Sri Lanka joined the global crypto adoption drive after establishing a committee for exploring and implementing blockchain and crypto mining technologies, reported Cointelegraph, a site dedicated to Cryptocurrency news around the world in early October. It quoted the Director General of Information saying the Sri Lankan authorities have identified the need to develop “an integrated system of digital banking, blockchain and cryptocurrency mining” to stay on par with global partners and international markets.

I first suspected a reporting error. Why mining? Shouldn’t we rather focus on investment and trading? Then the same news hit local media. I was wrong. It was mining, not investment or trading. A committee has already been appointed consisting a few familiar faces. They are professionals.

Sri Lanka is thinking ahead. Many nations, including industrialised ones still struggle with their cryptocurrency mining legislation. The general rule is mostly straightforward. If you are at a place where you can use them, you certainly can mine cryptos.

There can be some deviations, though. Investopedia provides summarised versions of regulations around the world. For example, China banned crypto mining in May 2021, forcing many engaging in the activity to close operations entirely or relocate to jurisdictions that allowed mining. India, proposed in early 2021 that it should be illegal to issue, hold, mine, and trade cryptocurrencies other than state-backed digital assets. That is yet to be legislated. In Malaysia, they found a novel way to dispose of more than 1,000 crypto mining machines seized in raids in July; they crushed the devices using a steamroller. Photos and videos of the destruction are on the internet. The issue was about high electricity consumption for mining. Given these circumstances, it would be difficult to think anyone would jump in to recommence currency mining there soon. Canada and the United States appear friendly to crypto mining while in Israel it is treated as a business and subject to corporate income tax.

Why do national policies diverge on an issue that on the face of it isn’t controversial? To answer this question, we must first understand what crypto mining is and whether it eats electricity for breakfast, lunch and dinner, as many believe.

Crypto mining is an often misunderstood phenomenon. Yes, mining does create new coins but there is more to that. In fact some crypto currencies cannot be mined at all. Ripple and Cardano are two examples for non-mineable cryptos.

As its market share is nearly half, let’s first focus on Bitcoin – a minable crypto. Mining is just the process by which Bitcoin transactions are secured. In a more techy term, mining adds new ‘blocks’ to the block chain. It is crowdsourced to a set of geeks who have the equipment and time to do it. Bitcoin network forces miners to perform complex mathematical calculations. Doing so delays the validations untill many are satisfied – so the process is secure. As a reward for their services, miners collect the newly created bitcoins along with the transaction fees they confirm. The return to miners is halved every four years or so. Don’t ask why its four years. The maths come from the structure and that is roughly the time required to mine a fixed number of coins. Skipping a lengthy technical explanation, let’s keep only this in mind: miners (or miners’ groups) compete and their income is typically proportional to the computing power deployed.

Let’s get one thing clear. Theoretically one can use a PC or a smartphone for crypto mining. Installation of a software app is a simple process and guides (even in Sinhala) are plentiful on YouTube. So why is not everyone is doing it? One needs to exceed a certain critical mass for the process to be profitable. That is why miners deploy high powered Graphical Processor Units (GPUs) over ordinary CPUs for mining. Even better are ASICs (Application-Specific Integrated Circuit) – a type of circuit that has been designed solely for mining crypto. Generally, ASIC miners are currency-specific, so they can be seen as “Bitcoin generators,” or “Ether generators” optimised to solve the mining algorithm. These units eat power. Just Bitcoin mining, is estimated to consume around 90 TeraWatthours of electricity annually and that’s seven times Sri Lanka’s – a middle income country of 21.9 million population – annual energy consumption.

A a crypto mining farm consumes a lot less energy than a factory of similar size. We are talking here about running computers, not computerised lathe machines. It’s similar to a data centre’s energy consumption in some ways. If they do not burden the grid excessively, neither would a crypto farm. Even if they do burden the grid, as long as we can produce power at a lower cost to be profitable from the business that wouldn’t damage the production map.

Crypto trading and crypto mining are just two faces of the same coin – crypto trading is risky but returns are currently attractive. Traders bear the risk not the government, banking system or Central Bank

What about the cost? At an average cost of generation (13.56 LKR/kWh in 2020) that would come at a price tag of Rs 1.425 billion to mine all the Bitcoin in Sri Lanka. This is a conservative estimate.

We are discussing just the mining. What about crypto trading and investment? Consider this example. On September, El Salvador became the first country to make bitcoin legal tender (US Dollars are the only foreign currency that has the status of legal tender in the country). A risky bet, but the project is fiercely defended by Nayib Bukele, the country’s president. He revealed on October 3, on Twitter, that 3 million Salvadorans were now using Chivo, the digital wallet launched by the state so that the population can use bitcoin everyday. Thats nearly half of the Salvadoran population, which is just 6.5 million people.

Sri Lanka’s approach to trading and investment is somewhat confusing. On April 9, 2021, the Central Bank of Sri Lanka published a public interest notice warning against investment in cryptos and their use. I do not see it has still changed. This notice, in black and white, said that no regulatory safeguards exists relating to the usage, investment or dealing in crypto currencies in Sri Lanka. Therefore, it warned investing or using crypto currencies in Sri Lanka poses significant risks like:

1. Users/investors will have no regulatory or specific legal recourse in the event of any user or transaction related issues or disputes.
2. High volatility of the value of the crypto currencies, as it is dependent on speculation, exposing the investment of crypto currencies to a risk of making large losses.
3. High likelihood of crypto currencies being associated in financing terrorist activities and used by criminals to launder criminal proceeds.
4. Violation of Foreign Exchange Regulations; as crypto currencies are traded as assets in Exchanges, purchasing crypto currencies from abroad would lead to a violation of Foreign Exchange Regulations.

So where do we really stand? On one hand, we want to encourage crypto mining, on the other hand, we want to discourage crypto currency trading and investing. These two contradictory policies will surely lead us nowhere.

Crypto trading and crypto mining are just two faces of the same coin – crypto trading is risky but returns are currently attractive. Traders bear the risk not the government, banking system or Central Bank. Introducing crypto currencies as legal tender is somewhat complicated, but is there any logic in preventing crypto currency trading?