Is it unwise to ban virtual currency mining?
Professor Yang Wang from the Hong Kong University of Science and Technology shared his insights on Bitcoin and the blockchain industry at the HashKey New Horizons event. Professor Wang is an internationally renowned mathematician and currently serves as Vice President (Institutional Advancement) and Chair Professor of Mathematics at the Hong Kong University of Science and Technology. He has made outstanding contributions in the fields of big data and biological intelligence, and has a deep understanding of the blockchain industry and policy making.
Professor Wang recalled his early misunderstanding of Bitcoin. When he first came into contact with Bitcoin in 2012, he thought it was a scam and missed the opportunity to participate in it early. As time went by and the industry developed, he gradually realized the importance of Bitcoin and blockchain technology, and pointed out that Hong Kongs development in these areas was too slow and needed higher goals and determination to lead regional development.
Of course, what caught Lawyer Honglin’s attention the most was that Professor Wang emphasized the social and economic value of virtual currency mining in his sharing. He believed that it was unwise to completely ban mining, because this would drive the mining industry to other countries and lose valuable tax revenue and economic opportunities. He suggested that policy guidance and supervision should be used to promote the legal and compliant development of the mining industry and achieve the integration of the digital economy and the real economy.
After Professor Wang shared the content, Lawyer Honglin forwarded it to several friends in the industry for exchange and discussion, and wrote this article based on the exchanges to talk about Lawyer Honglin’s views and ideas on virtual currency mining.
Cryptocurrency mining: some are happy while others are worried
Once upon a time, mainland China was the dominant force in the cryptocurrency mining market. According to data from the Cambridge Center for Alternative Finance in 2021, Chinese miners account for more than 65% of the Bitcoin networks computing power, with Xinjiang, Sichuan, and Inner Mongolia accounting for 35.76%, 9.66%, and 8.06% of the total network computing power, respectively. Since 2021, the Chinese government has gradually strengthened its negative supervision of cryptocurrency mining, and the proportion of computing power dominated by Bitcoin has naturally plummeted. Cryptocurrency mining has gradually become a topic that has disappeared from the mainstream media.
According to Honglin Lawyer’s understanding, China prohibits virtual currency mining for the following reasons: First, virtual currency mining consumes a huge amount of electricity, leading to tight power supply in some areas and causing adverse effects on the environment. Second, virtual currency transactions have high financial risks, which can easily lead to market fluctuations and speculation, posing a threat to financial stability. Finally, there are risks of illegal activities such as money laundering in virtual currency transactions and mining activities, which makes supervision difficult.
For these reasons, the Chinese government has taken a series of measures to gradually strengthen the supervision of virtual currency mining. In September 2017, the Peoples Bank of China and seven other ministries and commissions jointly issued the Notice on Preventing the Risks of Token Issuance and Financing, which completely stopped the initial coin offering (ICO) and required all types of token issuance and financing activities to stop immediately. In April 2019, the National Development and Reform Commission included virtual currency mining in the Guidelines for Industrial Structure Adjustment to be eliminated, showing that the governments attitude towards virtual currency mining has become stricter. In May 2021, the Financial Stability and Development Committee of the State Council proposed to crack down on Bitcoin mining and trading. This is the first time that China has clearly proposed to crack down on virtual currency mining and trading at a national level meeting. In September 2021, the Peoples Bank of China and ten other departments issued the Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation, which clearly stated that virtual currency trading activities are completely banned, and financial institutions and payment institutions are required not to provide virtual currency related services. Local governments have successively introduced mining clearance policies. For example, the governments of Inner Mongolia, Xinjiang, Sichuan and other places have required the closure of virtual currency mining companies and the clearance of related projects. These policies demonstrate the governments determination to curb virtual currency mining activities.
Unlike China, which restricts and prohibits virtual currency mining, other countries overseas have different attitudes and policies towards virtual currency mining.
United States: The United States is relatively open to virtual currency mining, but the policies of each state are different. For example, places such as Texas and Wyoming are friendly to cryptocurrencies and encourage mining companies to invest, while New York has a more stringent licensing system. The United States has attracted a large number of mining companies, especially after China cracked down on mining, and many miners moved their equipment to the United States. According to data from the Center for Alternative Finance at the University of Cambridge, by 2022, the United States accounted for 37.84% of the global Bitcoin computing power. These mining activities not only drive local economic development, but also optimize energy consumption. For example, some mining companies in Texas work with power companies to use renewable energy and reduce power consumption during peak power demand periods to support grid stability. On June 12, 2024, former US President Trump met with executives from Nasdaq-listed Bitcoin mining companies CleanSpark Inc. and Riot Platforms, promising that Washington would support the Bitcoin mining industry. He also posted on social networking sites that he hopes that the remaining Bitcoins will be mined in the United States, and reiterated that this will help the United States become an energy power.
Canada: Canada supports cryptocurrency mining, especially in Quebec, which has become a gathering place for mining companies due to its abundant and cheap electricity resources. The Canadian government encourages mining companies to use clean energy and imposes strict energy efficiency standards on high-energy-consuming companies. In 2022, Canada accounted for 9.55% of the global Bitcoin computing power. The mining industry in Canada has promoted the development of the local economy, increased employment opportunities, and promoted the use of renewable energy.
Russia: The Russian government has a relatively open attitude towards virtual currency mining. Although there are certain restrictions on virtual currency transactions, mining activities are relatively active locally. Russian mining companies are mainly concentrated in Siberia, using the regions rich hydropower resources for mining. In 2022, Russia accounted for 11.23% of the global Bitcoin computing power. Mining activities have driven economic development in some parts of Russia, but have also triggered challenges in energy consumption and power load.
Kazakhstan: In recent years, Kazakhstan has become one of the worlds major Bitcoin mining centers. The government is supportive of mining activities, but is also gradually strengthening supervision. Mining companies in Kazakhstan mainly use the countrys coal-fired power resources. In 2022, Kazakhstan accounted for 13.22% of the global Bitcoin computing power. The mining industry has promoted the development of Kazakhstans economy, but it has also brought problems such as power shortages. The government is seeking a balanced development and promoting mining companies to turn to renewable energy.
EU: The EU is cautious about cryptocurrency mining, and the policies of each member state vary. Countries such as Germany and Sweden are open to mining activities and support the use of renewable energy for mining. Other countries, such as the Netherlands, strictly regulate mining activities and limit their energy consumption. The EU as a whole is concerned about the impact of mining activities on the environment and has implemented a series of policies to promote the use of green energy and improve energy efficiency. In 2022, the EU accounted for 5.83% of the global Bitcoin computing power.
Cryptocurrency mining is not a disaster
As a commercial lawyer deeply involved in the Web3 industry, based on Honglin’s understanding of the industry, banning virtual currency mining may do more harm than good to the development of China’s Web3.0 digital economy.
First, the closure of the mining industry will weaken Chinas influence in the global blockchain technology and digital currency market, leading to the loss of a large number of talents with rich experience and skills in high-performance computing, algorithm optimization and hardware development. China was once the worlds largest Bitcoin mining market. According to Bloomberg data, Chinas Bitcoin computing power accounted for 65% of the world in 2021, but by 2023, this proportion has dropped to less than 10%. This change not only caused China to lose its dominant position in the global digital currency market, but also led to a large number of outstanding talents and companies to move to other countries, such as the United States, weakening Chinas technological innovation capabilities and competition in this field, and putting China at a disadvantage in future digital economic competition.
Secondly, the ban on mining not only affects technology and the economy, but also causes a significant loss of commercial profits. According to media statistics, there were 13 A-share listed companies, 7 Hong Kong-listed companies, and 9 Chinese concept stocks involved in virtual currency mining business, such as Xinyuan Technology (300472.SZ), Lianluo Interactive (002280.SZ), and Futong Information (000836.SZ). The mining industry has provided a large number of employment opportunities and tax revenues for the local economy. Inner Mongolia, Yunnan, Sichuan and other places have attracted a large number of mining companies due to their energy advantages, which has played a positive role in local economic development.
For example, Sichuan ranks first in the country in terms of installed hydropower capacity and power generation. How to promote the consumption of surplus hydropower is a problem that the local government has been exploring. In August 2019, the official website of the Sichuan Provincial Government announced the Implementation Plan for the Construction of Hydropower Consumption Industry Demonstration Zones in Sichuan Province, which will carry out hydropower consumption industry demonstration zones in Ganzi Prefecture, Panzhihua City, Yaan City, Leshan City, Liangshan Prefecture, and Aba Prefecture. , Ganzi, Yaan, Liangshan and other cities and prefectures have successively released policies to attract Bitcoin mining projects. For virtual currency mines, the price of hydropower in the hydropower consumption demonstration zone during the flood season is very attractive. The market transaction price of abandoned hydropower during the flood season is about 0.075 yuan/kWh, plus the transmission and distribution price of 0.04 yuan/kWh and the government fund of about 0.02-0.047 yuan/kWh, the household electricity price is 0.135-0.162 yuan/kWh. Using hydropower to mine virtual currencies can create a win-win situation for all parties, including stable mining in mining farms, power generation companies absorbing abandoned hydropower, power supply companies increasing network fee income, and local governments increasing fund and tax revenue. The losses caused by the one-size-fits-all mining ban to these regions can be said to be very obvious. According to the South China Morning Post, the Inner Mongolia region lost thousands of jobs due to the withdrawal of mining companies, and also weakened the tax source of local finances.
In the United States, well-known virtual currency mining companies such as Riot Blockchain and Marathon Digital Holdings are both listed companies on the Nasdaq, and these companies have made huge profits through mining activities. Riot Blockchain is a company focusing on Bitcoin mining and blockchain technology, headquartered in Castle Rock, Colorado, USA. Riot Blockchain reported total revenue of $213 million in 2022, a year-on-year increase of 65%, and continued to grow to $275 million in 2023. Marathon Digital Holdings, headquartered in Las Vegas, Nevada, USA, had total revenue of $250 million in 2022, a year-on-year increase of 75%, and grew to $310 million in 2023. According to CoinDesk data, the stock prices of Riot Blockchain and Marathon Digital Holdings increased by 45% and 60% respectively in 2023, showing investors confidence in these companies and their recognition of market prospects.
If China can guide the mining industry to develop legally and in compliance with regulations, these profits and economic growth can also be achieved in China. According to a research report by PricewaterhouseCoopers (PwC), Chinas potential annual revenue from the virtual currency mining industry can reach billions of dollars. If combined with clean energy development and technological innovation, the actual economic benefits may be higher.
In addition, according to a report by the International Energy Agency (IEA), global Bitcoin mining energy consumption has been gradually transitioning to clean energy. Mining companies in the United States, Canada and other countries are actively adopting renewable energy such as hydropower and wind power to reduce carbon footprints and improve energy efficiency. For example, some mining companies in Texas have cooperated with power companies to use renewable energy such as wind and solar power for mining activities. In addition, the Texas Electric Power Commission (ERCOT) also allows these companies to reduce power consumption during peak power demand periods to support the stability of the power grid. The Canadian province of Quebec imposes strict energy efficiency standards on high-energy-consuming mining companies and encourages them to use clean energy for mining. Hydro-Québec works with mining companies to reduce carbon emissions by providing renewable energy electricity. This trend shows that through reasonable policy guidance and supervision, a win-win situation between virtual currency mining and environmental protection can be achieved.
By referring to the successful experiences of other countries, China can explore reasonable policies and regulatory frameworks to promote the healthy development of the virtual currency mining industry and achieve the comprehensive benefits of technological progress, economic growth and environmental protection.
It is recommended to adjust the virtual currency mining policy in a timely manner
In order to promote Chinas dominance in the next generation of the Internet with blockchain as its core technology, it may be time for Chinese regulators to re-examine and adjust the current one-size-fits-all prohibitive regulatory policy on virtual currency mining.
First, the government should formulate clear policies to guide the mining industry to develop in a green and energy-saving direction, while strengthening the supervision of mining activities to prevent illegal activities. Through a reasonable regulatory framework, it is possible to regulate industry behavior and avoid the negative impact of a blanket ban. For example, virtual currency mining usually consumes a lot of electricity. The government can stipulate that mining companies must use a certain proportion of renewable energy to promote the development of green energy and improve overall energy efficiency. At the same time, companies that violate the regulations will be severely punished.
Secondly, encourage enterprises to innovate in mining equipment, algorithm optimization and energy-saving technologies to improve energy efficiency and reduce environmental impact. The development of the mining industry is inseparable from the development of computer hardware, especially in the innovation of high-performance computing chips, heat dissipation technology and large-scale computing systems. These technologies are not only widely used in virtual currency mining, but also have a positive role in promoting other high-tech industries. The government can provide special funds and policy support to promote the research and development and application of related technologies. For example, set up a special science and technology fund to subsidize enterprises and research institutions to develop high-efficiency and low-energy mining equipment and technologies.
In addition, explore the model of state-owned enterprises holding or participating in mining enterprises to ensure that mining activities are carried out under government supervision. The mining industry has provided a large number of employment opportunities and tax revenues for the local economy, especially in some economically underdeveloped areas, where mining activities have become an important driving force for local economic development. Through the participation of local state-owned enterprises, not only can risks be effectively controlled, but also the steady growth of tax revenue and economic benefits can be guaranteed. The participation of state-owned enterprises can help mining enterprises obtain stable power supply and policy support, and at the same time increase the governments supervision of mining activities.
In addition, China should actively participate in the formulation of the global digital currency regulatory framework and cooperate with other countries and regions to jointly respond to the challenges brought by the virtual currency market. Through international cooperation, China can maintain its competitiveness and voice in the global digital currency market. The government can actively participate in relevant discussions and decision-making of international organizations, share experiences and technologies with other countries, and jointly formulate global regulatory standards and policies.
Finally, strengthen the publics awareness of virtual currency and blockchain technology, and enhance the publics trust in the industry through transparent information disclosure. The government can carry out educational and publicity activities to help the public understand the value and risks of virtual currency. For example, release relevant information on virtual currency and blockchain technology through various media channels, organize popular science lectures and training courses, and improve the publics awareness level.
Summarize
Virtual currency mining plays an important role in promoting technological innovation, optimizing energy utilization, promoting economic development and enhancing international influence. Although the Chinese governments comprehensive ban on virtual currency mining is based on the consideration of controlling financial risks and environmental protection, it has also brought negative impacts such as the loss of technical talents, damage to the local economy and the decline of global market influence. We suggest that by formulating reasonable policies and regulatory frameworks to guide the mining industry to develop in a green and energy-saving direction, and strengthening the supervision of illegal activities, the positive role of virtual currency mining can be brought into play while ensuring financial and environmental security.
We call on more industry professionals and research institutions to conduct in-depth research and discussion on the regulatory policies for virtual currency mining and put forward scientific and reasonable policy recommendations to promote the healthy development of Chinas digital economy and blockchain technology.
