Friday 29 Mar 2024
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This article first appeared in Digital Edge, The Edge Malaysia Weekly on April 11, 2022 - April 17, 2022

The exponential rise of cryptocurrencies is causing an increase in illegal cryptocurrency mining activities and driving rampant power theft. From 2018 to 2021, the country lost RM2.3 billion in power theft as a result of illegal cryptocurrency mining.

All this consumption of electricity is becoming a hazard, because of not just excessive power usage but also the millions of tonnes of carbon dioxide emitted a year.

Given the skyrocketing popularity of digital assets that have increased exponentially in value, it is paramount that issues surrounding cryptocurrency mining are dealt with, say observers. 

Despite the escalating problem, however, there are no plans to govern cryptocurrency mining activities in the country,checks by Digital Edge reveal.

A drone used by PDRM to detect heat signals from suspected illegal rigs (Photo by Reuters)

Covid-19 containment measures have led many to flock to digital assets, and with it came boom trends such as non-fungible tokens (NFTs) and the metaverse.

Malaysia ranks sixth globally for cryptocurrency mining, which is not unlawful, as there are no specific laws governing the activity. A large proportion of the operations are conducted illegally, however, leaving the innocent with hefty electricity bills and putting lives at risk from excessive power usage.

“The illegal connection consumes a huge load of electricity to mine bitcoin, compromising the integrity and stability of the electricity supply,” a Tenaga Nasional Bhd (Tenaga) spokesperson tells Digital Edge in an email interview.

The issue made national headlines when Sarawak Energy Bhd joined forces with the state police to crack down on illegal Bitcoin mining in Miri last July. A steamroller was used to crush RM5.3 million worth of mining machinery, or rigs, seized from the operation — with the aim of striking fear in anyone involved in illegal mining. 

Shortly after, however, electricity theft and illegal mining were uncovered in other states. In 2020, Tenaga lost RM90 million worth of electricity in Johor; from February 2019 to July 2021, it lost RM9 million in Melaka; and, in Perak, authorities seized RM610,000 worth of mining rigs in February this year.

A steamroller was used to crush RM5.3 million worth of mining rigs in Miri (Photo by Dayak Daily)

The number of incidents has risen 400% since 2018, to 7,209 cases involving 4.5 billion kilowatts per hour (kWh) of stolen electricity that amounted to RM2.3 billion.

The illegal miners use various tactics, including tampering with electrical meters to bypass the connections or bribing officers not to submit reports of the misconduct. Tenaga has joined forces with the Royal Malaysian Police (PDRM), Energy Commission (ST), Malaysian Anti-Corruption Commission (MACC) and local councils across the country to clamp down on these activities.

According to Tenaga, 211 joint operations have been conducted with ST, PDRM and local councils, involving 677 premises in the peninsula from November 2020 to December 2021, and 244 arrests were made for power theft. Through joint operations conducted with MACC, Tenaga also foiled a Bitcoin mining syndicate in 988 premises nationwide.

Inspector General of Police Tan Sri Acryl Sani Abdullah Sani said in a statement on March 29 that, since 2020, Tenaga and PDRM’s Criminal Investigation Department had apprehended 627 individuals for illegal crypto mining and confiscated items worth RM69.8 million.

Currently, illegal miners are charged with power theft under the Electricity Supply Act 1990, which carries a fine of up to RM1 million or imprisonment for a term not exceeding 10 years, or both. They can also be charged with theft or mischief under the Penal Code.

Bank Negara Malaysia says that, while it oversees cryptocurrency exchanges and transactions, mining activities are not under its jurisdiction. The Ministry of Energy and Natural Resources has not come up with policies to address the issue either. At the time of writing, the ministry had yet to respond to questions posed by Digital Edge.

“So far, 65 out of 211 raids have been charged under the Penal Code,” says Tenaga.

Power theft of this magnitude will eventually lead to recurring interruptions in electricity supply, it adds. “In other words, these [illegal] miners are conducting their activities at the expense of the security and reliability of power supply for the public at large.”

According to a study conducted by UK financial site MoneySuperMarket, every Bitcoin transaction consumes 1,173kWh of electricity, which could “power the typical American home for six weeks”.

The Cambridge Bitcoin Electricity Consumption Index found that Malaysia ranked 24th in global electrical consumption, with 150.062 terawatts annually, of which the percentage of energy consumed for Bitcoin mining is 116.08%.

Digiconomist reported last December that a single Ethereum transaction released 102.38kg of carbon dioxide (CO2), “equivalent to the carbon footprint of 226,910 Visa transactions or 17,063 hours of watching YouTube”. That is like watching 8,532 Netflix movies — something that would require most of us a lifetime to achieve.

While mining activities are unregulated, institutions acting as exchanges in digital currency are deemed “reporting institutions” under the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (AMLA).

In 2018, a more specific guideline — the Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) – Digital Currencies (Sector 6) — was included, stipulating that businesses involved in dealing with cryptocurrencies would need to provide detailed information on the buyers and sellers of such currencies to ensure transparency in the use of digital currencies, protect the integrity of the financial system and strengthen incentives to prevent their abuse for illegal activities.

Countering illegal mining

Cryptocurrency mining activities are very costly. Miners are required to possess as many computers as possible for a higher chance of success in finding assets such as Bitcoin. This activity, evidently, consumes a lot of power.

To ensure their security, all cryp­to­­currency transactions need to be validated on the distributed public ledgers. Each transaction activity is recorded, creating a chain of timestamps known as the “blockchain”.

Miners act as the “guardian” of the ledger by validating transactions. Validations usually involve complex mathematical problems, and miners will compete to solve the problem.

The first miner to put the transaction on the ledger will earn financial rewards, usually in the form of cryptocurrency.

As the MIT Technology Review puts it, blockchains do not have a central gatekeeper, like a bank, to verify transactions. “Instead, both Bitcoin and Ethereum, the two largest cryptocurrencies, rely on a consensus mechanism called ‘proof of work’ (POW) to maintain a time-ordered ledger of transactions. Crypto miners are at the core of that process.

“Decentralisation comes at a hefty cost. In the case of proof of work, that cost is computing power. Proof of work pits miners against each other, as they compete to solve a difficult math problem. Any miner who solves the problem first updates the ledger by appending a new block to the chain and gets newly minted coins in return. This requires an enormous amount of computing power and, thus, electricity,” explains the magazine. 

In her “Illegal Roads Lead to Legal Ends” research published in the Asian Journal of Law and Policy in January, Institut Nyala researcher Hiral Sanghvi emphasises the need for regulations and guidelines to govern cryptocurrency mining activities.

On the national level, enforcement agencies and respective governmental bodies should issue adequate guidelines on cryptocurrency mining so that miners know exactly how they can legally mine Bitcoin in their locality, Hiral says in her research paper. “For instance, the United States Cybersecurity & Infrastructure Security Agency published guidelines for law enforcement agencies to combat the illegal practices of mining cryptocurrencies, such as to check electrical system privilege policies and review user accounts to verify that users with administrative rights have a need for those privileges. Besides that, the agency also illustrates the act of crypto-jacking that can occur on any internet-connected device that has a CPU.”

For starters, Hiral suggests, the government should be proactive and seek the feedback of industry stakeholders on how this activity can be held in check. “When these [cryptocurrencies] become a norm in the future, at least we will already have [regulations] to fall back on,” she says.

For its part, Tenaga has taken steps to deal with this issue. For one, it has proposed to ST that licensed cryptocurrency miners apply for a legal power supply and that Tenaga offers them a special tariff. In addition, its officers regularly conduct raids on suspicious premises.

Tenaga and PDRM are also using drones to detect heat signals from suspected illegal mining rigs and has increased surveillance to detect premises suspected of power theft or illegal power connection.

Clamping down on illegal operations aside, Hiral adds that the authorities need to consider the carbon footprint of the mining activities. El Salvador, for example, is constructing its “Bitcoin city” at the base of the Conchagua volcano to power mining rigs using geothermal energy. Some Nordic countries, on the other hand, use hydroelectric and wind turbines to power the rigs.

According to Hiral, using renewable energy sources to generate power is more sustainable and environmentally friendly, causing much less carbon emissions.

She says: “It’s quite interesting, at least you make use of the things that you have. The main thing to do is to find an alternative power source. After that, we can think about the laws and how to regulate [cryptocurrency mining]. Then we’ll be on the right track.”

The European Securities and Markets Authority — the regulator of the European Union’s securities markets — is lobbying to ban the energy-consuming POW system and replace it with the more compelling proof-of-stake (POS) method, which promises to use 99% less energy, allow the network to scale and potentially help it reach 100,000 transactions per second, compared to 15 transactions per second with POW.

POS was first proposed in the online forum BitCoinTalk in 2011. Ethereum has been working on making POS a reality, but it has been six years since the efforts began, as the system is more complex than the existing POW.

Instead of having miners validate transactions, POS replaces them with “validators”. To become a validator and win rewards, you lock up or stake tokens in a smart contract — a self-executing contract that runs the blockchain and holds cryptocurrency sent to its wallet address.

Ethereum has been testing the POS system on Beacon Chain since Dec 1 last year, with a total of 9.5 million ETH staked there. It is looking to implement the system in the main Ethereum chain in the next few months. It is also more secure than POW, as it requires control of more than half the coins in the system, which is more difficult for POW to achieve, but not impossible.

The POW system is widely used for popular cryptocurrencies such as Bitcoin and Ethereum to validate transactions.

It is not only the main contributor to massive energy consumption and carbon footprint but also electronic waste, as computer servers that work with the POW system last for only 1½ years before they end up in landfills.

 

Hatten powers into crypto mining space 

Spotting a business opportunity, Singaporean-listed property developer Hatten Land Ltd ventured into cryptocurrency mining early this year, using its unused property space and infrastructure in Melaka for cryptocurrency mining.

It has set up 80 rigs in the state and plans to expand to 2,500 rigs by year-end.

“The group’s strategy is to leverage our existing physical assets to provide a secure and stable facility to host cryptocurrency mining activities without having to incur substantial capital expenditure or recurring cash outflow,” says Datuk Colin Tan June Teng, executive chairman and managing director of Hatten Group Sdn Bhd.

Tan is optimistic that cryptocurrency mining will be beneficial to the country’s economic growth. “It can spur more employment and investment opportunities from the infrastructure created to support the ecosystem such as data centres, renewable energy, R&D construction and talent development.”

Although there is little clarity on whether the country’s regulators will start governing cryptocurrency mining, Tan says the authorities are “keeping a close watch” on the development of the sector, and their current focus will most probably involve new regulations to deter illegal mining activities.

“With the growing prominence of crypto mining activities, growing interest from stakeholders at all levels — investors, operators, users, incumbents and authorities — will require guidelines and regulations for the development and expansion of this emerging industry,” he notes.

“Malaysia is the sixth-highest country in terms of average monthly share of total Bitcoin hash rate [see ‘Digitionary’]. However, we see that the majority of the cryptocurrency mining activities in Malaysia are small-scale operations, therefore the industry is quite fragmented.”

Hatten, which is on track to becoming one of the largest local cryptocurrency mining operators, aims to become an industry role model and showcase the economic benefits of the sector.

In the light of reports of power theft, Tan says, Hatten also aims to educate the general public and work with the authorities to reduce illegal mining.

The company is also actively developing a renewables strategy using solar power to reduce the carbon footprint of its rigs. Its wholly-owned subsidiary, Hatten Renewable Energy, is working with Nestcon Sustainable Solutions (NSS) to develop a solar photovoltaic plant and facility (SPPF) and other renewable energy opportunities in Malaysia.

A total of 6,000 solar panels and associated systems, capable of producing 3.19MW-peak, will be installed on the roof of Melaka’s largest mall, Dataran Megamall, by the second half of 2022.

“Upon the completion of the project in 2022, we will enter into a power purchase agreement with the mall owner and generate about 3,900MWh per year, the equivalent of powering more than 1,100 three-room apartments for an entire year,” says Tan.

The green energy generated over the lifetime of the project will reduce at least 72,248 tonnes of CO2, akin to planting 137,000 trees.

While waiting for the solar installation to commence, Hatten will use idle electricity capacity at its malls for all cryptocurrency mining activities, ensuring no incremental burden to the environment.

To further support its green vision, Hatten plans to source about 300 acres of land in Melaka for solar energy generation and expand the solar farm acreage later on.

“In the longer term, as we continue to build up our solar power generation capabilities, we expect a greater portion of renewable energy in our energy mix to power Hatten’s ‘green’ cryptocurrency mining operations and other digital initiatives,” says Tan.

He believes it is only a matter of time before regulations on cryptocurrency mining activities are imposed, which will then result in higher usage of renewable energy. In preparation for that, Hatten aims to develop mega-scale solar power plants by 2027.

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