Web3 lawyer: It is recommended that the government adjust the cryptocurrency mining ban policy in a timely manner

Author: Mankiw Blockchain

Is it unwise to ban virtual currency mining?

Professor Yang Wang of the Hong Kong University of Science and Technology shared his profound insights on Bitcoin and the blockchain industry at the HashKey New Horizons event. Professor Wang is an internationally renowned mathematician and is currently the 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 biointelligence, and has a deep understanding of the blockchain industry and policy making.

Professor Wang reviewed his early misunderstandings about 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 Kong's development in these areas was too slow and needed higher goals and determination to lead regional development.

Of course, what caught Hong Lin's attention most was that Professor Wang particularly emphasized the social value and economic value of virtual currency mining in his sharing. He believes that it is unwise to ban mining completely because it will drive the mining industry to other countries and lose valuable tax 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 realize the integration of the digital economy and the real economy.

After Professor Wang's sharing was sent out, Lawyer Honglin forwarded it to several friends in the industry for discussion, and wrote this article based on the communication to talk about Lawyer Honglin's views and ideas on virtual currency mining.

Virtual currency mining: some are happy and some are sad

Once upon a time, mainland China was the overlord in the virtual currency mining market. According to data from the Cambridge Center for Alternative Finance in 2021, Chinese miners account for more than 65% of the Bitcoin network computing power, of which Xinjiang, Sichuan, and Inner Mongolia account 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 virtual currency mining, and the proportion of computing power dominated by Bitcoin has naturally plummeted. Virtual currency mining has gradually become a topic that has disappeared from the mainstream media.

According to Honglin's understanding, China prohibits virtual currency mining for the following main reasons: First, virtual currency mining consumes a huge amount of electricity, resulting in tight power supply in some areas and adversely affecting the environment. Second, virtual currency transactions have high financial risks, which are prone 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 make supervision difficult.

Based on these reasons, the Chinese government has taken a series of measures to gradually strengthen supervision of virtual currency mining. In September 2017, the People's Bank of China and seven other ministries and commissions jointly issued the "Announcement on Preventing the Risks of Token Issuance and Financing", which comprehensively 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 government's 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 explicitly proposed to crack down on virtual currency mining and trading at a national-level meeting. In September 2021, the People's 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 prohibited, and financial institutions and payment institutions are required not to provide virtual currency related services. Local governments have successively issued 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 show the government's determination to curb virtual currency mining activities.

Unlike China's restrictions and prohibitions on 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 virtual currency 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 also 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 in the local area. Russian mining companies are mainly concentrated in Siberia, using the region's abundant 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 caused challenges in energy consumption and power load.

Kazakhstan: In recent years, Kazakhstan has become one of the world's major Bitcoin mining centers. The government is supportive of mining activities, but is also gradually strengthening supervision. Mining companies in Kazakhstan mainly use the country's 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 Kazakhstan's 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 more cautious about virtual currency mining, and the policies of member states are different. Countries such as Germany and Sweden are open to mining activities and support the use of renewable energy for mining. While some 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.

Virtual currency mining is not a scourge

As a commercial lawyer who has been deeply involved in the Web3 industry, from 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 China's 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 world's largest Bitcoin mining market. According to Bloomberg data, China's 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 caused a large number of outstanding talents and companies to move to other countries, such as the United States, weakening China's technological innovation capabilities and competition in this field, and putting China at a disadvantage in future digital economic competition.

Second, banning mining not only affects technology and economy, but also 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 revenue for the local economy. Due to their energy advantages, Inner Mongolia, Yunnan, Sichuan and other places have attracted a large number of mining companies to settle in, which has played a positive role in local economic development. For example, Sichuan's hydropower installed capacity and power generation are both ranked first in the country. How to promote the consumption of surplus hydropower is a problem that the local government has been exploring and solving. 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, Ya'an City, Leshan City, Liangshan Prefecture, and Aba Prefecture. , Ganzi, Ya'an, Liangshan and other cities and prefectures have successively released policies to attract Bitcoin mining projects. For virtual currency mining farms, the price of hydropower in the hydropower consumption demonstration area 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 form a win-win situation for multiple parties, such as stable mining in mining farms, power generation companies consuming abandoned hydropower, power supply companies increasing grid 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, Inner Mongolia has lost thousands of jobs due to the withdrawal of mining companies, and has 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 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 US$213 million in 2022, a year-on-year increase of 65%, and continued to grow to US$275 million in 2023. Marathon Digital Holdings, headquartered in Las Vegas, Nevada, USA, had total revenue of US$250 million in 2022, a year-on-year increase of 75%, and grew to US$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 the market prospects.

If China can guide the mining industry to develop legally and compliantly, these profits and economic growth can also be achieved in China. According to a research report by PricewaterhouseCoopers (PwC), China's potential annual revenue in 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), the energy consumption of global Bitcoin mining has been gradually transformed 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 footprint 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 energy for mining activities. In addition, the Electric Power Commission of Texas (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 these companies 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 can be achieved between virtual currency mining and environmental protection.

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 China's leading position in the next generation of the Internet with blockchain as the 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 comprehensive 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.

Second, encourage companies 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, a special science and technology fund can be established to subsidize companies 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 revenue 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 government's supervision of mining activities.

In addition, 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 public's awareness of virtual currency and blockchain technology, and enhance the public's 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, relevant information about virtual currency and blockchain technology can be released through various media channels, and popular science lectures and training courses can be organized to improve the public's awareness level.

Summary

Virtual currency mining plays an important role in promoting technological innovation, optimizing energy utilization, promoting economic development and enhancing international influence. Although the Chinese government's comprehensive ban on virtual currency mining is based on the consideration of controlling financial risks and environmental protection, it has also brought negative effects 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 at the same time strengthen the supervision of illegal activities, the positive role of virtual currency mining can be played 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 China's digital economy and blockchain technology.