VYSYN Ventures Weekly Insights #81 — Revamp of energy sector prompted by fiscal crisis changes mining economics
The government of Argentina has begun 2022 by paying closer attention to Bitcoin mining activities. Confronted with energy shortage challenges, the state has identified undisclosed Bitcoin mining as a potential reason for the shortage, and has embarked on an audit to unearth these miners.
In the latest VYSYN Release, we examine the initial efforts of the Argentinian government towards ensuring that Bitcoin miners pay for the power they consume. Given the country’s debt profile, we also look at the creative ways Argentina is employing to solve its fiscal challenges as it negotiates a deal with the International Monetary Fund (IMF) and the ramifications this has on Bitcoin mining in the country.
Argentina targets Bitcoin miners in energy consumption audit
In June 2019, the energy sector in Argentina suffered a major hit. A failure in the electrical grid that served both Argentina and Uruguay resulted in a blackout that affected tens of millions of people. The incident which was described as unprecedented was linked to a failure in the transmission of electricity from the Yacycretá hydroelectric dam. The issue was addressed and power restored to the region shortly afterwards.
In December 2020, another major setback was encountered by the Argentinian power sector. This time, the nation’s capital, Buenos Aires was thrown into a blackout and hundreds of thousands of homes and businesses left in the dark. Metro lines in the capital were also brought to a standstill. This warranted an investigation into the power sector by the Argentinian government as it tries to identify the actual causes of its electricity challenges. Under such circumstances, it is most convenient to focus on identifying the major sectors responsible for the load on power grids and Argentinian Bitcoin miners happened to play a bigger role in recent years.
In the past few years, many Bitcoin miners have found a comfortable home in Argentina. Friendly weather, affordable electricity, and favourable regulations have made the region attractive for miners. Recent data suggests that electricity is as low as $0.056 for households and $0.041 for businesses respectively. On the regulatory front, in July 2021, the national deputy for the Mendoza province, Jose Luis Ramon presented a bill to the legislature that would allow independent workers to receive their salaries in cryptocurrencies.
For now, cryptocurrency has provided some degree of relief to Argentina’s citizens who have suffered harsh domestic currency devaluation, and the government is one of the most crypto-friendly in the world. Argentina’s friendly weather coupled with favorable regulation has made it an attractive destination for Bitcoin miners. Recently, Bitfarms, a publicly-listed cryptocurrency mining company, began building a mega-mining complex in the country. Against this background, the government’s recent actions came as a slight shock to the system.
Cammesa, the state-owned power wholesaler in Argentina, has issued a memo to big power consumers asking them to declare their cryptocurrency mining status. The company aims to determine the power consumption of these companies and classify them in appropriate price structures. The companies that received notices will have to disclose power consumption by server groups and other entities that offer telltale signs of Bitcoin mining.
According to local reports, the Undersecretary of Electric Energy may be aiming to categorize cryptocurrency miners as large-scale consumers. They may also be planning to launch a new tariff scheme and make cryptocurrency miners invest directly in the nation’s power system.
The objective behind encouraging such investments is to relieve the stress caused by mining operations on the national power grid. In some cases, mining operations are alleged to be behind the power cuts that have affected more than 80,000 citizens and provoked protests across the country. Local crypto users believe that more than 200 large companies have offered their property to cryptocurrency miners, with most of them located in Buenos Aires, the Argentinian capital.
Bitcoin and cryptocurrency mining is energy intensive. In February 2021, Cambridge researchers reported that Bitcoin uses more electricity annually than Argentina. According to the report, the Bitcoin network consumes 121.36 terawatt-hours (TWh) a year. This energy is required by computers on the Bitcoin network to verify transactions and ensure the security of the Bitcoin network.
Such an amount of energy surely leaves a mark on power infrastructure and should be properly accounted for. Hence, the growing number of secret miners that add significant load to power grids across the globe are definite areas of concern. If not properly accounted for, such loads are significant enough to disrupt the balance in supply and demand of electricity.
This justifies the intention of the government of Argentina in trying to identify all existing mining stations. Proper accountability would make for appropriate taxing, and probably the provision of adequate infrastructure to support the nation’s energy sector.
Economic woes and consumer protests affect Bitcoin mining economics
In order to fix its economic challenges which include the energy problems mentioned above, Argentina is currently renegotiating its debt with the IMF, in what has long been a point of contention for citizens. To retain the support of the IMF, Argentina must reduce its fiscal deficit and removing government subsidies from certain aspects of the economy, including electricity tariffs, has been proposed as a way forward.
Fearing soaring electricity bills, citizens took to the streets in protest. However, electricity costs have steadily soared and government subsidies are set to come to an end. From January 2022, the citizens of Argentina will pay increased tariffs on electricity amounting to between 17% to 20%. Larger consumers will pay more than smaller ones. As the government seeks ways to cushion the effect of these measures on the broader population, large-scale energy consumption has come under scrutiny.
As a result of this categorization, Cammesa aims to conduct an audit that would identify large power consumers correctly, and charge them according to their consumption patterns. Bitcoin miners have found themselves collateral damage to this situation as their power hungry systems have pushed them into the category of highest consumers.
Despite the negative news, the situation in Argentina is different from similar government moves in places like China. Far from banning mining activities, the government seeks to document and bring mining operations into the mainstream. Cooperation and transparency in mining is good for the crypto industry as a whole, and the Argentinian government’s efforts are to be applauded.
Transparency might also create more opportunities for miners and ancillary crypto service providers to set up shop in Argentina. In turn, this will boost the economy and create more opportunities for locals. While Bitcoin miners are currently processing events and absorbing the shock, there’s no doubt that the government’s move may augur well for Argentina’s long term fortunes.
About VYSYN Ventures
VYSYN Ventures is a longstanding venture capital company that specializes in funding and supporting disruptive startups in the blockchain and cryptocurrency industry. We have provided early-stage support to several projects that have grown to USD market capitalizations of hundreds of millions and even billions. Our incubation program focuses on providing capital allocations, versatile marketing support, and tech assistance.