Fact File: Did Bitcoin Mining Lead to Blackouts in Iran?

On Tuesday, January 12, 2021, one of the largest power outages on record took place in Iran. Large cities in at least 10 provinces were practically shut down for hours. Not in the last two decades has such a significant blackout happened in the country.

Electricity and gas outages are common in Iran in the winter months. But this mass-scale event is linked to two recent developments: the widespread consumption of mazut fuel, which recently made headlines because of its link to drastically worsened air pollution, and also the energy consumption of Iranian bitcoin mining farms.

Ordinary citizens had a more or less clear understanding of the first issue. But the second has been less substantially covered in Iranian media. This report is an attempt to answer questions they and others might have about the bitcoin phenomenon in Iran.

 

What is Bitcoin?

Explanatory articles about bitcoin are generally stuffed with technical jargon and are not useful to a citizen unfamiliar with the field. We will return in the final section of this report to a brief explanation of cryptocurrencies and how they work.

For the time being, let us assume that most citizens in Iran and other parts of the world are familiar with a new type of digital currency having emerged. This new source of earnings is attractive not only to individuals but to some governments, especially in non-democratic states such as Iran, China, North Korea and Venezuela.

Bitcoin was invented about 12 years ago but is still not formally recognized as an international currency, and in some countries’ legal systems it is treated as a “commodity” instead. Those who “mine” for the digital building blocks of the currency, however, will be rewarded with bitcoins that they can exchange for some goods and services online, and many more have taken to speculatively investing and trading in bitcoin.

 

How Many People in the World are Using Bitcoin?

There is no way to find out definitively who is using bitcoin or other cryptocurrencies, or to what extent. But anyone who owns bitcoin keeps it in what is known as a "digital wallet", and about two weeks ago, at the end of 2020, the website Blockchain announced that the number of digital wallets had exceeded 63 million. Of course, it should be taken into account that some users have more than one wallet, and about 20 percent of these wallets are thought to be owned by people who have since lost the password.

 

What About in Iran?

Although users in Iran were familiar with the bitcoin phenomenon from the beginning, the number of people engaged with it has increased rapidly since 2016.

In mid-2019 a survey was conducted involving 1,650 people who use cryptocurrencies on Persian Telegram groups. The study found that 25 percent of those surveyed reported earning $500 to $3,000 a month from bitcoin-related activities. Of these, 35 percent were mining bitcoin and 58 percent were bitcoin traders.

Bitcoin mining and bitcoin trading via local exchanges are more popular in Iran because Iranians are often excluded from international exchanges. Many users are thought to have purchased VPNs and even fake IDs to get around this issue.

Iranian officials have by and large only described bitcoin in prohibitive terms, especially since the beginning of 2019, when discussions have taken place around "illegal equipment", the "illegal use of electricity", and "dealing with violators”.

 

What is Bitcoin Mining?

Bitcoin mining is the act of solving complex math problems to generate new bitcoins. In doing so, often with highly sophisticated machinery, bitcoin miners are maintaining the “blockchain”: the digital ledger of cryptocurrency transactions.

Jalil, an Iranian bitcoin miner, told IranWire he became acquainted with the work through Telegram. "I didn’t look into the meaning of the terminology much,” he said, “I just read some stuff. But after consulting with people, I first got one ASIC [an Application Specific Integrated Circuit, a small piece of hardware programmed to carry out one task – in this case mine bitcoin] and then bought a few more. After I configured each of them, I had nothing more to do with them."

But a bitcoin activist, who spoke to IranWire under the pseudonym Harold F, said some  miners are more involved in the process. In recent years, he explains, a vast labor market has emerged from bitcoin that encompasses not only the importers and distributors of mining equipment, but also those tasked with installing the hardware, instructing customers on how to use it, and repairing it where necessary.

The process of bitcoin mining or “extraction" is a computer operation. Theoretically, this is possible with a laptop and home computer, but it would not be profitable because of the large amount of time it would take and the electricity required. Most miners therefore use ASICs, and there are now several brands on the market.

Most ordinary miners, who are private individuals, buy and work with a few devices. But some organized outfits have set up networks involving thousands of devices at once, which are sometimes known as bitcoin “farms”.

Before a recent clampdown on private miners in Iran, detailed descriptions of various types of equipment were published online in Persian. Users could calculate their would-be monthly profit online by entering information such as the device they planned to buy and the local cost of electricity. Videos were also uploaded instructing Iranian bitcoin miners how to install their devices, alongside endless Persian-language explanatory articles on how the equipment works and the mathematics behind it.

 

Is Bitcoin Mining Legal in Iran?

Until about a year and a half ago, anyone in Iran could extract bitcoins or fractions of bitcoins in their own set-up at home. But problems of household electricity consumption on the one hand, and the attractiveness of new revenue for the government on the other,  initiated a process of change..

In August 2019, Abdul Nasser Hemmati, governor of the Central Bank of Iran, said a mechanism for the production of digital currency had been approved by the government's economic commission. Two months later, the Council of Ministers approved a new law that delegated the task of organizing it to a few ministries and organizations, and required would-be bitcoin miners to obtain a licence from the Ministry of Industry, Mine and Trade and the Ministry of Energy.

Then in July 2020, the Cabinet of Ministers passed a resolution aimed at “resolving the confusion of those involved in cryptocurrencies" which compelled the owners of cryptocurrency mining equipment to register their details within the next month.

Pressure on miners increased and numerous reports surfaced of equipment being confiscated, and of miners being prosecuted and imprisoned or issued with heavy fines. Those who succeeded in obtaining a licence now have their electricity and water calculated at export rates. All those who did not are now considered “illegal” miners. Iranian officials have put the number of "illegal cryptocurrency extraction centers" at 1,620 nationwide.

A miner from Damghan in Semnan province told IranWire that more and more neighborhood raids have been conducted of late. One of his acquaintances in Tehran, he said, had to sell two family cars to pay a fine and stay out of jail.

In the latest development on January 13, Iranian President Hassan Rouhani ordered the two ministries to take "serious action” against the unauthorized use of electricity to extract bitcoin. He also said it was defamatory to claim that the government itself was involved in bitcoin.

 

What Does This Have to do With Power Outages?

Specialist bitcoin mining equipment needs a very large amount of electricity in order to run. Multiple Iranian officials, including energy minister Reza Ardakanian and industry spokesman Mostafa Rajabi Mashhadi, have recently said bitcoin mining was the principal cause of the blackout of January 12.

The latter also blamed the “widespread Chinese presence in Iran with the necessary permits” and Iran’s blockchain association has also reported that Chinese workers had set up a large bitcoin farm in the Rafsanjan Special Economic Zone.

Representatives for Iranian electricity companies have encouraged people with information about “illegal” bitcoin mining farms to come forward, saying they could be rewarded with up to 20 million tomans for useful tip-offs.

 

Could Bitcoin Mining Really be Behind the Blackouts?

Bitcoin mining has been blamed for power outages by both Iranian officials and the media. But two cryptocurrency users told IRNA that in their view, the energy consumption of bitcoin mining in Iran simply is not significant enough for this to be the case.

The Minister of Energy has previously said that the average amount of electricity consumed by the whole of Iran during "peak" periods is as 38,000 megawatts. But he and others have said in the past that authorized miners are responsible for just 300 megawatts of this.

Meanwhile, the CEO of Tavanir energy company has pointed out that in total, about 3.8 percent of all cryptocurrency mining in the world is thought to take place in Iran. That being the case, he said, “If we convert this into electricity based on the existing model, these miners’ electricity consumption will be 500 to 600 megawatts: about half of which is permitted based on the contracts we hold."

 

What do we Know About Chinese Bitcoin Extraction in Iran?

For the past two years scattered reports have surfaced about the presence of Chinese bitcoin miners creating farms in various cities in Iran, from Qom, Rafsanjan and Lushan all the way to a village in West Azerbaijan.

The bitcoin mining farm in Rafsanjan was exposed in a video posted on Twitter more than a year ago. It was being run by Top Echo Middle East co, a Chinese-Iranian joint investment vehicle that owns the nearby ferrochrome smelting plant. In January this year Twitter users drew attention to the site again and shortly afterward, it was announced that the site had been shut down “at the request of the honorable people of Iran”.

This joint enterprise is far from the only such firm operating in Iran's special economic zones. The presence of China-backed bitcoin mining operations has been reported in almost every such area of Iran. Calculations have shown that even if these outfits really are being charged for electricity at export rates, they would still be raking in a huge profit from such enterprises.

 

Isn't Selling Electricity at Export Rates Good for Iran?

In recent years, several countries have tried to attract bitcoin miners as a means of generating income, through enacting miner-friendly laws and even offering incentives. In Pakistan, the government has just announced it will be launching two state-owned digital currency farms to support the country's economy.

The Iranian government could also exploit a potentially rich seam of revenue by properly regulating bitcoin mining and supporting would-be miners. But the corrupt governance structure, the lack of transparency and the compulsion toward monopolistic control means any such income generated in the Islamic Republic is unlikely to be used for the public good.

 

What is the Attraction of Bitcoin for the IRGC and the Islamic Republic?

Cryptocurrencies, and above all bitcoin, are of interest to the Islamic Republic and the security services for two principal reasons. First and foremost, it is another opportunity for control: by expelling ordinary citizens and granting a licence only to mining outfits linked to the state, the regime can increase its stranglehold on the Iranian economy. Strict controls have recently been imposed on ordinary importers of bitcoin mining equipment and devices are instead finding their way into Iran through the IRGC’s unofficial channels.

Simultaneously, bitcoin allows the Iranian state and the IRGC, which is also subject to international sanctions, to circumvent restrictions on trade and conduct covert transactions. From now on, a government official recently said, any bitcoin mined in Iran should only be used "to provide the currency for the country's importations." Parliament is also working on a bill to provide currency exchange services through bitcoin.

Alex Goldstein, chief strategy officer at the Human Rights Foundation, told IranWire that dictatorships and totalitarian governments might well find use in cryptocurrencies in the short term, but in the "long term" this new financial ecosystem, which is ultimately decentralized and unmediated, is likely to work more to the benefit of democracies.

 

Coming Full Circle: What Exactly is Bitcoin?

In October 2008, a research paper loaded with mathematical formulas was published entitled "Bitcoin; a peer-to-peer monetary system." The author gave their name as Satoshi Nakamoto: true identity unknown, even 12 years later.

The benefits of the new monetary system were defined as helping to eliminate bureaucracy, preventing inflation and eliminating intermediaries. The person or persons behind Satoshi Nakamoto appeared to have benevolent intentions with the creation of the world’s first cryptocurrency, despite what may have happened since then.

There are now a total of 21 million bitcoins in existence, of which about 18.5 million have been extracted. Even after the last three million have been “mined”, helping to process transactions will be a profitable venture in its own right. Last year a number of cryptocurrency activists, along with several human rights activists, wrote a brief guide to bitcoin that was duly published in Persian with the title The Little Bitcoin Book.

 

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