STORY NAME: Offshore Mining from – Bitfury Case

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USAGE TERMS: Share & Adapt - Attribution 4.0 International (CC BY 4.0) https://creativecommons.org/licenses/by/4.0/

EDITOR’S NOTES: N/A SOURCE: Tabula, link to the video http://www.tabula.ge/ Open Media Hub – http://www.openmediahub.com “This production was supported by OPEN Media Hub with funds provided by the European Union” LANGUAGE: Georgian DURATION: 13:53 JOURNALIST: Shota Tkeshelashvili EMAIL: [email protected]

SLUGLINE: Conflicts of interests, crypto currencies, bitcoin, Georgian Government, , Tax heaven. HEADLINE: Offshore Mining from Georgia – Bitfury Case DATELINE: , Georgia, July 2018

SCRIPT: Offshore mining from Georgia

Voice over 00:00-00:31 On December 16, 2015, consumption of electricity in Capital of Georgia has increased by 40 megawatts. This volume of electricity is twice larger than medium sized city or national railway consumes. The reason for such a sharp increase in consumption was the opening of Bitufry’s Bitcoin mining data center in Tbilisi’s free economic zone. Facility had a lavish opening. Georgian Prime Minister Irakli Gharibashvili and founder of the Bitfury group Valery Vavilov both attended the ceremony. It was one of the largest mining centers in the world at that time.

00:32-00:50 Irakli Gharibashvili Ex Prime Minister of Georgia

(soundbite in Georgian) Today I’m happy, because such a well-known company enters Georgia. This indicates that the investment environment in our country is better than it used to be. This gives us a hope for the future.

Voice over 00:51-02:36

Today, Georgia is one of the leading countries in bitcoin mining. According to the World Bank estimates, 15% of electricity consumed in Georgia is spent on cryptocurrency mining. Most of this mining takes place in large data center which is located in special free economic zone owned by Bitfury Holding. Government of Georgia has created tax free economic zone specially for Bitfury, thus creating offshore zone for bitcoin mining. Even more, Georgian Government has given 18 hectares of land specially to Bitfury for 1 Gel, which is equivalent of less than one US Dollar.

Bitfury has ties with ex prime minister of Georgia Bidzina ivanishvili. Wealthiest citizen whose net worth is higher than $4.8 Bn by Forbes estimates. In 2014 Ivanishvili’s fund has invested 20 million dollars in Bitfury. also one of Bitfury’s key managers - George Kikvadze is a member of the Board of Directors of Co- investment Fund founded by Bidzina Ivanishvili.

Cryptocurrencies are generated by computer chips which solve highly complex mathematical algorithms. In exchange for the completed work, a virtual system called blockchain confirms an operation done by chip and it gives it a bitcoin. This process is quite demanding, therefore mining bitcoins on industrial level requires tens of megawatts of electricity.

This increase in power consumption was one of the main reasons why the cost of electricity has increased by 10% in 2018. Increased power cost is putting pressure on businesses and citizens of Georgia.

But Bitfury is getting electricity 18% cheaper than other businesses get in Georgia, because company is not required to pay VAT tax which is a part of electricity tariff.

Largest parliamentary opposition force of Georgia - European Georgia sees business interests of head of the ruling party Bidzina Ivanishvili behind the tbilisi free economic zone and Bitfury.

02:37-03:53 Levan Tarknishvili Member of political party European Georgia (soundbite in Georgian) We have many concerns on how Tbilisi free economic zone was created. By Georgian laws, in order to even review the application from a company for creating free economic zone applicant must have a land. But Bitfury had no land, and to fulfill this requirement Georgian government, several months prior to the opening of the center gave them a land for a symbolic price, for less than one Georgian Lari. The second condition for creating free economic zone is that the investments and business activities on free economic zone should be encouraging employment and should be beneficial for entire economy. But in Bitfury case almost all investments were made in technologies which has been imported and very little people work there. So the country has not benefited by a cent, moreover indirectly, it affected the population of Georgia, because of the increase in electricity consumption, has resulted in an increase of electricity price.

Voice over 03:54-04:45 The founder of Bitfury Group, Valery Vavilov, confirms that Bidzina Ivanishvili’s funds is one of their investors. We have interviewed Vavilov in November 2017, when he visited Georgia to attend Silk Road Forum organized by Georgian Government. In the interview, Vavilov praised the Georgian tax system, but Georgian Government has totally freed his company from paying taxes. Vavilov also said that Bitfury was interested in opening new Mining center in Georgia. In contrary of his words, Bitfury sold it’s data center in Tbilisi in February of 2018 but kept their shares in free economic zone. Ephrem Urumashvili, a representative of Bitfury in Georgia, wrote us that they are not intended to build new data center in free economic zone at this time.

04:46-06:16 Valery Vavilov Founder of Bitfury Group (Soundbite in english) Co-investment fund has invested little bit in Bitfury.

Georgia has one of the lowest energy prices in region. And also what is very important Georgia’s energy is green energy, it’s hydro energy. And we are thinking to invest in our next data center and build it in Georgia most likely next year.

Georgian prices are quite competitive. Of course some of Canadian regions have lower energy price than Georgia, but Georgia has also a lot of different benefits compared to Canada. For example, internal bureaucracy of processes - it’s very easy to do business in Georgia. The tax system is so efficient so simple. And this is also very important. And also labor, labor costs are very inexpensive in Georgia and people are very hard working.

Once you place data on the blockchain this data cannot be deleted and cannot be changed. So this completely eradicates any attempts to data manipulation. Even if you have an access to the system you can’t change the data. It’s so extremely important to create the secure systems. So with the blockchain we will be able to remove third party checks and balances, remove the paperwork.

Voice over 06:17-08:21

Bitfury opened it’s first bitcoin mining center in Georgia in 2014. total capacity of center located in gori is 20 Megawatts.

After the opening of first center, the state handed to Bitfury a large plot of land in Tbilisi for symbolic price of 1 Georgian Lari. The Prime Minister Irakli Gharibashvili has signed the decree of this transaction. Officially owner of the land was a subsidiary of Bitfury, company named Georgia Technology Park.

Within 5 months of this decree, Government of Georgia issued another decree by which the land transferred to symbolic price for Bitfury was declared as a free economic zone. with the same document, Prime minister gave Ministry of Finance an order to monitor the borders of free economic zone and to arrange a customs checkpoint at its entrance.

According to the website of the Free Economic Zone, the first company to lease a land from them was Bitfury. Since the entire free economic zone belongs to Bitfury, it Means that company was leasing the property from itself.

Bitfury does not disclose information about their revenue. It means that citizens cannot get information how much of the budgetary income is deducted by the state, because company operates from free economic zone.

We asked to Minister of Economy and Sustainable Development Dimitry Kumsishvili what benefits does Georgia gets when a company which is making virtual money on an industrial scale gets highest tax credits from Government. Minister answered that today Georgia is a leader in region in cryptocurrency production and maintaining this position is a goal of Government, that maximum amount of bitcoins were made in Georgia. However, it is unclear how does a country benefit when a company is exploiting it’s resources for cryptocurrency generation, thus not pays any taxes to government.

08:22-08:45 Dimitry Kumsishvili Minister of Economy and Sustainable Development (soundbite in Georgian) The blockchain technologies and applications based on blockchain can be very interesting for the country. In worldwide Georgia has one of the largest mining capacity. Very large scale mining is ongoing in Georgia, and it has a positive impact on the economy of our country. We can additionally speak about its benefits more thoroughly.

Voice over 08:46-09:25 In addition to not paying taxes, Bitfury has become government contractor in 2017. The Government of Georgia launched a pilot project. National Agency of Public Registry of Georgia has began blockchain based land-titling project. Bitfury is uploading documents saved in Public Registry into blockchain. The presentation of the pilot project was attended by Valery Vavilov and member of the advisory board Hernando de Soto. Hernando de Soto has been in Georgia several years before the company opened Tbilisi free economic zone, during the visit he held a meeting with Irakli Gharibashvili, then Prime Minister of Georgia.

09:26-09:42 Valery Vavilov Founder of Bitfury Group (soundbite in english) This is the huge step to create the history, because the blockchain is really the transformational technology since the creation of internet. This technology will allow to add more security and more transparency, even more reduce the friction.

09:43-10:10 Hernando de Soto Member of advisory board of Bitfury (soundbite in english) I Think that Bitfury with blockchain will bring to this is development of potential that assets have. Aristotle used to say that the biggest part of any asset is its potential. It is the advantage of the additional facets that blockchain brings out.

Voice over 10:11-10:39 The World Bank has prepared a special Report on the growth of Cryptocurrency mining in Georgia. According to Hans Timer the chief economist at the World Bank in Europe and Central Asia, Georgia is has become of the leading countries in the world in Cryptocurrency mining. However, this growth may create a new type of social problem, which is price hike of electricity. Hans Timer says that currently 15% of electricity consumed in Georgia is spent on generating virtual money.

10:40-11:37 Hans Timer chief economist at the World Bank in Europe and Central Asia (soundbite in english) Georgia is one of the countries where this technologies are most developed. There is a lot of mining of cryptocurrencies going on. Many people invest in cryptocurrencies, there are many small firms that are experimenting with new applications of blockchain and then the government itself is experimenting with this technologies to improve their services and to become more accountable. That is all good news, but there are also drawbacks on the current applications. One big drawback is the electricity use in the mining of cryptocurrencies that is social problem. Almost 15% of total electricity used in Georgia is now used to solve puzzles in the mining of cryptocurrencies. That creates problems for electricity markets.

Voice over 11:38-11:52 Hans Timer draws attention to the fact that blockchain is still a new technology and the introducing it to the public services is not a tested path.

11:53-12:19 Hans Timer chief economist at the World Bank in Europe and Central Asia (soundbite in Georgian) There are several other problems on the cryptocurrency market, foremost the volatility of the currencies, there is also a question whether the blockchain technologies that is used for the cryptocurrencies is actually the right technology for all applications, including government applications.

Voice over 12:20-13:11 Bitfury was founded in 2011. Company is based in a tax haven of Cayman Islands, and operates through its subsidiaries. Bitfury Group LTD is registered in Cayman Islands, the company has a subsidiary in Luxembourg, which has a subsidiary in the Netherlands - Bitfury Holding BV. This company has founded free economic zone in Georgia through the subsidiary named Georgia technology Park. Bitfury Holding BV also owns another company in Georgia called BFDC GEORGIA LLC .

In June, Georgian parliament voted for new prime minister . in his speech to the parliament Bakhtadze said that he plans to reform tax system. According to Bakhtadze, all taxes will be administered through the blockchain system.

13:12-13:37 Mamuka bakhtadze Prime minister of Georgia (soundbite in Georgian) We will start administration of tax system with the new technologies. All taxes in exception of the value added tax, will be administered through the system of Blockchain. Therefore I give the task to the ministry of finance to come up with pilot project of the reform by next year.

Voice over 13:38-13:53

The details of this reform are not known at present. it is possible that tax administration system is given to a Bitfury whose investor is head of ruling party of Georgia and which received full tax benefits from government and even got 18 hectares of land in Tbilisi for less then one USD.

SHOTLIST: Shows: • WS Tbilisi, Free Economic zone of Bitfury (drone footage) • MS Opening of Tbilisi free economic zone Mr. Gharibashvili and Vavilov walking • Ms of Bitfury mining factory • Ws of Valery Vavilov • Close up of Vavilov • pan across audience • Sot of Irakli Gharibashvili (in Georgian) • Animation of mining • Animation of Data Centre • Ms of Bidzina Ivanishvili walking • Ws of free economic zone • Ms of Ivanishvili and Mr. kikvadze • Ws of mining centre • Ms of mining centre • Ws of parliament building of Georgia • ms of Ivanishvili • sot of Levan Tarkhnishvili • ms of valery Vavilov • pan across room • ws of mining centre • ms of mining centre • ms of Efrem Urumashvili • sot of Valery Vavilov • ws of mining centre • ms of Irakli gharibashvili and Valery Vavilov handshaking • ms of them walking • ws Time lapse footage of construction of data centre • animated image of TFZ • ws of Dimitri Kumsihvili • ms of • pan across audience • close up of Dimitri Kusmihvili • ws of mining centre • sot of Dimitri Kumsihvili • ws of Government meeting • close up of George Kvirikashvili • ms of Kumsihvili and Kvirikashvili • ws of government meeting • animation of blockchain • ms of Valery Vavilov • ms of Hernando de Soto • ws of de Soto and Gharibashvili handshake • sot of Valery Vavilov • sot of Hernando de Soto • ws of Hans Timer • pan across audience • ws of high voltage electrical wires • ms of Hans Timer • close up of Hans Timer • sot of Hans Timer • ws of Cayman Islands • animation of Bitfury Group shareholders • ws of office buildings in Amsterdam, Netherlands • ms of Mamuka Bakhtadze in Parliament Building of Georgia • ws of Mamuka bakhtadze • sot of Mamuka Bakhtadze • pan of mining centre in Tbilisi free economic zone • ms of Bidzina Ivanishvili

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CAMERA Merabi Okromchedlishvili, Viktor Merebashvili OPERATOR: VIDEO EDITOR: Giorgi Kasrashvili MUSIC RIGHTS: (If applicable)