“Iran’s electricity grid has a lot of problems. The equipment is very old, we need to create new power plants,” Alavi says. Iran’s subsidised electricity sector has long been plagued by mismanagement.

Mining, he points out, “forces the government to have to think about investing more in changing the voltage of the network, transformers and cabling.”

Furthermore, Alavi thinks there is a preference to concentrate usage in a few areas than spread them out and have to accommodate new consumers, which is what the presence of crypto mining has done.

The government’s crackdown has included illegal operations too.

According to local media outlet Tasnim News Agency on Sunday, 45,000 Bitcoin machines had been confiscated as part of the authorities’ expanded crackdown. The machines had purportedly been consuming 95 megawatts per hour of electricity at a reduced rate, Tavanir’s head Mohammad Hassan Motavalizadeh said.

Over the past 18 months alone, Iranian authorities claim to have shut down 1,620 illegal cryptocurrency mining farms that collectively used 250 megawatts of electricity.

Mining operations that are found to be using subsidised electricity are heavily fined.

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

He says the rate the ministry of energy 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 at under $0.01. A further 20 percent tariff is slapped on future imported mining equipment.

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

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

It was a very profitable period before the government started regulating the space in 2019.

Now, because of the high tariffs, “no one wants to invest in mining in Iran on a large scale,” Alavi declares. Mining farms are scattered and mostly small, underground mines, he adds.

Moreover, he suspects the claim the government has targeted thousands of illegal farms that have popped up all over the country is overstated.

“People might be just buying one or two machines and the government considers it a farm.”

The long arm of regulation

Cryptocurrencies, such as Bitcoin, are issued based on a consensus mechanism where people called “miners” perform “mining,” which involves using high-powered computers to validate “blocks” and verify transactions recorded to a decentralised ledger called the blockchain. For each new block that’s created, miners receive a block reward and the ability to issue new tokens or coins.

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

For Iranian crypto miners, the country’s subsidised electricity costs – as low as $0.006 per KWh – was a huge incentive. Promised as a hedge against inflation of the Iranian rial also made it an ideal destination for the mining of digital currencies like Bitcoin.

In a short period of time the mining business grew popular in the Islamic Republic, as Chinese and Russian firms partnered with local entrepreneurs to set up Bitcoin farms.

Due to lack of regulatory oversight, the industry was sustained illegally, as miners used equipment smuggled from other countries like China, says Alavi.

Then in 2019, in the face of a suffocating regime of US-imposed economic sanctions, Iran reduced its restrictions on cryptocurrencies in an attempt to break economic isolation and combat hyperinflation, becoming one of the first countries to recognise and license mining as a legitimate industry.

Sensing an opportunity to cash in on the Bitcoin bonanza and bring it under their purview, miners would have to register for government-provided farms at electricity rates higher than the public.

Since regulations came into place, over 1,000 mining permits have been approved. But the government has also grown wary of large spikes in electricity consumption by mining farms.

In 2019, authorities shut down 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 illicit crypto miners were setting up their rigs in schools and mosques to take advantage of cheap electricity and making the power grid “unstable”.

Alavi says an environment of increased government scrutiny and compliance protocols have weighed down miners and made it much harder to operate.

Exchanges, meanwhile, remain unregulated. The founder of Arzdigital, one of Iran’s leading cryptocurrency media outlets, Hamidreza Shaabani told TRT World it is still not possible to obtain a license if you are a crypto exchange, despite it being more than a year since the issuance of mining licenses.

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

The ‘bitter taste of inflation’

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

According to Shaabani, “using digital currencies to circumvent sanctions is a very small percentage of Iranians’ interest in this field”. Interest remains high because many have endured the “bitter taste of inflation” he says.

Shaabani sees two main groups in the Iranian market that have been attracted to the blockchain space and digital currencies: those who want to protect the value of their money and those who are simply interested in the technology or need to transfer money across the globe.

“It is interesting to note that more than 80 percent, 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 exert further control over the industry, Iranian lawmakers recently approved legislation to redirect cryptocurrencies into the central bank’s funding mechanisms for import transactions.

Shaabani worries that Iran’s Central Bank is trying to monitor emerging crypto businesses in a controlled space – much like global regulators are – ultimately to the detriment of the industry in the long run.

Amid fears of capital outflow due to the pandemic, the government is attempting to tighten rules around cryptocurrency smuggling and foreign exchange laws to protect against further devaluation.

While the government has announced plans to develop its own central bank digital currency (CBDC) – the “crypto rial” – there is yet to be significant progress.