On April 9, Reuters reported that a Chinese government agency is considering the elimination of crypto mining in the country. Given that China has been hosting the majority of mining pools on its soil, the global crypto industry might be poised to take a massive hit. However, the plan is not written in stone at this point, and part of community has dismissed it as casual FUD.

Brief introduction to China’s relationship with crypto

Chinese authorities have been spearheading the “blockchain before Bitcoin” approach since September 2017, when the infamous crackdown on local initial coin offerings (ICOs) and crypto exchanges occurred. As of now, people in China can hold cryptocurrencies, but they are prohibited from trading them.

The local mining industry specifically has also been subject to repressions. In February 2018, CNN Money reported that the Chinese government pushed crypto miners to make an "orderly exit" from the industry due to tax issues and mining being generally dangerous for the environment.

Indeed, according to a separate article published by Quartz a month earlier, the country’s top internet-finance regulator, the Leading Group of Internet Financial Risks Remediation, ordered local authorities to use all available options — such as “measures linked to electricity prices, land use, tax, and environmental protection” — to force miners to shut down their business. In addition to that, the agency had allegedly obliged regional authorities to submit regular progress reports, detailing the existing mining facilities in their jurisdictions.

In response to the intensifying crackdown, some of China's largest mining players chose to move shop or even change their main line of business. Thus, Chinese ASIC chip manufacturer and mining outfit Bitmain, once the industry’s most profitable company, which is now experiencing significant difficulties caused by the bear market, decided to turn to artificial intelligence (AI) as an alternate revenue source. “As a China company, we have to be prepared,'' Bitmain’s former co-chief executive, Jihan Wu, explained at the time. The company also planned to run a major mining operation in Rockdale, Texas, but had to suspend the plan due to the market collapse earlier this year.

However, China remains a mining superpower. According to data from Blockchain.com, most of the largest Bitcoin mining pools are controlled by Chinese organizations. An earlier study conducted by the University of Cambridge argued that the Chinese dominance in the mining market was made possible by the cheap electricity and land available in provincial areas such as Xinjiang, Inner Mongolia, Yunnan and Sichuan. Reports issued around the same time indicated that over two-thirds of global mining pools were based in China.

New plans: NDRC to dismiss mining as an eco-unfriendly activity

Now, China's central state planning agency, the National Development and Reform Commission (NDRC), has revealed it might curb crypto mining in the country altogether. Notably, the news was first broken by state-owned newspaper the Securities Times, who reported that the NDRC’s draft list “distinctly reflects the attitude of the country’s industrial policy” toward the cryptocurrency industry, as per Reuters.

Thus, the NDRC has reportedly included crypto mining as part of its draft for a revised list of industrial activities the agency intends to shut down because they “lacked safe production conditions, seriously wasted resources, polluted the environment,” among other issues.

The move forms part of the NDRC’s wider Catalogue for Guiding Industry Restructuring, which has been issued since 2005 and determines which industries are to be encouraged, restricted or eliminated in the country.

The agency has reportedly not set a proposed deadline for eliminating crypto mining industry, postulating instead that it should be dwindled with immediate effect. The public now has until May 7 to comment on the draft.

As local newspaper South China Morning Post reported, the new plan brings uncertainty not only to local miners, but to the makers of cryptocurrency mining rigs as well. That would include the aforementioned Bitmain, which, in 2017, controlled an estimated three-quarters of the global market, as well as Canaan Creative, another large Chinese mining hardware manufacturer. Both companies had filed for initial public offerings (IPOs) in Hong Kong, but were met with skepticism by the local watchdog.

Additionally, according to its IPO filing, by mid-2018, Bitmain operated as many as 11 mining farms in China, and hence would be largely affected by the NDRC’s reported plans. The company has declined to comment on the issue, as per various media reports.

Community reaction

Historically, big news from China tends to affect the crypto market. For instance, when local regulators introduced yet another restraint on cryptocurrencies in January last year, Bitcoin swiftly dropped to its lowest level in more than a month, with Ethereum (ETH) declining 19% and Ripple (XRP) collapsing 29%.

Similarly, the new ban, if implemented, is likely to have a strong impact on the global crypto industry, argue some crypto mining consultants, such as Mark D’Aria of Bitpro Consulting LLC. “Short term, it could be extremely disruptive,” he told Cointelegraph. He went on to say:

“There will certainly be many winners and losers in the mining industry, as non-Chinese miners would benefit in the short term from significantly reduced difficulty, and from inexpensive surplus hardware as it filters out of China.”

However, the ultimate effect largely depends on how, if and when the ban is implemented, D’Aria argues, which is unclear at this time:

“If it was decreed that all miners were to shut down immediately, all of that hashrate lost in an instant could significantly disrupt the technical operation of the Bitcoin blockchain, slowing it down significantly until the next difficulty reduction. If this ban was implemented shortly after the last difficulty adjustment, this transitional period could last months.”

In the worst-case scenario, D’Aria explains, it could take months for the network to bounce back — but either way, the Bitcoin blockchain should be safe in the long run.

“It's yet another example of how resilient Bitcoin actually is — it can be disrupted in the short term, but long term it adjusts to compensate.”

He elaborated:

“Difficulty is adjusted every 2016 blocks. This takes approximately every two weeks at a stable hashrate. If 80% of the hashrate were to go offline 16 blocks after the adjustment, the next 2000 blocks would take 5x as long to mine (assuming the hardware wasn't rapidly redeployed outside of China.) This two week period would stretch out to over two months. During these two months transaction rate would also be slowed down by 80%, confirmations that used to take minutes will take hours and fees will likely rise dramatically due to competition for block space. At a time when Bitcoin is still widely criticized for being slow and expensive to use, it's hardly going to do Bitcoin any favors. [...] But if China allows miners to wind down over a few weeks, difficulty adjustment will gracefully handle the loss in hash rate, and there would be little noticeable change to the functioning of the Bitcoin blockchain.”

If the ban does come through, however, part of the mining economy could move underground, but the overall scope of mining operations won’t be the same for China, which might be dethroned by other countries in that case, D’Aria said:

“It [cryptocurrency mining in China] can continue at a very small scale — a basement here, a shed there, etc. However, it is not plausible that large mining farms would be using megawatts of electricity without the authorities noticing. Even if a few chinese miners try to carry on at a small scale, on a global level it would be insignificant. The US, Canada, Scandinavia and a few Eastern European nations would then comprise the lion's share of mining power — and in all likelihood the mining hardware would eventually filter outside of China to those who can still use it.”

“China FUD”?

Other parts of the crypto community don’t see any reason to panic whatsoever. For instance, Dovey Wan, founding partner at blockchain-focused Primitive Ventures, pointed out that the NDRC’s purview in regard to the industries it wants to eliminate seems limited:

there is another version of such proposal published in 2011 https://t.co/BY2unufFbd



Obviously many stuff should be “eliminated” in the 2011 version reappear in the 2019 version 🙃🙃🙃 such proposal in China usually is just “proposal” — Dovey Wan 🦖 (@DoveyWan) April 9, 2019

A similar viewpoint was expressed by an independent crypto industry analyst Katherine Wu, who told Wired that this clampdown seems to be more indirect compared to previous crypto regulations in the country, and many industries on the commission’s list of wasteful activities are still far from what’s described under “immediate elimination.”

“It is categorized as an industry that is not encouraged or allowed to expand, but it is not a ban,” Zhao Qianjie, a former employee at BTCChina exchange, told The New York Times, arguing that the government might not impose strict sanctions for local miners.

Emin Gün Sirer, creator of the world’s first cryptocurrency to deploy a proof-of-work (PoW) concept and professor at Cornell University, argued that the news “doesn't mean the end of Bitcoin” in a series of tweets.

“It just means that most of the hashpower will move across a border, some will go ‘underground’ in China, tucked into backrooms of old factories. Cost of coin production might go up, but that doesn't affect coin price at all.”

Sirer then categorized the media reports as “China FUD.” “Though as far as consumer-affecting FUD goes, this is pretty weak,” he tweeted. “The impact is on miners, not regular users.”

Instead, Sirer referenced the reports to talk about the status of proof-of-stake (PoS) in the global crypto market, which, in his opinion, has far more advantages compared to PoW.

“It's high time some adult looked at what was happening with PoW mining, namely, racks of machines performing useless calculations whose sole purpose is to hold back other racks of machines, and said ‘this is a waste of electricity.’ [...] The coming year will be the year of Proof of Stake systems. They are green, sustainable and quiescent. They do not leak any value from the store of value to the power company. There's no dependency on a state energy commission for their security.”

Notably, last week, in the United States, Montana’s county of Missoula adopted new regulations for cryptocurrency mining, requiring miners to use only renewable energy.

Nevertheless, while PoS is indeed generally considered to be much more power-efficient than PoW, it might have its own shortcomings as well, warns D’Aria:

“Arguably the core difference between PoW and PoS is that PoW is an inextricable link between the blockchain and the ‘real world’, for better or worse. Whereas PoS exists purely as a computational and societal construct, no one has to give up anything extrinsic to the system in order to keep it running, and with nothing to physically anchor it's value to the real world a crisis of confidence in the value of the currency could potentially lead to a death spiral where security becomes so compromised by loss of coin value that it is effectively destroyed. Just because we haven't seen something like that happen to a PoS blockchain yet doesn't mean it can't — there's a first time for everything.”