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Even though Georgia is not on the list of top IT countries, it does rank among world leaders in terms of cryptocurrency mining. According to the World Bank report, in 2018, the former Soviet republic of Georgia was the third-largest cryptocurrency miner in the world with 5% of citizens engaged in mining. As of 2020, cryptocurrency mining in the country has not lost its popularity. And this is confirmed by constant international conferences held on its territory, as well as an increase in the number of ATMs for the exchange and purchases of cryptocurrency.
In this article, Solomon Brown, Head of PR at Freewallet, explains how Georgia has become a prominent crypto miner and if it really has become the next country to affirm its Bitcoin and other cryptocurrencies status.
Georgia on Blockchain
Looks like Georgia has decided to implement blockchain at the state level and began to successfully use it in domestic processes. The first step was taken in February 2017 when it was legitimized as a means of selling property rights and registering the purchase of land.
Over the last year, the cadastral blockchain system made certain improvements, and we can confidently point out that they were caused by the right actions of the government:
- The transparency of obtaining land and real estate property rights has increased;
- The time required to complete transactions was reduced as notary services were no longer necessary;
- Real estate transactions can now be accomplished in just 1 day;
- You can verify the authenticity of property rights in real time;
- The possibility of falsification of documents on property rights has been minimized.
At the moment, the government is considering introducing technology into the country's fiscal system. This will provide the following benefits:
- Raising awareness of the system among the general population;
- Changing information management;
- Minimizing the potential for falsifying information;
- Decreasing possible legal manipulations;
- Simplifications and adjustments to tax payment procedures.
Foreign companies also take part in the blockchain-isation process. At the end of June 2019, it became known that the IOHK blockchain project of Charles Hoskinson, one of the co-founders of Ethereum met with Georgian Prime Minister Mamuka Bakhtadze to sign several memorandums of understanding with the Georgian authorities, as well as with Tbilisi University. IOHK, a leading Cardano (ADA) cryptocurrency developer, is developing a new blockchain system for issuing digital passports for Georgia.
The system can use the Cardano blockchain, and also involves the creation of a separate token to stimulate network members who verify their identities when creating a digital ID.
Nevertheless, the introduction of blockchain technology into the Georgian fiscal system may encounter some problems. Firstly, it will be a real test of the stability of the tax system itself. Secondly, there will be a need for new forms of control. Thirdly, it will be necessary to change tax rules, because at the moment they are simply not ready for digital currency taxes.
The main thing that the Georgian government wants to achieve with the help of the introduction of blockchain is transparency and the absence of corruption in the fiscal system. At the moment there is neither a single system of control over all payments made between the state and taxpayers, nor an automated tax calculation system.
The blockchain in the fiscal system of Georgia will make it easier to conduct business - settlements will be transparent as all transactions will be displayed in real time, and amounts will be quickly and efficiently debited. Another positive aspect of introducing technology is minimizing VAT fraud due to open reporting and the absence of intermediaries.
Given the previous positive experience in introducing technology, blockchain in the fiscal system will benefit not only the population and business, but also the state itself. Naturally, at first the country will have to face many difficulties: ensuring the stability of the tax system during its improvement, the correct integration of smart contracts in the legal field, and more. But given the fact that blockchain itself can become the leading technology in the tax system, it will make Georgia an even more attractive country for international investors.
Cryptocurrency Regulations in Georgia
On June 28, 2019, a law governing cryptocurrency taxation entered into force in Georgia, according to Bitcoin.com. It has received international attention as it is open to interpretation. A piece of good news is that Georgian Finance Minister Nodar Khaduri signed a law that exempts cryptocurrencies from VAT, the cash cow of many governments (the value-added tax that most countries levy on the sales of goods and services) when exchanging cryptocurrencies for fiat money.
According to Gela Barshovi, a Tax Lawyer at TPSolution, Georgia, “If a natural person becomes a resident of Georgia, he/she will not be taxed on the profit generated from selling cryptocurrency, neither VAT will be applicable on such a transaction. If a legal entity established in Georgia does the same activity, no VAT is payable in that case as well but CIT of 15% and withholding tax 5% will be due only in case of distribution dividends to shareholders.”
Some crypto enthusiasts believe it makes Bitcoin similar to foreign currency and simplifies its usage. The only thing they omit is that lari remains the legal tender in Georgia and that the country hasn’t fully legitimized cryptos as a means of payment.
Cryptocurrencies are not recognized as a means of payment, but as digital assets, transactions with which are carried out in electronic form. To be more exact, the definition is the following: “Cryptocurrencies are digital assets that are exchanged electronically and based on a decentralized network.
Their exchange does not require a reliable intermediary and they are managed using distributed ledger technology.” This means you can exchange crypto, but you still can’t legally buy anything for digital coins.
Except for that, the most important points of the bill include the following:
- The sale of computing power (hash) from Georgia abroad is not subject to VAT. In addition, individuals and legal entities retain the right to input VAT;
- The sale of computing power (hash) within the territory of Georgia (between residents) is subject to VAT;
- A hash purchase by a Georgian resident abroad is subject to VAT.
It is reasonably safe to suggest that the legislation was caused by the fact that the Georgian government wants to pique the interest of foreign investors by offering them preferential tariffs and exemption from VAT, which has resulted in a significant increase in electricity consumption.
Georgian Crypto Mining Triumph
In Georgia, cryptocurrency mining is very popular. The chairman of the Energy Regulatory Commission of Georgia, Irina Milorava, said that electricity consumption in the country in recent years has increased by an average of 5%, and in 2018 the growth was almost 8% compared to 2017.
Although the regulatory commission does not have information about the share of mining in the total indicator of electricity consumption, over the past six months, the energy consumption in several regions has grown so much that the network often could not manage it and the supply of electricity to the population was limited, which most likely was caused by the increase in mining.
Milorava explained: “Mining enterprises are not registered separately according to different criteria, but we know several large consumers, and we need to evaluate their impact. For example, we know that one of the largest mining enterprises consumed 300 million kWh per year. And in past years, when the topic of mining was not relevant at all, then the electricity consumption was also high, the growth was 5%. In recent years, we have an 8% increase. Let's say that these 3% are mining growth, because before we had a five percent increase in consumption in the energy sector.”
Many entrepreneurs and ordinary people buy equipment on an industrial scale and organize entire farms for the production of digital currency.
The growing popularity of mining in Georgia can be explained by the availability of cheap electricity in the country. So, the cost of electricity for those who consume more than 300 kWh is: for residents of Tbilisi - 23.0395 tetri (7.5 cents), for residents of other regions - 22.733 tetri (7.4 cents).
Such favorable conditions for the development of the crypto business did not go unnoticed by foreign companies wishing to mine digital currency on an industrial scale. So, in 2014, the Dutch company BitFury built their first data center in Gori with a capacity of 20 MW, and, in July 2017, a second one in Tbilisi with a capacity of 40 MW. Investments in these projects amounted to about 30 million US dollars.
After the launch of these projects, Georgia broke into the list of leading countries in industrial mining, and BitFury controlled up to 15% of all Bitcoins produced in the world.
It should be noted that BitFury has received huge benefits from the Georgian government, including the purchase of a land plot of 2.5 acres for the construction of a data center in Tbilisi, that cost a symbolic 1 lari. And a few months later this territory received the status of the Tbilisi Free Industrial Zone, which gave the company the following benefits:
- lack of taxation - companies registered in Free Industrial Zone do not pay taxes to the state budget;
- no need to keep records;
- hiring employees is not required;
- the cost of electricity has become even cheaper (by 18%), since goods and services are not subject to VAT on the territory of the Free Industrial Zone;
- lack of currency restrictions and currency control.
Thus, BitFury received very favorable conditions for industrial cryptocurrency mining.
The Dutch company’s path was followed by many ordinary Georgians, private entrepreneurs and foreigners. Many of them began to open mining farms in the Free Industrial Zones in Tbilisi, Kutaisi, Poti, Kutaisi Hualing, as well as in the high mountains of the country, where the cost of electricity is even cheaper.
However, it should be noted that in 2018, BitFury sold its data center in Tbilisi to the Chinese company Chong Sing Holding (Hong Kong) under public pressure. But, this did not reduce the desire of people to engage in cryptocurrency mining in Georgia.
The favorable conditions for the opening of mining farms attracted investors from abroad to Georgia...until last year’s slump in Bitcoin’s value made almost 80% of miners pull the plug. Like the Georgian tech entrepreneur Shota Siradze, many people who were involved in the industry had to reconsider their options in 2019.
Siradze, for instance, started using the heat from mining rigs to heat rooms to a temperature conducive to growing tomatoes, saying “A few tomatoes will not make a fortune, but it keeps the space occupied and machines busy earning a bit of spare change.”
Georgian law does not prohibit foreigners to mine cryptocurrency, and BitFury is an example of this. But, it must be taken into account that the National Bank of the country does not recognize virtual money as legal tender. And, what’s even more important, Bitcoin value might bounce back and forth, making mining profitable “only for big businesses and those operating in tax-free zones or areas where electricity is cheap.”
Cryptocurrencies in Georgia: Where to Buy and How to Spend
Although Bitcoin and other cryptocurrencies are not accepted in stores or restaurants, selling real estate and cars for cryptocurrency is popular in the country. For example, in 2017 a Mercedes was sold for 2 Bitcoins in Georgia. And today it is easy to find ads for the sale of real estate for cryptocurrency using one of the real estate search engines like Geoln.com.
All you have to do to buy real estate online is to select a property that meets your criteria in the price selection filters and select the cryptocurrency icon. After choosing the right offer, users transfer the required amount of crypto to the owner’s wallet, observing the terms of the smart contract on both sides.
Georgia is actively creating infrastructure for cryptocurrency trading. So in 2016, the government of the country, together with BitFury, launched a project to store information on the public real estate register of Georgia in the blockchain. And since February 2017, all transactions on Georgian real estate have been carried out on the blockchain. The government is also planning to use this technology in business registration.
Where do Georgians get cryptocurrency? Since 2018, Georgia has been actively installing ATMs for the exchange and purchase of digital currencies in public places. The first crypto machine was installed in New York Burger , a burger joint in the center of the capital. In March 2018, a second one was installed on Shalva Dadiani Street. Currently 13 crypto machines operate in the country, of which 10 are in Tbilisi, 2 in Batumi and 1 in Kutaisi.
The purchase or sale of a cryptocurrency using a crypto machine can be done in seconds. Even if the interested person does not have an online wallet like Freewallet, they can buy the desired cryptocurrency through a crypto machine. In a single operation, it is possible to purchase or cash out $6,000 worth of cryptocurrency at a cost of at least $20.
The Prospects of Cryptocurrency in Georgia
In March 2020, the famous crypto news outlet 99bitcoins included Georgia in its TOP 10 Bitcoin-friendly countries. A very fair decision. In spite of the fact that mining Bitcoin and other cryptos in Georgia is not officially allowed, the loyal position of the government, as well as favorable taxation and cheap electricity, has created favorable conditions for the registration of crypto companies in Georgia.
Other beneficial factors that contribute to the favorable atmosphere are affordable banking (a personal account at a Georgian bank and an international credit card can be obtained for just 15 USD a year), high business confidentiality (Georgia is not a participant in the automatic exchange of CRS information, which means that no one will know about the financial turnover that takes place in local banks), quick company registration (just 1 day) and the scant legislative restrictions put on foreigners.
Beneficial taxation rates have attracted foreign entrepreneurs who have registered their companies in the Free Industrial Zone of Georgia where their tax burden is decreased to zero. Locals with annual turnovers of up to 500,000 lari enjoy a special tax regime in which they pay only 1% on their revenue per year. All these factors point to Georgia remaining a cryptocurrency hotspot moving forward.