When it comes to China, clarity isn’t exactly a trademark, and the recent crackdown on cryptocurrency mining is no exception. The State Council’s Financial Stability and Development Committee reported May 21 that it was restricting mining of Bitcoin (BTC) over concerns about financial risk.which led the South China Morning Post to announce that “China’s place at the center of global bitcoin mining is dwindling.”
“We are seeing the cryptocurrency market enter a path of ‘dechinization’, first in commerce and now in hashing power, due to a series of tougher measures against cryptocurrencies and bitcoin mining last week for Beijing“Wang Juan, associate professor of blockchain at Xi’an Jiaotong University and a member of the OECD’s Blockchain Expert Policy Advisory Council, told the publication.
But maybe not. Darin Feinstein, founder and CEO of Blockcap – one of the largest cryptocurrency miners in North America – is not absolutely convinced that bitcoin mining in China, the current mining center of the world, is over. In 2017, China made a similar announcement, he told Cointelegraph, further explaining:
“After that announcement, another company I founded, Core Scientific, signed several contracts with Chinese miners to help them move some of their miners back to the United States. None of these agreements came to fruition, and all of these miners continued to mine “in China to this day.”
Even so, three mining companies – BTC.TOP, Huobi and HashCow – announced that they were closing their businesses in mainland China, while China expert Bill Bishop ireported in his newsletter “Sinocism” that the eight government draft measures against mining activities in Inner Mongolia were “harsh” and “it will be much harder to think that this is just a temporary raid and that things will return to normal”. relatively soon. ” Other provinces and regions such as Sichuan and Xinjiang could follow suit.
Nobody can know for sure what’s going on behind the scenes in China, as Feinstein points out, but it’s worth asking: What is the real dynamic behind the recent (apparent) crackdown on cryptocurrency mining, and why now?
Is it just about avoiding financial risks, as the state has announced, or could there be something else, such as energy or environmental concerns? Will China-based mining companies move overseas now, and if so, where could new cryptocurrency mining hubs arise?
In the end, Is this another sign that energy-intensive proof-of-work validation and consensus protocols such as those used by Bitcoin and other cryptocurrencies are becoming increasingly popular and problematic in an increasingly environmentally active world?
A threat to the “old systems”?
“Control over monetary policy and the financial system is important to a central government and Bitcoin is a threat to it,” said Ethan Vera, COO of Luxor Tech, to Cointelegraph regarding the new restrictions on mining, adding: “Bitcoin is clearly cementing its place in the world and proving to be a valuable store of value for people worldwide. That threatens the old systems“.
Yu Xiong, International Associate Dean at the University of Surrey and Professor of Business Analysis at the Surrey School of Business, cites concern for the environment as the main driver behind the crackdown. Countries like China that have declared that they want to become “climate neutral” at some point -2060 in the case of China- they are now feeling increasing pressure to “stay away from emission-intensive sectors”. Bitcoin mining is a sector that can easily be sacrificed “nationally without undue cost”.Xiong told Cointelegraph.
Why now? “Bitcoin has grown too fast lately and has influenced the behavior of many investors,” said Xiong, adding, “Governments usually want a sector to grow sensibly rather than radically, so some action had to be taken.“
From Xiong’s point of view, however, this does not necessarily have to be the end of mining on the mainland. The sector could later develop into a regulated industry. To put it financially, “You’ve already made money this round, so now calculate, wait for the price to go down, and join again.”, According to him.
“It is too early to know the real impact of what the Deputy Prime Minister has said.“Vera said, adding:”We saw a few hundred megawatts of power requirements land on our table this week“. He also stated:
“Miners from Inner Mongolia and Xinjiang have turned to international suppliers to get their mining equipment out immediately. Some miners in Sichuan have started moving some of their operations overseas to diversify geopolitical risk.”
Are the environmental concerns justified?
Vera suggested that the environmental concerns about energy use and carbon footprint of crypto mining could be something of a “scapegoat,” while Feinstein suggested that the environmental problem has a few nuances. For example in the Sichuan region “Most of the energy is renewable and comes from a large group of hydropower plants that run on renewable energy. These plants have enormous excess energy during the rainy season in China.“, With electricity costs close to zero.
But China uses large amounts of coal elsewhere, Feinstein said. “I assume that the coal regions will be put under pressure to achieve their internal climate goals“While miners who are in areas where renewable energy sources are predominant may face fewer restrictions.”But we haven’t seen a full document yet, so it’s a guess at this point“.
Winston Ma, adjunct professor at New York University School of Law and author of The Digital War: How China’s Tech Power Shapes the Future of AI, Blockchain and Cyberspace, told Cointelegraph that environmental concerns were indeed a big factor in the repression, and while hydropower – as used in the Sichuan region – is considered clean energy, “the Chinese government is committed to meeting energy efficiency targets that could limit the expansion of energy-intensive industries such as cryptocurrency mining“And added:
“Yes, CO2 neutrality is an important aspect. […] Recent research by Chinese scientists has shown that these emissions in China [de la cripto minerÃa] it would exceed the total annual production of greenhouse gas emissions in some smaller countries such as the Czech Republic and Qatar.
However, Feinstein questions the carbon footprint and energy use arguments and insists that they lack context. “The total energy produced worldwide is 160,000 terawatt hours of energy. That is all energy from all sources. The Bitcoin network consumes 120 TWh of this energy. That simply means that the Bitcoin network consumes 0.00075 of the energy available worldwide, “less than a tenth of 1%.
Likewise is the carbon released “As a result of the energy consumption when the machines are connected to the grid” is also less than 0.1%, and this figure is drastically reduced as more mining machines switch to renewable energy sources. Feinstein added:
“There are industries that are criminally responsible for the destruction of our environment and our ecosystem, but this is not one of them.”
Could North America Make Up Lost Ground?
If China Reduces Cryptocurrency Mining, Will it replace North America as a regional mining hub, as some suggested before the new restrictions? Who could still benefit?
According to the Cambridge Center for Alternative Finance Bitcoin consumed currently around 110 terawatt hours per year while Ethereum adds another 44.5 – according to Digiconomist – and that doesn’t even include other PoW cryptocurrencies. Vera says:
“North America is ready to meet the lion’s share of this energy requirement in the medium term, but it will not have the capacity to meet everything immediately. We expect significant growth in South America, the region of the Commonwealth of Independent States [por ejemplo, KazajstÃ¡n] and Northern Europe “.
“If Chinese miners are nervous about future policies, they will slow down the process of buying new equipment,” Feinstein said. “And these equipment buyers are going to go to the next best customers who I think are in the US So we should see US miners increase their hash rate.”
However, there are potential barriers here, including the lack of infrastructure companies that provide the electricity needed to power the computers that validate blocks of cryptocurrency transactions. “To connect these machines, you have to […] Companies are building enough infrastructure at a speed to accommodate these miners. For now, the demand to connect miners exceeds the available infrastructure “said Feinstein.
“Kazakhstan and Canada are regions that Chinese miners are talking about these days for possible relocation,” Ma added. But relocation may not be as easy as it sounds. “Chinese miners may face unknown partners, unstable power supplies, and new unexpected compliance costs. If you add the cost of moving, probably only the largest and most resourceful mine operators will be able to handle the Exodus without a hitch“.
It’s important to note that all of the major bitcoin ASIC manufacturers are based in China, Thomas Heller, co-founder and chief business officer of bitcoin mining service provider Compass Mining, told Cointelegraph. Bitmain, MicroBT, and Canaan are the only three companies with next-generation Bitcoin ASICs. Heller continued:
“If the Chinese government were to crack down on ASIC manufacturers, it would have a huge impact on the mining industry. Currently, Bitmain has a factory in Malaysia and MicroBT is exploring the possibility of establishing a factory in Southeast Asia and I would expect these companies to step up their efforts overseas.
In other places “Russia and Kazakhstan are the preferred countries to relocate large numbers of old generation miners due to lower energy prices“Heller added”,while North America is more suitable for new generation units. The current challenge in North America is the severe lack of space to accommodate miners“.
Long term, What does all of this controversy say about Bitcoin and other cryptocurrencies that use energy-consuming validation protocols? Is it a long-term sustainable sector? “While we don’t believe that the repression in China has anything to do with the environment, we think it is an urgent problem in North America,” replied Vera, adding:
“Western miners entering the capital markets to expand must push for renewable energy or carbon neutral mining methods to attract capital. Publicly traded mining companies are the first to hit the market and they have to respond, as we saw with the Greenidge purchase of Carbon Offsetting and the move from Marathon to Compute North from its Hardin headquarters.
Bitcoin can continue to grow, especially if all of its mining pools move to renewable energy, Xiong told Cointelegraph. Indeed, the sector has the potential to be a shining example for other industries, ie “the first sector to achieve zero carbon emissions”.
On the other hand, Xiong wrote that “regulations and standards should be published as soon as possible to normalize the behavior of Bitcoin mining, specifically requiring that only renewable energy sources such as solar and hydrogen energy may be used for mining cryptocurrencies.”
Does China still play a long-term role?
Certainly, Have recent events marked the beginning of the end of China’s dominance in cryptocurrency mining, which is estimated to reach 80% of global capacity, although some put it below that?
“In the long term, almost all Chinese cryptocurrency mining equipment will be sold overseas as Chinese regulators will crack down on mining in the country.”BTC.TOP founder Jiang Zhuoer wrote in a blog post, Reuters reported. “China is losing computing power to foreign markets“including European and US mining pools.
Related: Zero-carbon bitcoin funds are gaining followers as investors seek a greener cryptocurrency
In light of China’s announcement of a similar mining restriction in 2017, Feinstein told Cointelegraph: “I would predict a similar outcome this time. These miners will be mining in 2024 when we can expect another similar announcement. We will see that certain countries forever ban Bitcoin and mining. If it were possible for a country to completely ban Bitcoin or Bitcoin mining, it would only happen once“.
But maybe the paradigm has really changed. “We continue to believe that China will play a role in mining in the long termVera said, “But this development has fundamentally changed the way Chinese miners perceive domestic risks and will fuel international expansion.”