Energy Not the Sole Factor Behind Shutdown of Bitcoin Mines in China?

In late 2017, China’s government had held discussions over shutting down of Bitcoin mines. The Leading Group of Internet Financial Risks Remediation had requested that local governments make an “orderly exit” from the industry. 

China produces the most Bitcoin in the world using Bitcoin mining, which involves an energy-intensive process of solving complex math problems to add transactions to the Blockchain, a public ledger. But the crackdown is about more than just the high levels of energy required to mine Bitcoin.

Bitcoin and Blockchain

Before delving into the essence of this article, one should understand the terms Bitcoin and Blockchain.

For those having followed banking, investing, or cryptocurrency over the last ten years, you may have heard of the term “blockchain,” the record-keeping technology behind the Bitcoin network.

Blockchain is a specific type of database. It differs from a typical database in the way it stores information; blockchains store data in blocks that are then chained together. As new data comes in it is entered into a fresh block. Once the block is filled with data, it is chained onto the previous block, which makes the data chained together in chronological order. Different types of information can be stored on a blockchain but the most common use so far has been as a ledger for transactions. In Bitcoin’s case, blockchain is used in a decentralized way so that no single person or group has control—rather, all users collectively retain control. Decentralized blockchains are immutable, which means that the data entered is irreversible. For Bitcoin, this means that transactions are permanently recorded and viewable to anyone. Bitcoin is a form of virtual currency—meaning, if you have bitcoins, you do not physically purchase goods by handing notes or tokens to the seller. Bitcoins are used for electronic purchases and transfers.

High amounts of energy utilization in Inner Mongolia

In early March 2021, China’s Inner Mongolia region announced steps to ban new cryptocurrency mining projects and shut down existing activities in a bid to cut down on the energy-consuming operation. The location failed to meet central government assessment targets with regard to energy usage in 2019 and was warned by the Chinese government. In response, the region’s development and reform commission laid out plans to shut down existing cryptocurrency mining projects by April 2021 and hold back from the approval of any new ones.

Bitcoin mining consumes an estimated 128.84 terawatt-hour per year of energy, more than the energy consumed by countries such as Ukraine and Argentina, according to a CNBC report. Inner Mongolia alone accounts for around 8% of all Bitcoin mining globally, more than the US which accounts for 7.2%.

While sustainability and environmental goals have been the buzzwords lately, there may be more reasons than one to shut down these facilities in Inner Mongolia.

The Good, The Bad and The Ugly

While the system and method of Blockchain is here to stay, and the energy consumption being the ugly side, there exists a threat in terms of security. 

While the blockchain technology promises to drive efficiency or reduce costs, it has certain inherent risks. These blockchain risks can be broadly classified under three categories:

• Standard risks: Blockchain technologies expose institutions to risks that are similar to those associated with current business processes but introduce nuances for which entities need to account.
• Value transfer risks: Blockchain enables peer-to-peer transfer of value without the need for a central intermediary. The value transferred could be assets, identity, or information. This new business model exposes the interacting parties to new risks that were previously managed by central intermediaries.
• Smart contract risks: Smart contracts can potentially encode complex business, financial, and legal arrangements on the blockchain, and could result in the risk associated with the one-to-one mapping of these arrangements from the physical to the digital framework.

However, China’s move isn’t just about the energy consumption. In fact, it is telling that it was China's central bank that met on the issue of Bitcoin mining, underscoring the fact that the issue is not only, or even primarily, an energy issue. It’s about clamping down on perceived risks of the cryptocurrency, which regulators have associated with malicious acts like fraud and money laundering. Authorities have already cracked down on thousands of criminal cases associated with alternative cryptocurrencies, including Onecoin and Ticcoin. These cryptocurrencies were viewed as Ponzi schemes used to raise illicit funds. Later, officials shut down cryptocurrency exchanges and banned fundraising through initial coin offerings (ICOs). Cracking down on fraud and money laundering alone does not appear to be the way China is addressing risks associated with Bitcoin, however. Authorities are going after the industry more broadly. This may be because China has enough financial risks to regulate at the moment, and it is at capacity, or it could be that officials really do view Bitcoin as insufficiently transparent to represent an appropriate means of exchange or store of value.

The Consequence

The move to shut down bitcoin operations has forced miners to move their equipment to other regions in China or even overseas. Chinese Bitcoin miners chasing lower electricity costs and looser regulations have already moved some operations to Russia, Belarus, Kazakhstan, Iran, Malaysia, Myanmar and even Iceland, according to a Forkast.News's check of the websites of several major Chinese mining pools that list mining farms' locations.

The perception that there is an influx of Chinese Bitcoin mining migrants now working overseas recently rocked Iran, which has suffered from power shortages, a surge in smog and blackouts earlier this year. 

Regardless of whether Iran’s air pollution and power outages were really caused by a surge in Chinese-owned bitcoin mining, many people in Iran blamed Chinese mining farms and posted anti-Chinese comments on social media. As a result, the Iranian government halted its supply of electricity to all cryptocurrency mining farms for two weeks, to cool down the outrage.