The increasing popularity of paying and trading with cryptocurrencies has raised regulatory and monetary policy concerns as these digital currencies reside beyond the governmental realm. Monetary policies dictate control over fiat currencies which are valued based on trust in governmental promises. Cryptocurrencies are digital currencies facilitated by a decentralized payment network and controlled by private users and computer algorithms without intermediaries between the sender and receiver. Some countries have legalized the use of cryptocurrencies, although many political leaders continue to express their concerns about the lack of centralized authority over them. The governments of some Central Asian de facto states have shown interest in legalizing cryptocurrency as a new payment method as it could bring the opportunity to open up to the international trade market and overcome sanctions. Having unrecognized status would no longer be a barrier for the de facto states to trade internationally, but in contrast, the new payment method will help them to open globally. However, the proto-states are still facing the challenges of being resource-dependent on their parent states and heavily influenced by Russia.
Although the Soviet Union collapsed in 1991, the newly formed and unstable de facto states of South Ossetia and Abkhazia (being part of Georgia), Transnistria (being part of Moldova), and Artsakh (being part of Azerbaijan) remain heavily influenced by Russia. These proto-states are not universally recognized, which limits their ability to participate in the international trade market. However, the Russian government recognizes these de facto states and has significantly aided their newly-formed economies, thus wielding notable influence over them.
Cryptocurrencies might serve as an efficient means of building a stronger and more independent Abkhaz state. After Abkhazia declared independence from Georgia in 2008, the level of political exposure and dependency on Russia further escalated. By providing economic and military support to Abkhazia, the Russian government successfully extended its influence over the young country, encroaching on its monetary sovereignty. Although Abkhazia`s monetary system is technically regulated by the Abkhazia National Bank, Abkhazia’s imports and exports are heavily dependent on Russian support, with Russia accounting for 80% and 60% respectively. Furthermore, when the ruble became the main currency of exchange and transfers, it caused increased inflation, and higher interest and unemployment rates. Adding to this, EU and US sanctions were imposed on Russia due to the occupation of Crimea and its aggression in Ukraine, which made the Abkhazian import more expensive. Therefore, it is unsurprising that Abkhazia would look to cryptocurrencies as an alternative way of fostering independence in its economy and reclaiming its monetary sovereignty from Russia.
One of the most popular cryptocurrencies in Abkhazia is Bitcoin, which is earned by cryptocurrency mining and trading. Cryptocurrency mining is a costly procedure as it requires powerful computers and the installation of an integrated system where the consumption of electricity is extremely high.
The Energy Cost of Crypto-Mining
The complicated situation of Abkhazia’s energy sources demonstrates the precarious and dependent situation the proto-state is in. The location of the Enguri Dam, a critical source of energy, has been decisive in creating a natural “border” between Georgia and Abkhazia since Georgia does not recognise Abkhazia as an independent state. In contrast, Abkhazia, with Russia’s backing, claims to be an independent and sovereign state separated from Georgia. Despite the ongoing dispute over Abkhazian independence, the proto-state has retained its right to secure a portion of its energy usage from the dam’s production by officially recognising the Georgian government’s ownership over the Enguri Dam. In return, the Georgian government agreed in 1996 to support its economy by supplying 40% of Abkhaz electricity usage free of charge. To supply the remaining 60% of energy usage, Abkhazia purchases energy from domestic companies or imports it from Russia for a higher price than the Enguri Dam would provide it for. For instance, when the hydroelectric plant was non-operating due to reconstruction in 2017, Russia supplied half of the Abkhazian electricity consumption, estimated by the leader of a de facto state-owned power company- Cherno Marengo- Aslan Basaria. The high energy demand for maintaining the crypto-mining technology caused a scarcity of domestic energy supplies, which increased the Russian energy imports and thus the political dependency on Russia.
Crypto-mining energy consumption significantly surpasses the average energy usage in Abkhazia per capita. Abkhazia’s electricity spending per capita in 2016 was estimated as 3.3 times higher than the spending of Georgia, which is populated with 3.7 million residents, while Abkhazia has only 240 thousand residents as of 2011. This peculiar trend caused energy shortages for Abkhazia, linked with the crypto-mining activities and suspicion of possible illegal energy outflows to Russia. Due to the increased power shortages, the Abkhazian government in banned cryptocurrency mining in December 2018, and thus energy imports from Russia increased. To avoid becoming dependent on Russian energy and falling under extensive Russian influence, Abkhaz Prime Minister, Valeri Bganba proposed to stop providing energy to cryptocurrency mining farms. Moreover, the government suggested new regulations limiting energy consumption per person. To tackle the issue of the lack of electricity in the region due to the increased crypto-mining operations, the Deputy Prime Minister of Abkhazia Christina Ozgan, restricted the operation of all mining farms until the summer of 2021.
The Benefits of Crypto-Currency
Despite cryptocurrency mining restrictions, the trade and usage of cryptocurrency are seen as a potential benefit for the de facto state. Cryptocurrency usage would increase government revenues and enable Abkhazia to access the international banking system and establish monetary sovereignty. The fact that cryptocurrency as a payment method is not managed through the central bank or traditional banking system has increased the accessibility of payments via the Internet for every individual. Similarly, it has allowed internationals abroad to bypass sanctions that had previously prevented them from sending money to or investing in Abkhazia. It has been projected that trading with cryptocurrencies would lower transaction costs by incurring no intermediary expenses and granting wider and easier access to international financial markets. This is especially important for de facto states because due to their unrecognized status, they often struggle to access the global economy, which can potentially lead to poverty and economic instability.
The Abkhazian Minister for Economy supported the idea that cryptocurrencies will benefit the nation by attracting international investors and subsequently eliminating potential cross-border sanctions. On June 24th, 2019, a law was approved by the Parliament to regulate cryptocurrency mining’s legal, economic, organizational, and technical structures. According to the new regulations, conducting cryptocurrency mining operations required the registration of a legal entity or enterprise, payment of tax revenues, and obtainment of a license.
The introduction of cryptocurrency as a payment method has allowed many Post-Soviet de facto states to be more self-sufficient and active on the international economic stage. The crypto-currency industry helps by facilitating access to the international markets and by making de facto states economically independent from Russia, which has become a main investor in the lucrative cryptocurrency industry. At the same time, unrecognised state governments aim to cap the increasingly popular crypto-mining’s energy consumption because it is supplied by Russia. The attempt to become economically independent from Russia through the creation of a crypto-currency-friendly legal environment has become inevitable to avoid the “help” of Russia.