South African taxman seizes Bitcoin mining equipment worth R10 million

Police and South African Revenue Service (SARS) agents raided an unauthorized warehouse in Vryburg, North West, on Thursday, 4 May 2023, confiscating Bitcoin mining equipment and illegally-manufactured alcohol.

In its statement announcing the successful raid, SARS said the Bitcoin miners were illegally connected to Vryburg’s electrical grid.

“[The warehouse] was also used to manufacture 14,617 bottles of duty-free liquor and popular local brands,” SARS said.

According to SARS, the Bitcoin mining equipment is valued at around R10 million, while the alcohol was worth an estimated R3.8 million.

“The warehouse was well equipped with state-of-the-art equipment to enable those involved to carry out their criminal activities,” the revenue service stated.

“One foreign national was arrested. An investigation is underway, and more arrests are expected.”

SARS Commissioner Edward Kieswetter said the raid formed part of the tax collector’s decision to act more vigilantly against unregistered taxpayers conducting business and to protect legitimate businesses.

“The abuse of duty-free labels to circumvent payable duties and other criminal undertakings found at this warehouse undermines our economy and will be confronted and met with the full might of the law,” said Kieswetter.

In an interview with Bruce Whitfield on 702’s The Money Show, Kieswetter explained that seizing Bitcoin mining equipment was incidental.

Cryptocurrency mining is not illegal in South Africa — so long as operators pay their taxes.

Kieswetter said SARS expects every business to be legally registered as a company, and to be registered for tax purposes.

Failing to do so is a crime.

In the case of this specific warehouse, the operators were also dealing in illicit goods, which is another crime.

“When a company also misrepresents the nature of its business, we would consider that a telltale sign [of] the company being inappropriate,” said Kieswetter.

“Our crime intelligence suggests this warehouse was occupied illegally. There were several activities taking place there, none of which, according to our information, were formally registered.”

Kieswetter said with this specific raid, they were acting on information gathered by police Crime Intelligence.

Cryptocurrency mining rigs composed of Antminer S9 ASIC machines taken in 2018. Photographer: Akos Stiller/Bloomberg

Why Bitcoin mining consumes so much electricity

Bitcoin “mining” is a process of solving a complex mathematical problem that has the dual role of validating new transactions and securing the blockchain’s distributed ledger against tampering.

As a reward for crunching the numbers to validate new blocks of transactions, miners are paid a “block reward” — a set amount of new bitcoin minted with every block.

They also receive any transaction fees people pay when sending funds over the network.

A new block is created roughly every 10 minutes, and block rewards will end once 21 million bitcoins have been minted. From that point, miners will only receive the transaction fees. However, this is only set to happen in the year 2140.

This system, called “proof of work”, is designed to be computationally intensive as a security measure.

A by-product of being computationally intensive is that Bitcoin’s proof of work algorithm is also energy-intensive.

Although less power-hungry approaches have been developed, such as Ethereum and Cardano’s “proof of stake” systems, the Bitcoin faithful argue that nothing beats proof of work’s security and incentive mechanism.

Because Bitcoin mining is so energy-intensive, electricity is its biggest operational expense.

Anyone who can mine without paying for electricity will be much more profitable than those that do.

The CSIR’s blockchain research group lead, Carel de Jager, told 702 that to be profitable, South African miners currently have to keep their marginal costs below R2 per kilowatt-hour.

This amount fluctuates with the price of bitcoin.

De Jager also said that given the R10-million valuation of the gear that was seized, the Vryburg mine wasn’t a small operation.

Bitcoin mining uses computers with specialized chips called application-specific integrated circuits (ASICs).

Local cryptocurrency hardware retailer Bitmart lists the Antminer S19XP 140TH/s on special for R151,999. This is the most expensive Bitcoin ASIC it sells.

Therefore, the South African Police Service (SAPS) and SARS must have seized dozens of ASICs in their raid.

“These machines use about as much electricity as your average geyser, or maybe a little bit more actually,” De Jager said.

For reference, the Antminer S19XP is among the most energy-efficient ASICs available on Bitmart’s site, and it has a power consumption specification of 3,010W.

Considering the power requirements, De Jager said he doesn’t believe the warehouse SARS and SAPS raided had a standard domestic power supply.

“That must have been a pretty big one. They had to have their own transformers and things.”

Kieswetter said although this raid was the first time they had seized cryptocurrency mining equipment like this, it probably won’t be the last.

“We are aware of other operations, and we are working with our Crime Intelligence colleagues,” he said.

Now read: Next Bitcoin halving could send price past R900,000

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South African taxman seizes Bitcoin mining equipment worth R10 million