China intensifies its crackdown on crypto mining
China has been one of the biggest and most important markets for crypto for a long time, both in terms of crypto traders and investors, as well as crypto mining. It has been home to the highest number of crypto mining facilities anywhere in the world, but now it seems as though the Chinese government is enforcing a strict crackdown on crypto mining in the country, which has also had a significant negative impact on crypto prices already. Mining is the energy-intensive process that both creates new coins and maintains a log of all transactions of existing digital tokens.
Estimates have shown that 65% to 75% of the world’s bitcoin mining happened in China – mostly in four Chinese provinces: Xinjiang, Inner Mongolia, Sichuan and Yunnan. Sichuan and Yunnan’s hydropower make them renewable energy hubs, while Xinjiang and Inner Mongolia are home to many of China’s coal plants. We are already seeing the exodus of mining operations from Inner Mongolia, where crypto miners were given two months by the province to clear out, stating their inability to meet renewable energy and emissions targets set by the Beijing government. The way this exodus is measured is by looking at hashrate, an industry term used to describe the computing power of all miners in the bitcoin network. It is assumed that nearly 60% of bitcoin’s entire hashrate will leave China in the coming months, which shows the amount of mining power that was concentrated in the country, as well as the level of the current exodus.
The crackdown is not based solely on environmental reasons, as it has also extended to Sichuan now, where miners were largely using hydropower to run operations. This suggests that the Chinese administration is more concerned with financial risks around crypto, and is moving to restrict operations across the country as a result. The Sichuan Provincial Development and Reform Commission and the Sichuan Energy Bureau issued a joint notice demanding the closure of 26 suspected cryptocurrency mining projects by 20th June. The notice orders state electricity companies in Sichuan to conduct inspections and make corrections, and they are to immediately stop supplying electricity to crypto mining projects they have detected. It has also banned new crypto projects in the province.
Thus, China’s renewed crackdown on the cryptocurrency industry has wiped off around $400 billion in value from the total digital currency market. The broad range of this crackdown can be seen from the news that the People’s Bank of China (PBOC) reportedly spoke to Alipay, the payments service run by Alibaba affiliate Ant Group, and some major financial institutions, urging them not to provide services related to cryptocurrency activities, including account openings or clearing and settlement. These rules are not new – China banned local cryptocurrency exchanges in 2017 forcing them to move offshore. That did not stop Chinese traders from buying and selling digital coins, though it added a layer of complexity to crypto trading. However, the current crackdown shows how China’s top regulators are stepping up monitoring and pressure on financial institutions related to cryptocurrencies. Chinese traders would have to move their Chinese yuan to a platform to buy crypto. That would be done via a payments service like Alipay or a bank account. So the PBOC’s latest reminder to financial institutions could be looking to stamp this out further.
This crackdown has understandably led to mining operators looking for other locations around the world to set up their operations, and several countries have been more than welcoming of these entities. Because miners at scale compete in a low-margin industry, where their only variable cost is typically energy, they are incentivized to migrate to the world’s cheapest sources of power. One likely destination is China’s next-door neighbor, Kazakhstan. The country’s coal mines provide a cheap and abundant energy supply. It also helps that Kazakhstan has a more lax attitude about building, which bodes well for miners who need to construct physical installations in a short period of time. Texas often has some of the world’s lowest energy prices, and its share of renewables is growing over time, with 20% of its power coming from the wind as of 2019. It has a deregulated power grid that lets customers choose between power providers, and crucially, its political leaders are very pro–crypto–dream conditions for a miner looking for a kind welcome and cheap energy sources. Wyoming has also trended toward being pro-bitcoin and could be another mining destination.
There are, however, a few major limitations to the U.S. becoming a global mining destination. For one, the lead time to build the actual physical infrastructure necessary to host miners is likely six to nine months. Moving logistics is also going to be difficult, with a global shipping container shortage due to the pandemic. the biggest question is the reliability of the Texas power grid. A storm that devastated large swaths of the state in 2021 has reignited a debate over whether Texas should winter-proof its systems, a potentially costly project that might affect taxes or other fees for those looking to tap into the state’s power grid. More recently, ERCOT, the organization that operates Texas’ grid, asked consumers to conserve energy amid what officials called an unusual number of “forced generation outages” and an upcoming heatwave.