Virtual Shutdown

Inner Mongolia Autonomous Region, a major region for Bitcoin mining, released a platform on May 18 for the public to report illegal mining activities. That day, three banking industry associations – the National Internet Finance Association of China, China Banking Association and the Payment & Clearing Association of China – released a statement asking their members to stop providing virtual currency-related services and warned their customers about the high risk of crypto trading. Three days later, the financial committee of the State Council, China’s cabinet, explicitly called for the country’s first crackdown on Bitcoin mining and trading. 　

Attitudes toward cryptocurrency, which has proven highly volatile, are diverse globally. As supervision of cryptocurrency trading intensified since April, many countries remain prudently ambiguous and limit exposure to cryptocurrencies, while some are more open. On June 9, El Salvador became the first country to make Bitcoin legal tender. China made its cryptocurrency stance clear in 2017 when it shut down all virtual currency exchanges within its borders. With the arrival of new policies, the ban has expanded from trading to mining. Besides fending off financial risks, the current crackdown on the energy-intensive Bitcoin mining is seen as a measure for China to reach its 2060 carbon neutrality goals. But since policies vary by country and region, restricting crypto business remains a challenge for China. 　

An experienced cryptocurrency investor who spoke on condition of anonymity told NewsChina that the price surge was mainly due to pandemic-led loosened monetary policies, the purchase of Bitcoin by institutions and companies and growing public support for decentralized finance. Bitcoin contributed to a quarter of Tesla’s Q1 profits for 2021, for example. “Eased monetary policies caused concern over the depreciation of legal tenders, so some institutions turned to cryptocurrencies like Bitcoin to mitigate risk and recognized it as an investable asset.” 　

But the high volatility and sensitivity of cryptocurrency can cause gains to evaporate just as quickly when prices fall. Tesla CEO Elon Musk has caused fluctuations in Bitcoin’s price with his tweets. On May 12, Musk questioned the high carbon emissions of Bitcoin mining, causing the price to fall over 10 percent. A month later on June 10, the price jumped again when he tweeted the possibility of Tesla accepting Bitcoin payments. On May 19, right after China began to tighten regulations on crypto mining, Bitcoin’s price fell 30 percent. This was followed by mass forced liquidations totaling US$7 billion in Bitcoin within 24 hours, according to statistics from BTC126.com, a Chinabased fintech information platform. 　

The high volatility and risk of cryptocurrencies, which are not backed by underlying assets, is a major concern for Chinese financial regulators. “Virtual currency has no real value and its price is easily manipulated. Related trading activities will lead to multiple risks,” read the statement released by banking associations. The financial committee of the State Council listed the crackdown on Bitcoin mining and trading among its efforts to prevent financial risks and “avoid individual risk from spreading throughout society.” 　

Speaking on condition of anonymity, a cryptocurrency analyst told NewsChina he believed the market is in a bubble. When the price of Bitcoin surged in 2021, the market was so overheated that many parody currencies, such as Dogecoin and Shiba Inu coin, also surged, a sign that the market needs adjustment. 　

The problem is garnering international attention. In March, the European Central Bank (ECB) compared Bitcoin’s surge to other historic financial bubbles, including “tulip mania” in the 17th century Dutch Republic, and the government debt-fueled stock schemes of the South Sea Company in 18th century Britain, known as the South Sea Bubble. Luis de Guindos, the ECB’s vice president, told Bloomberg on May 19 “This [cryptocurrency] is an asset with very weak fundamentals and it is going to be subject to a lot of volatility.” 　

On June 10, global regulator the Basel Committee on Banking Supervision called for toughened bank capital rules for Bitcoin, saying the increasing exposure to cryptocurrency puts banks at risk. 　

“Crypto assets have given rise to a range of concerns including consumer protection, money laundering and terrorist financing, and their carbon footprint,” the Basel Committee said in a statement. 　

In China, improved supervision of digital currency is urgently needed to crack down on criminal activities like investment scams and money laundering that are increasingly seeking refuge in cryptocurrency. 　

As early as 2013, China’s central bank and four other ministries published a statement warning against Bitcoin-related risks, but still saw Bitcoin trades as normal online transactions of goods that investors could make at their own risk. But regulations gradually tightened as the number of crypto investors increased. 　

After China’s banking regulators prohibited cryptocurrency trading in September 2017, almost all the 88 known virtual currency trading platforms had withdrawn from the China market by July 2018, and the proportion of Bitcoin trading in yuan globally dropped from more than 90 percent to 1 percent. 　

After September 2017, domestic cryptocurrency exchanges began moving their servers beyond China’s borders while regulators have blocked them from doing business in China to varying degrees of success. “There is currently not one single exchange for virtual currency at home,” Chen claimed. 　

This round of reinforced regulation maintains the previous resolve to ban cryptocurrency trading but explicitly focuses supervision on Bitcoin and other coin mining. “It’s probably out of concern for reducing energy consumption,” said the anonymous analyst. 　

China has vowed to peak its carbon emissions by 2030 and achieve carbon neutrality by 2060. Bitcoin mining, an energy-intensive industry that requires powerful computers running non-stop, works against this goal. 　

The Cambridge Bitcoin Electricity Consumption Index run by Cambridge University tracks the electricity consumption of Bitcoin. It shows that based on consumption levels at the end of May, Bitcoin mining takes about 111.54 terawatt-hours a year on average, or 0.53 percent of annual electricity consumption worldwide. This is more electricity than the Netherlands consumes annually. As the largest Bitcoin mining market, China accounts for the bulk of consumption, taking 65.08 percent of the global hash rate (a measure of a blockchain’s total computational power), far higher than the US’s 7.24 percent. 　

Xinjiang Uygur Autonomous Region, Sichuan Province, Inner Mongolia and Yunnan Province have the greatest hash rates because electricity and land are cheaper there. Xinjiang accounted for over 35 percent of the total hash rate. 　

Ahead of the new mining policy, Inner Mongolia announced in March it would shut down virtual currency mining projects and prohibit new mines. In eight measures it released in late May, local authorities focused on big data centers, cloud-computing enterprises, internet companies and even internet cafés that enable virtual currency mining, as well as companies that provide venues and electricity for cryptocurrency mining. 　

Similarly, Xinjiang, along with Yunnan and Qinghai provinces, have reportedly been shutting down cryptocurrency mining projects or cutting their power supplies. Several virtual currency mines in these areas told NewsChina they have given up on mining cryptocurrencies such as Bitcoin and Ethereum for less energy-intensive ones like Filecoin, and are also trying to move their operations abroad. Mcloud.io, a mining service platform, announced on May 26 a block on IP addresses from the Chinese mainland. Many of its services have relocated to Kazakhstan. In early June, Sina Weibo accounts related to cryptocurrency trading were suspended for violating laws and regulations. 　

But Chen said it will be hard to ban domestic mining completely. “The crackdown mainly targets enterprises that could be supervised and controlled through financial audits. But blocking individual operations is still an issue, particularly those in areas rich in hydropower,” Chen said, adding that the remaining small mines will be inconsequential compared to the large ones. 　

Supervision abroad, though getting tougher, focuses more on regulating the trading process instead of prohibiting it. Gary Gensler, chairman of the US Securities and Exchange Commission, proposed stricter crypto exchange regulations to protect crypto investors similar to securities. For crypto transactions, the US Treasury Department said in May it will require any transfer worth above US$10,000 to be reported to the Internal Revenue Services, which will take effect by 2023. On May 21, Hong Kong’s regional government proposed a licensing system for crypto exchanges and required they provide services only to professional investors. 　

“Overseas regulators are tightening supervision over cryptocurrency’s uses. In the Chinese mainland, nevertheless, the trading process is not regulated step by step, but rather thoroughly blocked,” said the anonymous crypto investor. 　

These differences in supervision, as several interviewed experts said, have to do with the kinds of investors. In the Chinese mainland, individual, risk averse investors make up the bulk of Bitcoin holders, while in many other countries they are mainly institutions and financial groups. 

“The cryptocurrency situation is like peer-to-peer lending (P2P), which appeared in other countries first but peaked later in China and involved a large number of people,” Chen said. In 2018, banking regulators led a two-year crackdown on P2P lending that eventually eliminated the risky financing sector from operating in the country. “What works abroad is not necessarily suited for China,” Chen added. 　

“Cryptocurrency prices fluctuate too wildly to be suitable for retail investors. Besides, investing in cryptocurrency is quite intellectually demanding,” another cryptocurrency investor who spoke on condition of anonymity told NewsChina. 　

Supervision gaps exist because countries vary in their development levels and goals. In China, innovations are required to serve the real economy and the nation’s development, while in the US, financial innovation itself has become a mode of production, an anonymous investor told Time Finance, a financial news platform. 　

These differences in supervision make cracking down on cryptocurrency a challenge. Limiting domestic exchanges has not stopped the market, as overseas digital currency exchanges remain available to Chinese users and underground banks facilitate transactions. Meanwhile, “closing all exchanges means cutting off an important source of informants who can help regulators trace the identity of otherwise anonymous cryptocurrency holders,” noted an anonymous insider.