China's Shutdown Of Bitcoin Miners Isn't Just About Electricity

China's Shutdown Of Bitcoin Miners Isn't Just About Electricity

A woman touches an ATM machine for digital currency Bitcoin in Hong Kong on December 18, 2017. (ANTHONY WALLACE/AFP/Getty Images).
China’s government is planning to shut down Bitcoin miners in its latest crackdown on the cryptocurrency. The Leading Group of Internet Financial Risks Remediation has 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 the high levels of energy required to mine Bitcoin.

Not just about the electricity

China is planning to limit electricity to Bitcoin miners, and government bodies have expressed concern about energy usage. Bitcoin mining is estimated to use up to 4 gigawatts of electricity, equivalent to three nuclear reactors' production levels.

However, this move isn’t just about the electricity. 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). On Monday, it was reported that Chinese authorities would block cryptocurrency platforms that permit centralized trading.

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.

Alternatives to mining in China

Chinese Bitcoin mining companies may be out of luck doing business in a favorable environment. To combat this, some companies have already moved operations overseas. Most recently, Bitmain Technologies set up a subsidiary in Switzerland, which will extend its branches, currently in Amsterdam, Hong Kong, Tel Aviv, Qingdao, Chengdu, Shanghai and Shenzhen. Bitcoin miners have also been attracted to the Canadian province of Québec for its advertised cheap electricity. However, other companies may be forced to shut down. Moving abroad is likely to result in higher energy costs, which can dramatically reduce profit margins gained from mining.

Moving forward

Make no mistake, the energy issue is a problem. Some Bitcoin enthusiasts have argued that Bitcoin mining must switch to renewable energy. This makes sense, not only for countries like China that have previously relied on coal powered energy, but for the world as it experiences climate change. I would even argue that the mining process should be altered so that it doesn't rely on enormous amounts of energy. This would require replacing computing power and its accompanying high energy usage with another barrier to entry, such as ownership of a specific technology.

The most critical aspect to address for China, however, is criminal activity. Unfortunately, it is not known what percentage of cryptocurrency activity is associated with fraud or other crimes as parties remain unknown by name. It seems likely, from my perspective, that Bitcoin would be used most efficiently for larger scale crimes in which quick conversion to a fiat currency is not essential. This is because cash can simply be used for petty or pedestrian crimes. For larger scale crimes paid in Bitcoin, rapid money laundering remains a challenge, since converting Bitcoin to cash requires the registration of an identity and makes it easier to find criminals. No matter the type of criminal activity, however, it must be controlled.

While cryptocurrencies were meant to be stateless, there is no avoiding the hand of the state in quashing criminal activity. China and other countries should set up regulations for Bitcoin to reduce crime. Bitcoin expert Professor Olivier Scaillet of the University of Geneva agrees, stating, "if you regulate the use of bitcoin in terms of acceptance as a mean of payment, it is a way to limit its criminal use." There is no need to believe that the main issue with Bitcoin mining is the electricity cost, we know it is about the larger issue of fraud and other illicit activities. Therefore it makes sense to end the worst practices rather than all practices in this area.