Despite Bitcoin’s Dive, a Former Soviet Republic Is Still Betting Big on It

TBILISI, Georgia — For three years, a windowless warehouse on the edge of town has been whirring with enough energy to power nearly 50,000 homes. Day and night, the warehouse, and dozens of cargo containers in a windswept valley, are generating Bitcoin, the cryptocurrency that has created a virtual gold rush in the former Soviet republic of Georgia.

Bitfury, an American technology company, is churning out millions of dollars’ worth of the digital money using ultracheap hydropower harvested from waters rushing down the volcanic peaks of the Caucasus. Even as the currency has tumbled in value, thousands of Georgians have jumped into the game and sold cars — even cows — to buy high-powered computers to mine Bitcoin and join what has become a state-supported dash toward data supremacy.

A former prime minister encouraged Bitfury with a $10 million loan in 2015. The governing Georgian Dream party sold 45 acres for $1 for Bitfury to set up shop. The government has been selling energy at half the rates charged in the United States or Europe, and it has created tax-free zones to draw in tech-savvy entrepreneurs.

The efforts have given Georgia, with 3.7 million people, a dubious distinction. It is now an energy guzzler, with nearly 10 percent of its energy output gone into the currency endeavor. The country consumed so much power in recent years that the World Bank ranked it one of the most active cryptocurrency sites in the world.

The whole experiment is likely to face immediate challenges as the price of Bitcoin declines, after a spectacular rise tempted investors around the world to bet on cryptocurrencies.

Most companies tend to lose money when the price of Bitcoin falls below energy costs, and mining operators worldwide have recently been scaling back. The largest mining company, the Chinese company Bitmain, has been closing offices and laying off workers. Last week, Bitfury announced layoffs at a facility in Canada.

Georgia, however, has been betting its economy on luring blockchain technology, the encrypted storage capability behind all crypto transactions.

Bitfury has helped migrate most of Georgia’s land registry to blockchain, making the government one of the first to rely on the secure digital ledger. Its tax system may soon follow. Georgia aims to beat Malta, Bermuda and other countries known for light-touch regulation of cryptocurrencies to dominate blockchain development.

“The economy’s digital transformation is our highest priority,” said George Kobulia, the economy minister. “We’re supporting this any way we can.”

In downtown Tbilisi, a neon-lit Marriott welcomes tourists. A nearby shopping mall installed a special A.T.M. for Bitcoin withdrawals. A cryptocurrency exchange flashes the prices of Bitcoin, Ether and other digital money on a ticker.

When street protests ousted the last Soviet-era leader in 2003, the government, struggling with poverty, corruption and grinding bureaucracy, began selling itself as a business-friendly low-tax outpost for investment. Big financial institutions came in. So did casinos. A private company willing to take a risk was Bitfury, founded in 2011 by a tech savant from Latvia who was proselytizing about a strange virtual industry.

Remi Urumashvili, a well-connected lawyer and now Bitfury’s main representative in Georgia, said that when Valery Vavilov, the co-founder and chief executive, approached him to seek advice on building a cryptocurrency operation, he was baffled.

“They told me they wanted to mine Bitcoins, and I’m asking them, ‘Hey, guys, what’s a Bitcoin?’” Mr. Urumashvili recalled.

Mr. Vavilov told him that the currency had introduced a new technology, blockchain, that had the potential for widespread use in business. Mr. Urumashvili said he had seen a potential tax advantage.

“They explained that it’s money that exists on the internet,” he said. “So I said, ‘If a thing doesn’t exist in reality, maybe the tax will be zero.’”

Mr. Urumashvili worked hard to lobby lawmakers to keep Georgia an open market for cryptocurrency. “I don’t like regulations,” he said, arching an eyebrow. “And there are very few regulations here for anything.”

As soon as Bitfury opened its doors, Georgia created “free economic zones” where mining activities and electricity weren’t taxed. When Bitcoin and other cryptocurrencies were exchanged for dollars or pounds, Georgia treated the exchange as an export exempt from value added taxes, so Bitfury could keep every penny of earnings.

Rumors have swirled that Bidzina Ivanishvili, a former prime minister from the Georgian Dream party and the country’s richest oligarch, has been a secret beneficiary of the digital experiment. He gave Bitfury a $10 million loan through his investment fund when Bitfury’s vice president, George Kikvadze, sat on his investment board.

Mr. Ivanishvili declined an interview. Mr. Urumashvili of Bitfury said that no laws had been violated to…

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