BELFRY, Kentucky - In a ravine deep in the Appalachian mountains, Warren Rogers stands on the ruins of an abandoned coal-washing plant that used to prepare hundreds of tons of the fuel a day for transport through the tiny town of Belfry, Kentucky.

His construction crews have been putting in 10 to 12-hour shifts through the winter, retrofitting the old site to power a new kind of extractive operation: mining the digital currency bitcoin.

"We're trying to digitize coal," said Rogers, the chief strategy officer of Blockware Solutions, a bitcoin mining giant that is expanding rapidly in eastern Kentucky.

Over the past year Rogers, a former venture capitalist, has been crisscrossing Appalachia, on the hunt for new bitcoin mining sites - and the power to run them.

"We own a money-printing machine," Rogers said, gazing at a tangle of power lines which descend the steep hills and connect to a pair of rusted old buildings, where his team is installing rows of Chinese-made bitcoin-mining computers.

"We're building our own Fort Knox," he told the Thomson Reuters Foundation.

When the planned construction is done, the facility will create up to three bitcoins per day - worth over $100,000, all the while sucking more power than all the houses in Belfry combined, based on estimates from Blockware Solutions.

Bitcoin and other cryptocurrencies are created or "mined" by high-powered computers competing to solve complex mathematical puzzles.

It is a process that guzzles energy and fuels planet-heating emissions, unless the machines run on power from renewable sources.

Meanwhile, there is debate around how effectively such operations can replace jobs lost when coal mines and other fossil fuel businesses shut.

In 2016, coal mining employed an average of more than 6,000 people per mine, according to the Kentucky Energy and Environment Cabinet.

Bitcoin operations, by comparison, only need a skeleton crew of less than a dozen to stand guard and maintain the machines at a site like the Belfry bitcoin mine, powered by Kentucky's coal-heavy electrical grid.

Still, with coal jobs having shrunk in the state to under 4,000 miners, compared to a peak of more than 50,000 in the 1970s, bitcoin miners say they are injecting much-needed investment into local economies.

The Belfry operation will provide between 5 and 10 full-time jobs, Rogers said, paying $23 an hour - nearly three times the minimum wage.

The Kentucky boom comes as environmentalists campaign to limit the spread of bitcoin mining, which consumes as much energy as a country about the size of Malaysia each year, according to estimates from Cambridge University.

China banned all crypto transactions and mining in September, citing energy concerns, and New York legislators recently introduced a bill to ban bitcoin mining, saying it undermined the state's climate goals.

Kentucky, however, is hoping to woo miners from all over the world.

"I don't see anyone who can compete with Kentucky in bitcoin mining," said state senator Brandon Smith, who has travelled the world pitching Kentucky as a prime location for mining operations.

In 2021 Smith - who chairs the natural resources committee in the state senate - spearheaded a package of tax incentives for bitcoin miners. The law was signed by the governor in March.

It could cost Kentucky taxpayers about $9 million a year in lost tax revenue - though bitcoin proponents say that will be outweighed by the broader economic benefits the industry brings, such as jobs and out-of-state investment.

Last year senator Smith briefly became the co-owner of a bitcoin mining operation in the Appalachian town of Inez.

He pulled out of the company in February, but is still working to make Kentucky a global hotspot for bitcoin mining. "We want to raise a flag and say to (bitcoin miners) come to Kentucky," he said.

MINING BOOM

Many large U.S. states have attracted signifiant bitcoin mining investment in recent months, but Kentucky is emerging as a small powerhouse.

With its fossile fuel-heavy energy supply, Kentucky produces more carbon from cryptocurrency mining than any other U.S. state, according to economist Alex de Vries, the lead author of a February paper published in the scientific journal Joule.

He estimates the state's carbon footprint at 3.1 megatons of carbon dioxide a year, the equivalent of running 650,000 passenger vehicles, according to EPA estimates.

That worries Lane Boldman, executive director of the Kentucky Conservation Committee, a progressive environmental group.

"There's an increasing concern that this could be a way to just prop up old power infrastructure and keep burning fossil fuels," she said.

Environmentalists say efforts to re-open closed gas and coal facilities to power the cryptocurrency industry undermine the battle to curb climate change, linked to fiercer storms, heat, flooding and wildfires across the United States and globally.

U.S. President Joe Biden has promised to halve U.S. climate-changing emissions by 2030 - and replacing fossil fuels like coal and gas with renewable energy, and cutting energy demand more broadly, are key to achieving that goal.

Kentucky sits at the nexus of several regional energy grids, and in 2020 about 70% of its power came from burning coal, according to government data.

But the state is also seeing growing investment in renewables, Boldman said, citing poverty-hit Martin County, where a proposed solar array could generate over 250 megawatts of clean power, enough to power tens of thousands of homes.

In the meantime, bitcoin mines have been springing up across the state - on top of abandoned coal mines, alongside highways, in industrial parks high in the mountains and deep in shale gas fields, hooked up to abandoned gas wells.

The precise energy mix and climate change impact of these operations is hard to pin down. While many are connected to the state's electric grid, some claim to use only renewables, while others burn fossil fuels in their own off-grid operations.

Investors from New York, Texas, and San Francisco are racing to find suitable sites in the state, forming local entities to prospect in the Appalachian region of eastern Kentucky, where land is cheap and power abundant.

At least four new operations have announced plans to build or expand bitcoin operations there since late 2021.

'ENVIRONMENTAL CRISIS'

The mining boom is matched by an environmental crisis, some locals warn.

"We don't have clean water in parts of Appalachia - but now I have million-dollar bitcoin mines? What is going on here?" said Nina McCoy, a retired biology teacher in Inez.

McCoy's house sits beside the Coldwater Fork stream, a small river that 20 years ago was the site of a devastating coal slurry spill that transformed the trickling brook into a 10-foot-wide torrent of coal-infused sludge.

People in town still do not trust the drinking water, she said.

Up the hill from her house, on a reclaimed surface coal mine, lies a hulking metal trash incinerator.

It will burn and gasify municipal waste trucked in from across the country, creating energy that local bitcoin miners plan to divert to their operations.

"We don't want them burning everyone's trash in our community," McCoy said.

After years of experimenting, the waste-to-energy technology is now ready for prime time, said John Burke, a former coal mine operator who co-owns the facility.

"Some people say it smells like trash - but it smells like money to me," said Burke, who grew up in neighboring Floyd County. He said the project had recently been approved by the state Environmental Protection Agency (EPA).

It will soon start generating more than 7 megawatts of power per month, he said - enough to initially power about 1,000 homes.

Once a bitcoin mine being set up around the plant becomes operational, the power will instead be routed to it, said Wes Hamilton, a local businessman. The vast majority of bitcoin mining operations in Kentucky do not generate their own power, but draw on the state's carbon-intensive grid.

Still, Senator Smith dismisses environmental concerns as overblown. "As people begin to mine (bitcoin) they will use more renewables over time," he predicted.

JOBS

The incinerator facility in Martin County is part of an ambitious bitcoin-based economic revival plan by Hamilton, who up until Feburary co-owned a bitcoin mining firm with senator Smith.

"My passion is to change the economic face of this region," Hamilton said, showing off shipping containers full of thousands of bitcoin-mining computers arrayed a stone's throw from the trash gasifier.

A 2021 report by the Appalachian Regional Commission labeled 38 counties in Kentucky as economically "distressed", or in the bottom 10% of U.S. counties in economic performance.

Martin County's poverty rate - defined as individuals living on an income of less than $28,000 a year - stands at 30%, nearly three times the national average.

Investors from around the country are descending on the county, where Hamilton pitches them on his vision for bitcoin mining powered entirely from trash.

"I just plopped down $50,000 for a few machines - why not?" said Adam Koehler, a bitcoin investor who lives in Cincinnati and drove down in December to see Hamilton's operation.

The crown jewel of Hamilton's plan is to open a center to train out-of-work locals to repair broken-down bitcoin mining machines built by the Chinese company Bitmain.

So far, seven technicians have been trained, Hamilton said.

Core Scientific, a bitcoin mining giant that announced plans to invest over $44 million in western Kentucky in 2018, predicted in its application for government financial incentives that it would create a total of 35 jobs.

There's no doubt jobs are needed, said Colby Kirk, the judge executive of Martin County, the highest-ranking elected official in the county.

"People drive one or two hours to find work ... Young people leave because they see no future here," he said.

He wishes the local bitcoin operation success - but is not sold on bitcoin as a silver bullet for economic revival.

"People here don't have broadband internet. I am focused on that kind of thing," he added.

TAX BREAKS

As part of Kentucky's drive to woo bitcoin miners, legislation written by Smith allows miners who invest more than a million dollars in the state to have their sales taxes waived.

Miners can also avoid paying sales tax on electricity bills, and Smith is pushing forward another batch of legislation that would give cryptocurrencies similar legal status to traditional currencies, such as allowing them to be passed on to heirs, something now difficult to manage.

"The question is: How do we get people to come here instead of West Virginia, Texas or Pennsylvania?" asked Daniel Mudd, a lawyer in Louisville.

His firm is fielding an influx of enquiries from bitcoin miners trying to understand the tax breaks available to them in Kentucky.

Blockware and Silicon Valley-based bitcoin mining firm PrimeBlock are among the out-of-state firms that are exploring Kentucky's tax breaks, according to company executives.

Senator Smith said his office is getting a constant stream of queries from bitcoin miners about how to take advantage of the tax breaks, though he says the state has so far been slow to actually approve applicants.

On top of the tax incentives, Kentucky's existing power infrastructure is itself a major draw, the companies say. The state is studded with abandoned industrial and coal sites already wired to handle large-scale energy supplies.

Having a bitcoin mine come to town can be a good deal for locals, said Rogers, by bringing down electricity prices by covering infrastructure maintenance costs that were previously passed on to ordinary rate-payers.

Kentucky Power, a utility serving 165,000 consumers in 30 counties, said no deals had yet been struck with bitcoin miners to pay infrastructure maintenance costs or to give preferential utility rates.

But a spokesperson confirmed dozens of mining operations have approached the utility to explore such an arrangement.

WEALTH DISTRIBUTION

No matter the economics, McCoy, a constituent of Smith's, is furious that her state senator has taken a personal stake in bitcoin mining while writing laws to benefit that very industry.

To deal with climate change threats, many governments "are asking regular people to save electricity, to try and do things to use less gas," said McCoy.

Smith said owning his own bitcoin operation did not run afoul of any state ethics rules, and that he got personally involved in the industry to "put my money where my mouth was" as he pitched the state as a hub for investors.

The Kentucky Center for Economic Policy, one of the few groups that lobbied against the bitcoin sweeteners, argues that incentivizing the industry so heavily is a poor use of government funds not least because it creates little local work. Karen Berg, the only Kentucky state senator who voted against the final version of the incentives package, said the proposal struck her as "fiscally irresponsible, environmentally unfriendly".

She would prefer the money be funneled into Kentucky's education system.

Some development specialists are skeptical the bitcoin incentives will help produce the kind of fair, employment-creating economic transition the region needs.

Baylen Campbell, executive director of the advocacy group ​​Appalachians for Appalachia, pointed to recent reports showing that utility bills are hitting all-time highs for households in eastern Kentucky due to rising fuel costs this winter.

"Local energy infrastructure is being pushed to the limit. Meanwhile these miners are receiving benefits that local business owners, and everyday people, are not being extended as well," he said.

Some see echoes of what they say were the worst elements of the now largely defunct coal industry: out-of-state money, absentee owners, and huge fortunes made with little wealth trickling down to local communities.

"We have a history here of outside players who come in to take advantage of available resources and great wealth that doesn't necessarily stick around here," said Kirk, the judge executive.

Karen Rignall, a professor of community development at the University of Kentucky, said economically distressed areas should not be forced to become profit centers for industries that produce little employment.

"The idea that they should be happy with a few jobs repairing servers, or guarding the perimeter of someone else's bitcoin mine - it's pretty insulting," she said.

LOCALS SPLIT

Still, for the few locals who have found work in the bitcoin mining facilities, it can feel like a big break.

"I've seen all of my family in coal mines for my whole life, getting their backs broken," said Ethan Aslinger, 22, from Harlan, Kentucky.

He was recently hired by PrimeBlock, the Silicon Valley firm, as one of 10 promised local hires to guard and do routine maintenance on their mining operation in Harlan County.

At $40,000 a year, it is an extremely competitive entry-level salary for the region, he said, standing in the half-constructed bitcoin mine site, in the shadow of one of the region's last operating coal mines.

Gaurav Budhrani, a former Goldman Sachs executive and CEO of PrimeBlock, said he is prioritizing building operations near energy grids that rely on renewable sources of energy.

He also closely tracks which states are offering tax breaks for new operations. His bitcoin mining firm is building facilities around the Appalachian region and in the Tennessee Valley.

But Kentucky's efforts to attract bitcoin mining frustrate businessman Geoff Marietta, the former head of the chamber of commerce in Harlan County who runs a small business accelerator.

"I am making a generational investment in this community — I'm not here to flip bitcoins," said Marietta, standing in a half-completed brewery he is building in downtown Harlan, a few miles from an under-construction bitcoin mine.

Marietta, who also opened a cafe and event space, is trying to rehabilitate a downtown dotted with abandoned buildings.

Yet while the bitcoin mine down the road is owned by out-of-state investors and will employ less than half of Marietta's payroll, it is paying lower tax rates than the owner of a restaurant or small business in town, he said.

That is a sign the state is prioritizing a "volatile asset" over "solid, long-term jobs and small businesses", he added. A Kentucky "off-grid" bitcoin miner who goes by his moniker "Hodl Tarantula" thinks it is unfair to cast the industry in those terms.

"There is no limit to the amount of capital that can be extracted from stranded energy now that bitcoin mining is at play," he said, standing at the site of a mine he has built in the middle of the woods in southeast Kentucky.

The small installation, miles from the nearest paved road, draws methane gas from a long abandoned well that Hodl Tarantula has fixed up with a generator and satellite internet, pumping out more than $20,000 in bitcoin a month.

Hodl Tarantula, who believes bitcoin offers people a path to financial freedom, sees off-grid crypto mining as a way for industrious small-timers to get into bitcoin without having to deal with big banks, power companies or government subsidies.

When he is not maintaining his own mines, he teaches others to set up similar operations. "We are never going to stop mining," he said. "This is just the beginning."

(Reporting by Avi Asher-Schapiro @AASchapiro, Editing by Zoe Tabary, Laurie Goering and Megan Rowling. Please credit the Thomson Reuters Foundation, the charitable arm of Thomson Reuters, that covers the lives of people around the world who struggle to live freely or fairly. Visit http://news.trust.org)