When Kazakhstan’s Ministry of Finance probed a slowdown in the processing speed of computers in February, they found unusual culprits. The ministry’s own IT specialists had secretly installed software on its information processing systems to profit from mining, or encrypting and decrypting, cryptocurrencies— inadvertently also shining a light on an emerging facet of Central Asia’s largest economy.
The guilty employees, who had tapped some of the government’s most powerful computers within the state revenue departments of four different regions, were charged with financial crimes. But their fascination with cryptocurrencies is of a piece with a larger fintech revolution that Kazakhstan is trying to both propel and manage as it tries to reshape its $ 156 billion economy, with an eye on the future.
Riding on an oil and gas boom in the 1990s and early 2000s, Kazakhstan has built one of the region’s most robust economies, averaging an annual 4 percent GDP growth since its separation from the Soviet Union. The country is also one of the world’s largest producers of uranium. But now, the government is setting its neo-futuristic capital of Astana up as an attractive destination for fintech companies as a part of plans to wean Kazakhstan off its overwhelming dependence on the export of natural resources.
We are very interested in blockchain technology as a financial instrument, and all the opportunities that blockchain has to offer.
Baur Bektemirov, Astana International Financial Centre
The Astana International Financial Centre, which was launched in January, has an independent legal framework based on English common law — to attract foreign investors more familiar with those standards — and a fintech regulatory sandbox where companies can innovate. A fintech company known as MedElement is already exploring by digitizing the medical infrastructure of hospitals around Kazakhstan. And the country’s government has set a goal to transition all records and government data onto digital platforms to allow the use of blockchain technology to deliver services more efficiently.
“We are very interested in blockchain technology as a financial instrument, and all the opportunities that blockchain has to offer,” says Baur Bektemirov, the AIFC’s managing director.
That Kazakhstan’s initiatives reflect a deep-rooted churn becomes evident from Yesset Butin’s concerns that the steps the country has taken so far are too few, and perhaps too late. Butin is the chairman of Kazakhstan’s Blockchain and Cryptocurrency Association — formed to assist the government with the business implications of blockchain technology — and is convinced his country desperately needs to play catch-up.
“We think we are late already in implementing blockchain technology,” says Butin, who formerly ran subsidiaries within the country’s National Bank. “If we don’t do it now, we will be too late and we will lose our possibilities and our advantages in this technology.”
He cites the example of Belarus, which in December legalized cryptocurrency transactions to attract foreign investment, and of Russia, which has said it plans to pass laws in the summer. A strong legal framework, absent at the moment, is critical for Kazakhstan to attract investors, suggest experts. Every country will soon legislate on cryptocurrency, says Butin, adding that his association and the government are still educating themselves on the potential uses of this new technology before drafting any measures. A law, apart from setting in place a regulatory framework, would also help curtail the use of cryptocurrencies by criminals, he says. “It’s very important to us to block all the [negative] possibilities using the legislation, like the trade or using of cryptocurrencies to fund terrorism or sell drugs,” says Butin.
But the urgency reflected in Butin’s concerns is also matched by an international interest that Kazakhstan’s initiatives are already attracting.
Alexey Sidorov, CEO of companies that provide alternative lending plans for the underbanked, says entrepreneurs in Finland and Hong Kong have reached out to him about registering with the AIFC. Sidorov’s companies include Prodengi — Kazakhstan’s first financial price comparison portal — and Kredit24, its first online microloan provider. “I said go ahead and do it,” says Sidorov. “I’m actually myself thinking about setting up a fintech company that would operate in a fintech regulatory sandbox.” He is launching a startup called Lendex that will use blockchain technology to connect borrowers in Asia with lenders anywhere in the world.
Bektemirov is clear that Kazakhstan wants to create the most favorable conditions within the region to develop new uses for blockchain technology. The AIFC’s independent legal framework and the regulatory sandbox are critical. But nature could prove helpful too.
With temperatures dipping as low as minus 40 degrees Fahrenheit in the winter and favorable electricity prices, Kazakhstan is well-suited for mining farms, says Sidorov. “In the mining of cryptocurrencies, you use a lot of processing powers, so the computers heat up very quickly and you have to use more power to cool them down,” he says. “With countries like Russia and Kazakhstan, you don’t have to cool down the [mining farm]. You just open a window and get free cooling.”
Fintech proponents like Sidorov still need to battle a social and administrative mindset that has for decades emphasized centralized data, data storage and management. “They’re just used to the way that things have been operating for years,” he says.
But Kazakhstan has already shown it has a decisiveness some bigger economies don’t. South Korea first banned initial coin offerings and took a tough stance on the industry, sending jitters among investors, then signaled in February that regulators might be backtracking on the strict measures. Kazakhstan isn’t going as fast as Butin would like, but it isn’t showing signs of doubting its ambitions either.
And with its liberal currency regulations and flexibility with fintech companies, says Sidorov, Kazakhstan’s goals aren’t just pipe dreams.
