Blockchain companies continue to leave China amid tightening regulation. What is the reason for this and why in the future the country will likely only increase pressure on the digital asset industry
Since mid-May, the Bitcoin rate has fallen by 48%, to $34 thousand. Cryptocurrency quotes began to decline sharply after tightening regulation of the digital asset market in China. Until recently, the country was one of the industry leaders, including in terms of the number of Bitcoin miners. However, now everything has changed; in the last two months, not only miners, but also companies from the cryptosphere began to leave the country.
On July 5, the blockchain company IBC Group announced plans to close data centers for cryptocurrency mining located in China. The company will transport equipment and employees from China to the USA, Canada, UAE, Kazakhstan, Iceland and various countries in South America.
Where it all started
On May 19, China's three financial regulators, which oversee online financial transactions, the payment market and clearing, banned local financial institutions from providing cryptocurrency-related services. The statement explained that virtual currencies are not backed by real value, their prices are easily manipulated, and trading contracts are not protected by Chinese law. After this, the Bitcoin rate fell by a third in one day, to $30 thousand.
A few days later, Vice Premier of the State Council of the People's Republic of China Liu He called for tightening regulation of mining and crypto trading in the country, and the government news agency Xinhua published an article “Urgently eliminate the hype and chaos around virtual currency.” It talks about four risks associated with trading and using cryptocurrencies: market, transaction, technology and compliance.
Amid negative rhetoric regarding cryptocurrencies, miners began to stop working in China at the end of May. BTC.TOP and HashCow were the first to stop bitcoin mining. Huobi crypto exchange also announced the suspension of mining and customer service from mainland China.
And in June, in two weeks, four Chinese provinces introduced a ban on mining. For example, authorities in Sichuan, a major cryptocurrency mining center, have approved measures to discourage mining in the region. This primarily affected 26 companies that operated officially.
The People's Bank of China (PBOC) also held a meeting with representatives of five Chinese banks and the Alipay payment system. The regulator has instructed financial institutions not to engage in transactions with digital assets. Following this, the Agricultural Bank of China (ABC), the third largest banking organization in China, issued a warning prohibiting transactions involving digital assets. The bank promised to block all such transactions, as well as terminate contracts with clients who made these transactions.
Banishment of Bitcoin
The 51st meeting of the State Council Commission on Financial Stability and Development of the People's Republic of China was recently held. It was chaired by member of the Politburo of the CPC Central Committee, Vice Premier Liu He. As a result of the meeting, a number of proposals were adopted, including one of them indicating the need to “focus on reducing credit risks, strengthening supervision over the financial activities of enterprises and striking a blow to Bitcoin mining and transactions with them.” This is the first time a top-level financial authority has publicly spoken out about Bitcoin, directly stating that it “needs to be dealt a blow.”
In June, the People's Bank of China (similar to the Central Bank) held discussions with several banking and financial institutions, such as Industrial and Commercial Bank of China (ICBC - the largest bank in the world), Agricultural Bank of China, Construction Bank, Postal Savings Bank, Industrial Bank and " Alipay Network Technologies". The stated goals of these meetings were: implementation of the decisions of the 51st meeting of the Commission of the State Council of the People's Republic of China on Financial Stability and Development, suppression of speculation with bitcoins and other virtual currencies, protection and maintenance of financial security and stability.
In recent years, the popularity of virtual currencies has increased: many people actively use them as a means of saving money and paying for purchases; naturally, there are also virtual currency speculators who make very real (and not virtual) fortunes. The most popular currency is Bitcoin. Virtual currencies (including Bitcoin) have no physical form and are complex digital codes generated by computers. The code generation algorithm is called “mining”. The equipment used has a lot of power and must consume a lot of electricity. Enterprises that create virtual currencies are commonly called “mining farms.”
The main equipment manufacturers are four Chinese companies: Bitmain, Bit Micro, Kanan Technology and Hangzhou Yibang Communications, which captured 98% of the bitcoin mining equipment market.
According to a study by scientists at the University of Cambridge, as of May 10, 2022, the annual energy consumption of global Bitcoin mining was about 149.37 terawatt-hours (1 terawatt-hour equals 1 billion kWh), which exceeds the energy consumption of countries such as Malaysia and Argentina , Ukraine, UAE, Sweden, and very close to the indicators of Vietnam, which ranks 25th in energy consumption in the world.
Owners of mining farms monitor electricity prices in different regions and transport their equipment to places where electricity prices are lower. Therefore, we can talk about seasonal migration of “farms”. In China, for example, they are transported by truck between the northern and northwestern autonomous regions of Xinjiang and Inner Mongolia, where there are sufficient thermal energy resources, and the southwestern provinces of Sichuan and Yunnan, with rich hydropower resources.
Excessive energy consumption by farms causes dissatisfaction with local authorities, as it leads to a lack of electricity, damage to the environment, and has other negative consequences. At the same time, the result of their activities - virtual money - does not bring serious benefits to the regions. And until recently, regional authorities fought them under various pretexts.
For example, the Inner Mongolia Autonomous Region has taken a series of policy measures this year to eliminate virtual currency mining projects, and as of the end of April, 35 farms had been closed and liquidated. Their energy consumption was equivalent to more than 1.6 million tons of coal. And China has set ambitious goals to reduce its use of coal and greenhouse gas emissions.
After a meeting of the State Council Commission on Financial Stability and Development of the People's Republic of China, provincial governments were able to act officially: in early June they issued local regulations banning “mining” and cut off electricity to Bitcoin producers.
After the People's Bank of China spoke with banks and financial institutions, they unanimously stated that they will monitor and investigate transactions related to virtual currencies, and will immediately block them if detected. Bitcoin transactions are now prohibited.
Currently, the cost of one bitcoin is $51,754 (RUB 3,775,290). It is clear that the owners of mining farms are not ready to close their business. In this regard, they are exploring the possibility of “moving” to other countries. In terms of current farm locations and logistics, the most attractive to miners are the United States, Kazakhstan, Canada and Russia.
The Chinese company Bit Digital, listed on the Nasdaq exchange, is in full swing preparing to ship its more than 20 thousand sets of equipment (70% of their total) from China to the United States. Headquartered in New York, Bit Digital is one of the industry giants. It recently purchased 3,515 mining machines, bringing the total number to 32,500 sets.
Bit Digital chief strategy officer Sam Tabar said the ban on bitcoin mining in China was a gift to the United States. In his opinion, “the mecca of bitcoin generation has now moved from China to North America, along with huge capital investment, energy innovation and jobs.” He also said the company has hired major international logistics operators to move the equipment and hopes to have all the machines in North America by the end of September. The company will install the machines in Nebraska, Georgia, Texas and Alberta, Canada.
However, the “relocation” process will cost millions of dollars. Transport tariffs have increased due to the pandemic, and the cost of fuel and other expenses are also rising. Computers imported into the United States from China are subject to a 25% tariff.
Another Chinese company, Bitmain, had four Bitcoin creation bases in China: two in Inner Mongolia, one in Sichuan, and one in Ningxia Hui Autonomous Region. On July 25, Bitmain announced that in cooperation with Kazakhstan's Enegix it would create the world's largest mining center in Kazakhstan with more than 50 thousand mining machines. It is envisaged that the center will receive electricity from Kazakhstan's national grid, which in turn receives it from a coal-fired power plant near the Russian border.
However, Russia is called the ideal place for Chinese farms to move. Chinese experts say, “The Far East has rich hydropower resources.” Among Russia’s advantages, it is also noted that its “Far East is in dire need of an influx of population and investment.”
In view of China's trade and economic tensions with the United States and other Western countries, friendly relations with China are an important advantage for Russia. Another positive factor is the geographical proximity of our country to China.
Among the most promising regions for relocation are the Leningrad and Irkutsk regions, the Krasnoyarsk Territory, as well as the adjacent constituent entities of the Federation.
Farms can be transported to the Leningrad region by sea, to the Siberian and Far Eastern regions - by road.
It is important for Chinese entrepreneurs that projects related to cryptocurrencies are already being implemented in our regions.
In the Leningrad region, the CryptoUniverse company invested in a “mining hotel” with 3,000 units of machinery and equipment with an area of 4,000 sq. m. m. The “Hotel” is located in a Soviet fertilizer laboratory, abandoned 20 years ago. Now Bitcoins (BTC) and Litecoins (LTC) are mined there.
The Irkutsk region is, first of all, interesting for the hydropower resources of the Angara River: the annual capacity of the Bratsk hydroelectric power station alone reaches 22.5 terawatts, so Chinese businessmen believed that, theoretically, 15-20% of all the world's bitcoin production capacity could be transferred here.
From all of the above, several conclusions can be drawn.
The Chinese authorities have long been concerned about Bitcoin, but decisive measures to ban it in China have only now been taken. This is due to the successful implementation of the digital yuan. To date, since 2022, there have been seven rounds of distribution of small amounts of digital yuan to the public in Shenzhen, Suzhou, Chengdu, Shanghai, Changsha, Xi'an, Qingdao, Dalian and other cities. Currently, the scale of pilot testing of digital yuan is expanding.
Since the beginning of the experiment, almost 150 million digital yuan have been distributed, more than 500 thousand people have used them to pay for utility bills, catering services, transport and travel, shopping in stores, as well as to pay for government services.
As of June 30 this year, the number of digital yuan users exceeded 10 million, 20.87 million personal wallets and 3.51 million institutional wallets were opened, and the total number of transactions reached 70.75 million, totaling 34.5 billion yuan.
The digital yuan is issued by the state, and the Chinese authorities will not tolerate other currencies in China issued by private individuals, especially those not controlled by the Chinese state.
Other “zero tolerance” factors for Bitcoin are the already mentioned excessive consumption of energy resources and environmental damage.
Many countries would like to accept Chinese miners. In Russia, some see this as an influx of investment. This may be true, but it is necessary that everything like this benefits the national economy, does not damage the environment and does not “draw” energy generating capacity from real production sectors.
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What is this connected with?
The Chinese authorities have set a goal to promote their own digital yuan, so they are and will continue to fight unofficial cryptocurrencies at the state level, explained Vitaly Mankevich, president of the Russian-Asian Union of Industrialists and Entrepreneurs (RAUIE). According to him, the Chinese are “clearing” the space by banning mining.
“China wants to make the yuan the world's main reserve currency, this can only be done through new technology, which is the digital yuan. Therefore, China will fight against any unofficial currencies that distance the country from global leadership in a new area,” Mankiewicz is sure.
He suggested that the tightening of cryptocurrency positions on the part of a number of national provinces will also intensify, since Bitcoin is not controlled, and therefore poses a threat.
New crypto havens
The recovery of the Bitcoin hashrate was facilitated by new “harbours” for mining - the USA, Kazakhstan, Russia and Canada. The United States now accounts for 35% of the global hashrate, Kazakhstan ranks second with 18% of mining in the network. Russia currently provides 11.2% and Canada 9.6% of the global BTC hashrate. Moreover, these regions have proven to be favorable for Bitcoin miners as they provide cheap electricity and have relatively favorable policies for cryptocurrency mining.
The majority of Russian cryptocurrency farms are currently concentrated in the Irkutsk region. Siberia is home to many hydroelectric power plants, whose relatively inexpensive electricity makes it attractive to miners. The region's climate is also ideal for cooling large numbers of ASICs.
Almost the same scenario is observed in Canada, with excellent weather conditions and sufficient inexpensive electricity. In June, Black Rock Petroleum announced a deal that, if completed, could attract much of the BTC mining industry to Canada.
conclusions
Experts almost unanimously decided that the main reason for the pressure from the Chinese authorities on the crypto industry was the upcoming launch of the digital yuan . At the same time , many believe that Chinese regulators made a mistake when they decided to get rid of participants in the crypto community.
Despite the fact that cryptocurrencies in China have come under pressure from the authorities, experts believe the changes can have a positive impact on the digital asset market. In particular , the migration of miners from China can increase the level of decentralization of the crypto industry.
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What would be the potential consequences of this ban?
First, although the market fell slightly following this news, it shouldn't have a significant impact in the long term.
There have already been many “Bitcoin bans” from China in the past. This development was already expected and was built into the price of Bitcoin and other crypto assets, especially after China’s actions against Bitcoin mining last summer.
It will be interesting to see if this speeds up the adoption of China's official digital currency, e-CNY, China's central bank digital currency (CBDC).
China is years ahead of other countries in the world when it comes to CBDC development, as the government began its CBDC research back in 2014.
And over the past couple of months, e-Chinese Yuan transactions have generated over $5 billion in transaction volume, with over 1.3 million use cases and over 30 million retail and corporate wallets opened.
Don't forget that the Winter Olympics are just around the corner, expected to start on February 4th, when many expect electronic Chinese yuan to become widespread.
How pressure from Chinese authorities on miners will affect the crypto industry
An expert on the popular anonymous digital asset exchange StormGain, Dmitry Noskov, believes that restricting crypto activities in China will lead to a decrease in the number of specialized specialists in the country.
In his opinion, “the future lies behind technologies such as blockchain and cryptography.” Accordingly, by introducing restrictions on working with digital assets on the territory of the country, China, the expert is sure, only made things worse for itself.
Expert StormGain believes that the relocation of miners from China will strengthen the decentralization of the crypto industry . Dmitry Noskov explained his point of view by the fact that China previously occupied more than 50% of the Bitcoin (BTC) hashrate. As restrictions were introduced, the figure began to fall.
Changes in the share of Bitcoin hashrate in countries. Source: cbeci.org
Also, due to the pressure on cryptocurrencies in China and the Chinese crypto community, in his opinion, industry participants will face a market redistribution and an “arms race” due to a drop in hashrate.
Dmitry Noskov noted that the crypto industry steadfastly withstood the blow from the PRC. The expert believes that in the future “we can count on stabilization of the situation.”
EXANTE lead strategist Janis Kivkulis claims that pressure from the PRC authorities on the crypto community did not cause an outflow of users from the industry.
“They [members of the crypto community] do not change their type of activity. Often we are talking only about a change in official jurisdiction,” the expert noted, hinting that the behavior of the Chinese authorities was the reason for the migration of local members of the crypto community.
The head of the investment department of ICB Fund, Aaron Chomsky, believes that the actions of Chinese regulators, coupled with the suspension of Tesla sales for bitcoins, negatively affected the behavior of prices in the digital asset market and brought down the BTC hashrate.
Bitcoin hashrate chart. Source: blockchain.com
“It may take, at best, three quarters to return to previous peaks,” the expert noted. He also voiced the reason for such a long recovery - China is ahead of other countries in offering members of the crypto community more accessible conditions for effective work.
Aaron Chomsky also drew attention to the fact that mining in China brought profit to local authorities.
“The decision by Chinese regulators was a disaster for the mining industry. A significant part of local miners worked legally and brought profit to the country’s economy,” the expert considered, noting that the launch of the digital yuan turned out to be a more important geopolitical task for local authorities.
Aaron Chomsky, like Dmitry Noskov, believes that the relocation of miners from China will increase the decentralization of the market. At the same time, against the background of the migration of the crypto community, many participants in the crypto industry switched to renewable sources of electricity, the expert noted.
Interesting! The transition of the majority of miners to renewable sources of electricity is a key condition that Elon Musk put forward for the re-launch of accepting payments in bitcoins for cars of his electric car manufacturer Tesla.
The results of a study by analysts of the non-profit organization The Bitcoin Mining Council (BMC) from the beginning of July 2022, according to which 56% of miners use renewable sources of electricity in their work
Valdis Wuldorfs, head of the trading department at Aravana Capital Management , believes that the digital asset market has adapted to changes and the prohibitive actions of the Chinese authorities no longer play any role.
