China’s relationship with bitcoin has long been defined by regulations. As news of the country’s latest restrictions once again dominates headlines, it’s important to put the new regulations in the context of past ones.
China’s first major crypto statute came in 2013, when the government recognized bitcoin as virtual property but banned it as a medium of transaction. In 2017, China’s central bank declared initial coin offerings (ICO) illegal, causing bitcoin’s value to temporarily plummet. While the currency’s trade restrictions are reiterated year after year, news of mining bans within several Chinese provinces is the latest cause of concern.
Last week’s announcement of a mining ban in China’s Sichuan province has created an exodus of miners seeking refuge for their hardware overseas. It’s estimated that 90% of the country’s mining capacity will be shut down as a result of the recent bans. The news is significant because Chinese mines power 80% of global cryptocurrency trades.
While mining regulations have brought FUD (fear, uncertainty and doubt) to the global crypto markets, causing the price of Bitcoin to fall dramatically, many experts remain optimistic as to how Chinese regulation will strengthen bitcoin’s long-term health. Here are 3 reasons why China’s mining ban may not be as bad as it seems.
1. Bitcoin is NOT banned in China
As it currently stands, Chinese citizens aren't being forced to surrender their assets to the state. The terms "bitcoin" and "ban" have been thrown around a lot with regards to the China clampdown, but it's important to note there has been no outright ban on holding bitcoin and other cryptocurrencies.
China’s central bank is primarily concerned by the increased popularity in cryptocurrency because it directly challenges the nation’s economic and financial stability. By upping the enforcement around speculative crypto trading and mining, it’s the Chinese State Council’s hope the nation's economy will be better insulated from the wild volatility of the crypto market. However, this rhetoric being used is far from new. The recent crackdown on financial institutions facilitating crypto payments is largely a reiteration of regulations from 2013 and 2017.
While China has taken a more aggressive stance against bitcoin and crypto in general in recent months, some of the regulations being mentioned could be subverted in the same ways they always have been. When China imposed a trading ban in 2017 during the ICO boom, cryptocurrency trading continued with many participants switching to foreign exchanges based in Hong Kong and Japan. As long as the holding of the assets themselves is legal, it’s possible Chinese citizens will look for ways to circumvent restrictions against trading them. This, of course, could change if the Chinese government opts to more strictly enforce existing laws.
2. Improved mining decentralization
While the exodus of miners may disrupt the crypto market in the short term, in the long term, increased decentralization promises to make the Bitcoin network less vulnerable to the rules and regulations of any single country. It's estimated that 65% of bitcoin mining takes place in China. With miners now forced to relocate to other countries, the redistribution should help to ease previous concerns of China’s mining dominance.
It’s also worth noting the conflict between bitcoin mining and national politics is far from new, with rumors of a Chinese mining ban dating to 2018. In May, Iran announced a temporary mining ban due to power shortages throughout the country. The news paired with the fact that 4.5% of all mining takes place in Iran caused crypto markets to shift, which is far from desirable in an already volatile space.
While Iran’s volume of mining pales in comparison to that of China’s, the point remains – risks and complications of mining will be less prevalent if the miners themselves are more spread out. And with this recent exodus, that’s exactly what could happen.
3. A greener crypto mining industry
With a sizable portion of Chinese miners expected to be relocating to the United States, the exodus could actually be a positive step towards reducing bitcoin's carbon footprint.
One landing spot for Chinese miners could be Texas. The state benefits from some of the world’s lowest energy prices, a growing share of renewable energy sources and a deregulated power grid. Maybe most important, it has one of the most pro-crypto politicians in the country as governor, Greg Abbot.
As it stands, North American miners use a wider range of energy sources compared to Asian-Pacific miners and tend to rely less on burning fossil fuels like coal. North American miners reported a 28% usage rate of coal-powered energy compared to a 65% usage rate by Asian-Pacific miners. North American hashers are also more likely to connect their operations to the shared power grid, which naturally diversifies the energy sources being used.
North America also has more incentives to supply miners with renewable forms of energy, both in the free market and via government regulation because the mining industry’s exorbitant use of energy continues garnering public scrutiny in the United States. In May, Elon Musk announced his company, Tesla, would no longer accept bitcoin as a payment method until the mining industry reached 50% clean energy usage. In June, Sen. Elizabeth Warren (D-Mass.) publicity criticized bitcoin for its negative environmental impact, calling for increased regulations around the mining industry. Musk also leads the Bitcoin Mining Council of North America with MicroStrategy CEO Michael Saylor, a group dedicated to improving the United States’ transparency and usage of renewable energy in bitcoin mining and countering bitcoin's environmental image.
Unlike with the Chinese government, North American regulations will not be an "all or nothing" affair. President Joe Biden’s addition of several new crypto reporting requirements in his 2022 budget indicates the country is moving towards a future where crypto may be tightly regulated but not completely banned.
Mining will likely be eased into using alternative energy sources over a multi-year span, a more sustainable tactic for progress than threats of an outright ban. While China voiced concerns over the environmental impact of hashing, it was far from the primary issue.
Ultimately, China’s mining ban and reiteration of trade restrictions are emblematic of many gripes investors have always had with bitcoin, and cryptocurrencies in general. For all the promise, innovation and ingenuity the technology brings to the digital age, there will always be obstacles, like government regulation, to overcome. But these are widely considered short-term obstacles in a long-term game – ones that have the power to strengthen cryptocurrencies like bitcoin as much as they can hurt them.
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