TMT focus
Fast on the heels of the Middle East’s growing focus on crypto-assets, comes crypto-mining - the process of validating crypto-currency transactions. Validation takes the form of solving a mathematical problem. Networks of high-powered, high-performance, computers are used for this work which involves running multiple combinations of solutions to solve the problem. The crypto-miners who are successful in validating the transactions, which are then posted to the public ledger (or blockchain), are rewarded with crypto-currencies.
As regional hubs develop for crypto-asset innovation and regulations are enacted regulating crypto-assets in places such as Bahrain, Abu Dhabi Global Market and Dubai, the region has seen the growth of industrial-scale crypto-mining operations.
Just like any other large scale industry, crypto-mining operations have certain key requirements. As crypto-miners look to identify the best regional jurisdictions to base their operations, we have summarised below some of the key legal and regulatory issues to consider:
Data centres are fast becoming the homes for crypto-mining operations. Data centre operators are leasing space to crypto-mining operations. Whilst crypto-mining can, technically, be mined on a basic desktop computer or in your run-of-the-mill office or warehouse, to run industrial scale crypto-mining operations, high specification data centres are sought out, with the power and cooling required to maximise the performance of the crypto-miners. Countries with well developed data centre industries are seeing an influx of crypto-mining operations.
Data centre operators need to be aware of who is filling up their data halls and reflect this in their colocation arrangements, particularly in relation to the tenant usage of power and cooling. They also need to be aware of the fast developing regulatory landscape relating to crypto-mining and build flexibility into their leasing arrangements to manage this. On the crypto-miner side, they need to ensure the colocation arrangements clearly set out what they need to effectively run their businesses from a power and cooling perspective with clear and controlled pricing in place. They want to ensure redundant power and internet connectivity is in place. They also need to ensure that the colocation arrangements allow them to scale their operations, both up and down, as required.
The process of crypto-mining is energy intensive. Running crypto-mining operations continuously, whilst preventing the water-cooled IT hardware from overheating, requires large amounts of reliable, and, ideally, cheap, power. For crypto-miners, their first question is how much power costs and the sources of power available. Certain countries require permits to be secured based on the sheer amount of power required for crypto-mining operations.
As an example, in the UAE, the electricity market has not been de-regulated. Electricity tariffs are regulated at the emirate level, and the emirates have their own separate electricity markets, and crypto-miners should be looking for the emirate that provides the most favourable tariffs and also looking at if and how they can secure long term power supply contracts.
Crypto-miners are increasingly looking for more environmentally friendly and sustainable energy sources, including renewable energy resources. Connections with solar farms are increasing as crypto-miners look to locate themselves close to these renewable hubs. With the potential for the growth in environmental regulation in the region, crypto-miners building their businesses in the Middle East are already identifying access to different forms of energy.
The normal legal and regulatory issues need to be considered as crypto-miners build out their technology infrastructure in Middle East data centres. Key considerations include the importation and type approval of the technology and ensuring that technology is compliant with relevant laws and regulations, such as Internet of Things and cloud-related regulatory issues as crypto-miners look to cloud solutions to provide the compute power to effectively run their operations (and manage hardware and power costs). Crypto-miners often look to apply innovative connectivity solutions and these also need to be reviewed for compliance against regional telecommunications laws and regulations.
As with many new and fast-growing industries, crypto-mining is seeing the development of new and innovative intellectual property rights. We have focused on this in a separate article here, which provides a detailed look at the topic.
As we start to see a regional move towards the financial regulation of crypto-currencies, the question remains regarding the potential regulation of crypto-mining to create a strong and secure platform for the development of the industry. It is a new and evolving regulatory landscape. In a small number of jurisdictions, crypto-mining is still facing regulatory restrictions and there continues to be questions regarding the separation of the crypto-currency and crypto-mining regulatory landscape.
As this industry grows in the region, we are starting to see government authorities reviewing the crypto-mining regulatory position. An example of this is the recent announcement in Dubai on free zones developing the regulatory and licensing regime to support a crypto mining industry
As this industry sector grows, and the regulatory framework supporting it develops, both crypto-miners and the industries that support them, from data centre operators to power providers, will need to remain focused on the evolving legal and regulatory requirements.
As we start to see a regional move towards the financial regulation of crypto-currencies, the question remains regarding the potential regulation of crypto-mining.
For further information, please contact Martin Hayward.
Published in June 2022
