An extraordinary discovery: Mining has never been banned in China.
Yes, you read that right. In fact, not only has it not been banned, but Chinese miners are leading the world in innovative uses of Bitcoin mining.
But what about this Reuters report and others that say it has been banned?
Let’s take a closer look.
Yes, the network hashrate dropped from 179.2 EH/s to 87.7 EH/s (a 51.1% drop), which seems to confirm the mining ban in China.
After all, according to Cambridge, China had 46% of the world’s hashrate a month before the “ban” (April 2021), so the numbers are roughly in line with the “mining is banned in China” thesis.
But there’s a big hole in that logic. If you’re a troublemaker and the principal sends you away from school, those “days away from school” don’t mean you’ve been expelled. They might just mean you’ve been suspended. As it turns out, that’s exactly what happened in China.
This is how we know this.
1. Investigative journalism
Let’s start with the main news items.
First, in May 2021, NBC reported that at least some miners remained “unfazed” by the latest “ban.”
Then in September 2021, the New York Times reported on a “ban” in China, citing the Chinese government’s disclosure of the policy (more on that later), though that same month, publicly available data from Cambridge showed that mining activity had already recovered to 22.3% of the global hashrate.
Cambridge data showed that by December 2021, China was still at 19.1% of the world hashrate.
It was only in May 2022 that CNBC published a full report on the significant Bitcoin mining capacity still operating in China, although this data had been publicly available to all media outlets since September 2021.
Aside from the New York Times article, the evidence suggests that mining was never banned, but merely suspended. Let’s take a closer look at the New York Times article and the document they cite as evidence of the ban.
2. Our unexpected discovery in Chinese legislation
When I read the document the New York Times used as evidence for the ban, it did not support their interpretation.
China’s September 24, 2021 policy document does not impose a ban, but rather a moratorium on the establishment of new mining sites, and “signals an intent” (but not a ban) to “at some stage” cease existing mining activities (which, three years later, has still not happened).
As for the statement of intent: the policy states that Bitcoin mining sites should be phased out because they do not support the Chinese government’s carbon neutrality goals. Other stated reasons include that they are easy to use for money laundering and that they consume a lot of electricity.
Cultural Factors Not Considered by the New York Times
In China, it often happens that policy says one thing, but in practice something completely different is implemented.
As a rule, in more developed cities the letter of the law will be followed to the letter. However, in smaller cities and regions this rarely happens.
For example, in China, there is an official policy that all banks are required by law to reduce the steps their customers must go through to obtain any legally certified documents.
However, in most cities, private banks do not follow this rule, the opposite is practiced. For example, if a parent or spouse dies and you need to get the remaining amount in their bank account, the bank may say: “your death certificate is not enough.” There have been cases where mourners had to bring the body of the deceased to the bank to prove it. I am not kidding.
More developed cities will follow the letter of the law. But in China, most mining activity now takes place in Inner Mongolia, far from the major developed cities. In these regions, it’s not government regulations that matter culturally, it’s your network. If you have the right network, you can do “this and that” to get around the law.
So, in short:
1. Mining was never banned, instead there was a moratorium on new mining and unfriendly proposals to keep existing mining operations open at some point.
2. The use of fossil fuels was stated as the main reason (although we know from inside sources in the Communist Party that while this was certainly a factor, capital control was the main reason). Energy policy expert Magdalena Gronowska confirmed this.
3. With the exception of coal mining, the moratorium has never been applied in more isolated regions. There, new mining activities have come into play.
4. The New York Times inaccurately described China’s policy document, failed to account for cultural factors that meant even the moratorium could not be widely applied, and failed to cross-check publicly available hashrate records that might indicate that mining is still taking place on a large scale in China.
This isn’t the first time that stories about Bitcoin mining bans have shown a discrepancy between what’s being reported and what actually happened. News reports of “bans” in Paraguay (they weren’t, they were a crackdown on electricity theft) and New York (they weren’t, they were a two-year moratorium on new fossil fuel mining only) were similarly exaggerated.
And just this month, numerous media outlets, even in the crypto community, reported that Venezuela had banned Bitcoin mining “in order to protect the energy grid,” and even called the government’s actions an “anti-corruption initiative.”
However, as it turns out, the blackouts were caused by widespread corruption (electricity theft within the government), which led to a well-documented case in which Venezuela’s state-owned power company, PDVSA, was unable to supply enough electricity to stabilize its own grid. For context, Venezuela ranks second out of 180 countries on Transparency International’s corruption index, and is becoming more corrupt over time, not less.
But back to China. Sebastian Guspilloux, CEO of BigBlock, who has experience in mining in China, allowed us to include his own take on the matter: “They stopped mining, and then they started mining again a few weeks later. But not everywhere; only where it was useful.”
3. Interviews with players in the Bitcoin mining industry
In total, we spoke to four independent organizations operating in China (HashX_Mining and three others who wished to remain anonymous). Interestingly, none of them say they are “risking everything” as the CNBC news article dramatically suggested, but on the contrary, are actively encouraged by the Chinese authorities to solve various energy problems.
We found that Bitcoin mining is not only happening in China, but also Miners are actively exploiting the positive environmental effects of Bitcoin miningin particular, heat recovery and monetization of unused renewable energy.
For context, the first reported examples of Bitcoin mining heat recovery were reported in Canada back in 2018. Since then, heat recovery has become the primary way Bitcoin mining (essentially an electric resistance heater that mines Bitcoin) can reduce the need for fossil fuel heating. China has joined the heat recycling party.
One mining distributor confirmed: “Due to the downturn in China’s economy, some heavy industry has left Inner Mongolia and Xinjing province. As a result, there is often a surplus of electricity.” Chinese authorities have invited Bitcoin mining companies to fill the void and stop the waste of renewable energy.
Bitcoin mining operations in Inner Mongolia typically employ only 200-500 miners (~1 MW), all of which use hydro, wind, or solar power.
Think of Inner Mongolia as the Texas of China. Like Texas, it had a history of fossil fuels, but now it is moving toward renewable energy solutions faster than any other part of the country (reportedly 57% of the country’s wind farms). And like Texas, it needed and wanted Bitcoin mining to help monetize wasted renewable energy and balance out the variability of renewable energy.
So why did China suspend mining at all, and why are those it has allowed to resume mostly small-scale and renewable energy-based?
Capital controls
Large-scale Bitcoin mining was problematic for China. It offered a way to move money out of China. Large operations turned yuan into Bitcoin, then Bitcoin into U.S. dollars. Second, but less important, the large operations often used coal-fired factories. This jeopardized the government’s emissions targets.
The initial mining suspension was a chance to limit capital flight from the yuan. By allowing mining companies with 200-500 units to monetize their wasteful renewable energy, it helps China stabilize its grid and monetize its wasteful renewable energy without the risk of large capital outflows.
Once again, special thanks Dan Leslie from @HashX_Mining, Sebastian Guspiyougeneral manager Big block, Magdalena GronowskaMetamesh partner and two Chinese nationals who wished to remain anonymous for this special report.
——-
Additional context
(We can add optional details if it is interesting to write something in more detail. Or, if we want to keep a strict focus on the “ban that wasn’t,” we can leave all of this out.)
Other findings from our interviews with Chinese mining companies.
- While much of the computing power has moved to other countries (first to the US and later to Ethiopia), a lot of new computing power has also come to China after the Chinese “ban”.
- There is no more off-grid coal mining. It is too easy to detect, competes for baseload power, and interferes with the Central Government’s emissions targets. This has led to a significant reduction in the emissions intensity of China’s mining industry since the “ban”.
- Production is mainly hydro and micro hydro (especially in the rainy season). Areas above the red line are very rainy months for 4 regions: Xi’an, Wuhan, Beijing and Xining, where hydro power becomes incredibly cheap.
But we also found a lot of mining on the network and, even more surprisingly, a lot retail Grid mining.
- Ongrid retail miners mine at a loss because they pay, well, retail electricity rates. Why would they mine at a loss? Simple: to get money out of China or from RMB to USD. They convert Chinese RMB into ASICS and electricity that creates BTC, which is converted to USD. Many retail miners are happy to take a hit in profitability just to be able to convert RMB to USD.
- Local provincial governments often support what the central government does not because it makes economic sense. We have heard more than one story where provincial governments effectively gave a “license to mine” in exchange for rights to use their recycled heat.
For example, one 13 MW mining operation, an example of this new hashrate, works in tandem with a provincial government. They buy their electricity, and in exchange, the government gets to use their recycled heat for free. Since 95% of the energy from Bitcoin mining is spent as heat, this is almost as efficient as free heating. What do they use this (free) heat for? Heating water for fish farms.
This is a guest post by Daniel Batten. The opinions expressed are solely their own and do not necessarily reflect the views of BTC Inc or Bitcoin Magazine.
