The dominance of bitcoin’s network infrastructure by Chinese companies could be coming to an end. China’s National Development and Reform Commission, a state-planning body, announced new proposals April 8 which may prohibit bitcoin mining, the energy-intensive process used to secure transactions and generate new units of the cryptocurrency.
Although China banned virtual currency trading and crypto-based fundraising (aka “initial coin offerings“) in 2017, it has struggled to rein in mining. An October study found that Chinese-run mining groups—known as “mining pools”—are responsible for 74% of bitcoin’s hash rate, the network’s computational power. Given that Chinese miners control the lion’s share of the bitcoin network, the country is disproportionately affected by bitcoin mining’s impact on the environment. Industry estimates say that on a daily basis, bitcoin sucks up as much energy as 5 million US households.
In its announcement about industrial improvements, the NDRC said its elimination targets included “backward processes, technologies, equipment and products that do not meet the requirements of relevant laws and regulations, do not have safe production conditions, seriously waste resources, [and] pollute the environment.” The agency recommended an immediate ban of crypto mining. The public may comment on the agency’s proposals through May 7.
Crypto advocates, however, claim that bitcoin’s electricity consumption isn’t altogether wasteful. “The energy use is anything but useless, it is securing data about transactions worth hundreds of billions of dollars,” writes Peter Van Valkenburgh, director of research for Coin Center, a pro-bitcoin lobbyist group. “Unlike the energy used by a gold miner, it goes directly to providing a public good: online peer-to-peer payments infrastructure that anyone on Earth with a smartphone and internet connection can use.”
Chinese authorities are unlikely to be persuaded by that argument, as the government also remains concerned about bitcoin as a tool for capital flight (subscription).
In the near term, China’s proposed ban on bitcoin mining may negatively impact the cryptocurrency’s price, as Chinese miners could sell holdings to cover potential relocation expenses. Additionally, miners’ profit margins may shrink. “During the elimination period, authorities are allowed to raise electricity prices for relevant businesses to force them to close,” reported the South China Morning Post. “The manufacturing, sale, and use of products in the eliminated categories are also prohibited.”
If enough miners stop mining, bitcoin’s hash rate could fall substantially, potentially causing processing delays and making the network less robust. Of course, if fewer miners are securing the network, then the “difficulty” of finding new blocks will automatically decrease—meaning that miners in other jurisdictions will have a greater chance to earn new coins. While this isn’t great for bitcoin’s security (it makes it vulnerable to a 51% attack, where hackers can control the currency), it would reduce the network’s carbon footprint.
Still, crypto insiders are regarding the potential ban with skepticism. Dovey Wan, founding partner at Primitive Ventures—a crypto investment holding company—remarked that the proposals were more like guidelines. Actual implementation, Wan said, could be “tens of years down the road.” She also noted that items listed on previous NDRC proposals often remained on subsequent updates.
For bitcoin users, the greatest concern is that Chinese authorities may set their sights on Bitmain, a Beijing-based company that is the world’s largest producer of bitcoin-specific mining equipment. Since Bitmain is responsible for 75% of bitcoin’s mining hardware market, any action against the manufacturing giant could cause real disruptions for miners—not just in China, but across the world.
Furthermore, while bitcoin experienced a revival in recent weeks—it’s now trading near $5,300, up from $4,000 just two weeks ago—China’s scrutiny could inspire similar actions by international counterparts, and drive it back down. Ultimately, for the sake of the environment, maybe it wouldn’t be the worst thing if the so-called crypto winter lasted a little longer.
Rep. Warren Davidson, an Ohio Republican, reintroduced the Token Taxonomy Act on Tuesday (April 9), which seeks to exempt some digital tokens from US securities law. The bill also strives to carve out a tax exemption for crypto-to-crypto trades and smaller purchases made using cryptocurrency (under $600).
Crypto industry watchers were disappointed by the bill’s revised definition of digital tokens. “The $600 tax exemption & 1031 (like-for-like) exchange provisions are great. I wish the bill stopped there!,” tweeted Caitlin Long, founder of the Wyoming Blockchain Coalition. “The definition of “digital token” got so watered down that there’s … not even a “taxonomy” left in the [Token Taxonomy Act],” she added. Long called the bill’s chances of passing into law “unlikely,” and expressed concern that it “claims federal preemption” over state laws defining digital assets. “Well-intentioned bill but it needs A LOT of work!!!”
Please send news and tips to email@example.com. Today’s Private Key was written by Matthew De Silva, and edited by Oliver Staley. Take care of your cents and the dollars will take care of themselves.