Issue 5, 2018. October-November


The Best Minds In The Business: Famous Economists Weigh In On Georgia

In the fifth article in this series, spoke with Niklas Dornbusch, who coordinates the German Economic Team Georgia; IMF Resident Representative to Georgia, Francois Painchaud; and Head of Macroeconomic Policy Research Center at ISET Policy Institute Yaroslava Babych to weigh in on the potential impact of the growing cryptocurrency mining operations in Georgia.

Niklas Dornbusch, together with Ricardo Giucci and Georg Zachmann, recently published "Mining cryptocurrencies in Georgia: Estimation of economic relevance."

A request from the National Bank of Georgia to look into how to regulate crypto-currencies in the financial market inspired the study, Dornbusch told The study estimated that mining turnover in 2017 was $311 million, and that the sector contributed $181 million or 1.2 percent to Georgia's GDP. To put that in perspective, the report noted that mining and quarrying contribution 1.1 percent to GDP, as does the manufacture of alcoholic beverages.

"In Georgia [the role of cryptocurrency mining] is much more important than in other countries," Dornbusch said.

The report highlighted, however, that while cryptocurrency mining was registering profits of $178 million in 2017, the sector was paying "practically no taxes."

Apart from direct economic benefits, Dornbusch noted that a successful cryptocurrency mining sector could serve as an "advertisement to attract FDI to the IT sector."

The IMF's Francois Painchaud agreed that developing the cryptocurrency industry could "hopefully lead to innovation and productivity gains spilling over to the broader economy."

But he warned that those gains would have to be balanced against the risks identified with cryptocurrency.

"As noted by the IMF Managing Director Lagarde, the underlying technology behind the cryptocurrency industry, including blockchain, is an exciting development that could revolutionize fields beyond finance," he said.

"They could lead to faster, cheaper, and more secure payment systems; bolstering financial inclusion. But they also pose specific regulatory challenges as they can be misused as vehicles for money laundering, financing of illegal activities, and tax evasion. Furthermore, excessive price volatility and their ill-defined connections to the traditional financial world could result in financial vulnerabilities. This calls for the development of a regulatory framework to meet these challenges."

ISET's Yaroslava V. Babych also sees the cryptocurrency industry as "one-off" for the Georgian economy.

She noted that much longer term measures need to be in place for high tech industries to develop in the country.

"Bitcoin itself, I think, will have a one off affect: it will create interest in young people for these kinds of things. But unless the government policies and the actions of private owners and so on support this, in the long term, there will not be anything," she said.