For over a year now, the billion-dollar fraud case surrounding former tech CEO Sam Bankman-Fried has been causing an uproar. In Kazakhstan, too, the case caused a stir – mostly because of the Bankman-Fried’s connections to local businessmen. The Kazakh government is planning to regulate the industry more strictly: from January 2024, new guidelines on trading in digital assets will apply.
Steep rises can be followed by equally dramatic falls, especially in the world of cryptocurrencies. The industry experienced such a fall in November 2022 when FTX, the world’s second-largest trading platform for such assets, collapsed within a few days, taking several billion US dollars of investments with it. At the beginning of November 2023, the American federal court in Manhattan found Bankman-Fried guilty of embezzling the assets invested by customers of its crypto exchange FTX.
The sudden collapse was caused by revelations of dishonest business practices by the company’s management, above all by the CEO and co-founder Sam Bankman-Fried, who was once hailed as a child prodigy. At his behest, the hedge fund Alameda Research, a sister company closely linked to FTX, which he also co-founded and managed, had invested more than one billion US dollars from FTX investments in Kazakhstan. In turn, this contributed to the financial imbalance of the company network.
The scandal also made waves in Kazakhstan, where Alameda Research and other companies have fueled a veritable crypto boom in recent years. In response, the government is planning to regulate the promotion of and trade in cryptocurrencies more strictly.
Bitcoin rush in Kazakhstan
For FTX, Bankman-Fried requires enormous “mines” – industrial electricity and server farms the size of factory halls. The best conditions for building such mines were found in Kazakhstan at the end of the 2010s, where cheap electricity and relaxed regulations attracted many such projects. In 2021, Kazakhstan was the second largest Bitcoin producer in the world, with up to seven per cent of national energy production flowing into data centres at the peak of the Bitcoin frenzy. This is also where Bankman-Fried made his momentous investment. He had Alameda Research invest in Genesis Digital Assets (GDA), a company that is registered in Cyprus but operates primarily in Kazakhstan.
This Kazakh connection was reconstructed by the online portal Kursiv.media. GDA was founded in 2017 by the Kazakh investors Rashit Mahat, who worked on the board of directors of the telecommunications company Kcell between 2019 and 2021, and his business partners Abdumalik Mirahmedov and Andrei Kim. They joined forces with two German crypto specialists, Marco Krohn and Marco Streng, to get the company up and running.
Bankman-Fried joined the board of GDA in 2021. The money from Alameda flowed into a total of three data centres operated by GDA in Kazakhstan, where computer halls powered by cheap electricity generated coins that were later to be traded on Bankman-Fried’s exchange FTX. At least, that was the plan. By the beginning of 2022, Alameda had invested 1.1 billion USD in GDA – by far the hedge fund’s largest investment.
The beginning of the end for FTX
However, when the crypto market collapsed worldwide at the beginning of 2022, the value of the mining companies also fell massively. A venture that had seemed lucrative enough to risk more than a billion dollars just a few months previously now looked far less attractive. When the industry service CoinDesk also reported in November 2022 that Alameda Research’s core capital consisted of FTT, FTX’s platform-owned cryptocurrency, the situation worsened.
The almost uncontrolled growth of the industry in Kazakhstan was coming to an end at this point anyway. After the mass protests in January 2022, which in part were fueled by high energy prices, cheap energy for Bitcoin mining was no longer an option. In July 2022, a tax on electricity for mining projects was imposed.
The aim is to gradually regulate the industry and integrate it with state actors such as the Astana International Finance Centre (AIFC), a prestige project of the Kazakh government. In line with the external image of the AIFC, the country continues to see itself as a promising location for the digital industry. Yet, in the future, crypto start-ups will need to comply with certain framework conditions. The laissez-faire attitude that once attracted Bankman-Fried to Kazakhstan seems to be over for good.
Moving the mines
The regulatory efforts from 2022 were, at least in part, fueled by the sudden collapse of FTX. Following the CoinDesk report, the FTX and Alameda Research financial construction was exposed and confidence in the actual liquidity of Bankman-Fried’s company evaporated…