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Let see first how regulations on the use of crypto assets have recently evolved in China before giving you few comments about the specific issue of the Bitcoin mining activity in this country. Regularly, rumors of ban come up , but at the same time, we know that China will become to be the first major country to launch its own digital currency in 2020.
Bitcoin legal status all over the world
The legal status of Bitcoin and related crypto assets varies substantially from state to state regulations and is even still undefined in many of them. While some states have explicitly allowed its use and trade as an asset, others have restricted or banned it.
Green : Legal to use Bitcoin
Red : Full or partial prohibition
Purple (Russia) : Specific legal restrictions but Bitcoin is not prohibited explicitly
Yellow (of which China and India): Legal restrictions on Bitcoin use
The case in China : regulation changes
In China , financial institutions are not officially allowed to facilitate bitcoin transactions. Regulation prohibits financial firms holding or trading cryptocurrencies.
On 5 December 2013, People’s Bank of China (PBOC) made its first step in regulating bitcoin by prohibiting financial institutions from handling bitcoin transactions.
On 1 April 2014 PBOC ordered commercial banks to close bitcoin trading accounts.
In September 2017, cryptocurrency trading exchanges were banned by regulation with 173 platforms closed down in less than 9 months.
In early 2018 the PBOC announced that the State Administration of Foreign Exchange would crack down or ban on bitcoin mining. Then , many bitcoin mines based in China had stopped operating but this decision was not finally approved.
Mining ban in China
For many people Bitcoin mining is synonymous with China, as we find out there the largest mining pools but also the predominant manufacturers of ASIC mining equipment. We estimate the world mining share realized in China at 74%. But the NDRC (National Development and Reform Commission),a Chinese agency which is responsible for setting domestic macroeconomic policy and follow up, has been in charge of studying and planning the ban of this activity. But in fact, up until now, it has never been finally decided as many different players together involved were not yet consulted and as this decision has not been validated by the executive politics power yet.
Reasons to justify the idea of Bitcoin mining ban are several fold, of which :
-Environmental unfriendly aspects because mining is energy wasteful and rejects CO2. However, it worth to add that an increasing share of energy used for mining is coming from renewable sources.
-In addition, because of current regulations and laws as Bitcoin does not comply with all the existing financial rules.
But it is likely that the real reasons are related to the uncontrollable an pseudonymous Bitcoin using, in a period during when private saving is searching for ‘safe haven’ and because private money cannot flow out of the country (household savings are blocked locally in China). Together, the political power is looking for a greater credibility of the Yuan (it will also likely be coming from the launch of the crypto sovereign currency next year) .Meanwhile, the banking sector pressure is strong against Bitcoin, and even if Bitcoin is not widely adopted, the potential is huge and its use would greatly reduce the power of the banks.
How a removal of China mining could affect security ?
What would be the consequences of such a removal from China and if all that mining activity moves to other countries in the world where costs are also weak (low energy consumption as in Canada, Russia or Iceland) ? It means that market share of miners out of China would rise and limit the large mining concentration in China. This would not be a bad news in term of security. But if the miners don’t find any countries where to transfer their businesses and cannot sell the equipment , the available mining power would suddenly plunge and would slow down the global transactions validation process. Therefore, this would trigger big delays on the network and transactions commissions would increase sharply over the following days.
What would be the effect on ASIC (‘Application Specific Integrated Circuit’) ?
Bitmain and Canaan Inc (the two largest producers of ASIC mining gear.in China) and all the other players would be the most affected. While it appears that the ban only affects the usage of mining gear, not the manufacturing of it, the bottom line of these two companies will still be at risk.
When Bitmain produces a new ASIC miner instead of selling it they use the cutting edge technology to mine Bitcoin themselves. This gives them a significant advantage over all the other miners. Through this method Bitmain can generate a significant revenue on their new ASIC miners and once the profits start to flag they can still sell these ASICS equipment. If Bitcoin mining was banned in China, however, the large ASIC manufactures would no longer be able to do this (unless they set up mining operations in other countries) and they would lose profit because of it. With this scenario, it worth noting that tens of thousands of second hand ASIC miners would come onto the market at significantly reduced prices and benefits.
What would be the impact on prices ?
1/ Some people are saying that it could increase the price of Bitcoin because mining would become more expensive (needless to say that the cheap average price of electricity in China is the main reason for the plethora of Chinese miners)
2/Second argument relies on the fact that lowering Chinese mining interference would strengthen confidence on Bitcoin and could help for a higher price.
Conclusion : Mining could be limited but not banned
1.It seems clear that how Bitcoin and other crypto currencies are considered by Chinese officials is a double speech. : in the one hand, restrictions to use it, and on the other hand, an early advanced project to issue soon a sovereign Chinese crypto currency (likely backed to Gold). But this digital currency will be totally controlled by the Government..
- About the mining activity, a potential ban in China would structurally modify its fundamentals. A large proportion of the mining in China is still very active, especially in some regions (they are still 30 000 machines that are not all legalized in the Sichuan region and that represent roughly 70% of the Chinese mining capacity). What NDRC did announce has worried many people, but reality is far different and it is not likely that this business will be proposed to be banned, and if yes, it is not likely that the Chinese power agrees such decision. If it is decided, miners will leave the country, and if they can’t , the network will however continue to run with security.
Not a ban but a limited use, in addition to taxation that can be reduced (if miners use renewable energies) would be a more logical scenario
About the editor…
A passion : Economics, behavioural finance and emerging digital assets
Yves started his career in the asset management in 1986 where he worked at different positions as manager of equity funds and diversified funds. at Crédit Commercial de France and later, at Barclays group in Paris. In 1998, he took the lead of equity funds and diversified funds, then of the whole fund management business at the French team of the Dutch Robeco group before joining Natixis Asset Management in 2012 as Director of the Equity Investment business unit. Yves left Natixis AM in 2018 to start as an independant player for professional investors and corporates (advisor and fund raiser).
He likes to engages in sports that test his endurance like running and swimming, Yves is also fascinated by social sciences, and more specifically by history and economics. But this is the economics mechanisms behavioural aspect and the markets behavioural analysis that are a constant source of thought and discussion. Since few years, the blockchain issue and emergence of crypto assets is a new field of passion and opportunities for him.
Financial markets and asset management
Financial markets and asset management