Central Commission for Discipline Inspection: Pay close attention and eliminate "mining"

Recently, the Wuyi County Discipline Inspection and Supervision Commission of Zhejiang Province established a special supervision team to conduct special inspections on the use of public resources to participate in virtual currency "mining" and trading through remote monitoring, technical verification and other methods. The picture shows the special inspection team using the big data intelligent security analysis platform in the county big data center to understand the relevant situation. Photo by Ji Wen

Virtual currency "mining" activities have been officially listed as an industry to be eliminated. The National Development and Reform Commission website recently announced that the "Decision of the National Development and Reform Commission on Amending the "Guidelines for Industrial Structure Adjustment (2019 Edition)" has been reviewed and approved. The seventh item is added to the elimination category "I. Outdated production process equipment" and "(XVIII) Others" of the "Guidelines for Industrial Structure Adjustment (2019 Edition)", which is "Virtual currency 'mining' activities".

Since last year, my country's virtual currency regulatory policies have continued to increase, with a two-pronged approach of clearing out "mining" activities and prohibiting related business activities. The National Development and Reform Commission and 11 other departments issued the "Notice on Rectifying Virtual Currency "Mining" Activities" (hereinafter referred to as the "Notice"), requiring the strengthening of the entire upstream and downstream industry chain supervision of virtual currency "mining" activities, strictly prohibiting the addition of new virtual currency "mining" projects, and accelerating the orderly withdrawal of existing projects. The People's Bank of China and ten other departments have also previously issued documents to clarify that virtual currency does not have the same legal status as legal currency, and related business activities are illegal financial activities.

What does it mean that "mining" is listed as an eliminated industry? In the context of promoting the optimization of industrial structure in my country and striving to achieve the carbon peak and carbon neutrality goals as scheduled, what is the practical significance of regulating virtual currency "mining" activities? The reporter interviewed Deng Jianpeng, professor of the School of Law of Central University of Finance and Economics and director of the Financial Technology Legal Research Center, and Guo Yungao, secretary-general of the Energy Storage Equipment Technology Committee of the China Electric Power Technology Market Association.

Attracted by the wealth effect, "mining" is being pursued by capital. Some companies are planning virtual currency "mining" business under the banner of developing high-tech such as blockchain.

Reporter: What is cryptocurrency mining? What is its background?

Deng Jianpeng: Simply put, virtual currency "mining" refers to the process of producing virtual currency through calculations using dedicated "mining machines". Virtual currencies, represented by Bitcoin, are decentralized blockchain systems that require network nodes to operate and maintain, and to package transaction information at each specific time onto the chain, thereby obtaining virtual currency issued by the system as a reward.

The virtual currency system uses human selfishness (obtaining virtual currency as an economic incentive) to achieve altruism (operating and maintaining the system and improving system security). The individuals or institutions that run these network nodes are commonly referred to as "miners" in the industry, and these computing nodes are "mining machines." "Miners" compete for the right to record transaction information on the chain by purchasing dedicated computer equipment and broadcast it to the entire blockchain system, commonly known as "mining."

Reporter: The "mining" industry has been very popular for some time. What are the driving factors?

Deng Jianpeng: Since 2019, the prices of some virtual currencies such as Bitcoin have soared, and "mining" has become a profitable and even highly profitable industry. Attracted by the wealth effect, the "mining" industry has been chased by some capital, and some companies have laid out virtual currency "mining" businesses under the banner of developing high-tech such as blockchain. In order to promote investment promotion, some local governments have also given these "mining" companies preferential policies in terms of finance, taxation, electricity prices, etc.

Since the second half of 2020, the market price of virtual currencies represented by Bitcoin has risen rapidly due to the halving effect. At the same time, blockchain decentralized finance (known as "DeFi" in the industry) has launched various "liquidity mining" that claim to have high returns; out of concern that the Federal Reserve's issuance of a large amount of dollars due to the epidemic will cause the dollar to depreciate, some European and American investment institutions have invested heavily in mainstream virtual currencies; some well-known foreign figures have "called orders" for specific virtual currencies. These factors have jointly contributed to the further surge in the prices of mainstream virtual currencies in the first half of 2021. This has also caused many domestic "retail investors" to rush into the market, and financial risks are highly concentrated.

The blind and disorderly development of virtual currencies has had a serious adverse impact on promoting high-quality economic and social development and energy conservation and emission reduction.

Reporter: What adverse effects will mining have? Where do the problems mainly manifest?

Deng Jianpeng: "Mining" represented by Bitcoin consumes huge amounts of electricity and is a high-energy-consuming industry. In order to increase computing power and increase the probability of competing for the right to record Bitcoin blocks, in recent years, tens of thousands of "mining machines" have gathered together to form a super-large "mining pool". "Mining machines" consume huge amounts of electricity, and "mining pools" that rely heavily on thermal power generation cause huge carbon emissions and air pollution, bringing pressure to reduce carbon emissions, which is contrary to my country's national policies of carbon peak and carbon neutrality.

The abnormal development of the "mining" industry and the increase in the computing power of the Bitcoin system have also led many domestic retail investors to join the "cryptocurrency speculation" army, and the possibility of the spread of financial risks has continued to accumulate and amplify. The frequent risk of liquidation in the virtual currency trading market will also affect the traditional financial market, impact the stability of China's financial market, and further affect the country's financial security.

Regarding the risks posed by the virtual currency "mining" industry, relevant regulatory authorities have previously issued some warnings and requirements. In January 2018, the Office of the Leading Group for Special Rectification of Internet Financial Risks issued a document requiring local governments to guide enterprises within their jurisdictions to orderly withdraw from the "mining" business. On May 21 last year, the State Council Financial Stability and Development Committee held its 51st meeting and once again clearly stated that it is necessary to resolutely prevent and control financial risks and crack down on Bitcoin "mining" and trading. However, attracted by the rapid rise in Bitcoin prices and the introduction of such projects by some local governments for the purpose of increasing employment, virtual currency "mining" has continued to exist in the market.

Guo Yungao: Virtual currency "mining" is a high-energy-consuming industry, which wastes electricity resources and increases the total energy consumption of the whole society, thus leading to an unreasonable increase in carbon emissions, which runs counter to the goals of carbon peak and carbon neutrality. "Mining" is also not in line with the direction of my country's industrial development. The output value of production is almost worthless, and the financial risks in the exchange and transaction of its products are also very large. In a sense, it is equivalent to walking on the edge of illegal crimes.

In general, the risks derived from the production and trading of virtual currencies are becoming increasingly prominent. Their existence and development are not conducive to social and economic development. Their disorderly and blind expansion has a serious adverse impact on promoting the synergistic efficiency of energy conservation, pollution reduction and carbon reduction and high-quality development.

Reporter: Since the end of last year, power shortages in some places have aroused concern. How much does Bitcoin mining consume energy and electricity?

Guo Yungao: Virtual currency "mining" consumes a lot of energy. According to a study by the Center for Alternative Finance Research at the University of Cambridge, as of May 10, 2021, the annual electricity consumption of global Bitcoin "mining" is about 149.37 billion kWh, which has exceeded the annual electricity consumption of Malaysia, Ukraine, Sweden and other countries, and is close to Vietnam, which ranks 25th in electricity consumption. In January last year, the Iranian government accused Bitcoin "mining" of causing power outages in the country. This is also the main reason why my country's "mining" activities are mostly concentrated in Xinjiang, Inner Mongolia, Sichuan, Yunnan, Guizhou and other regions where electricity prices are relatively cheap. The huge energy consumption of "mining" also exacerbated the power supply shortage in some parts of my country last year and expanded the scope of local power restrictions.

Last April, scholars from the Chinese Academy of Sciences and Tsinghua University published a paper titled "A Policy Assessment of Carbon Emissions and Sustainability of Bitcoin Blockchain Operations in China". The paper points out that China's "miners" account for more than 75% of the computing power of the Bitcoin network. Without policy intervention, China's Bitcoin blockchain's annual energy consumption is expected to peak at 296.59 terawatt hours in 2024, generating 130.5 million metric tons of carbon emissions, accounting for about 5.41% of China's carbon emissions from electricity generation. This scale exceeds the total annual greenhouse gas emissions of the Czech Republic and Qatar.

In the stage of high-quality development, and in the context of striving to achieve the goals of carbon peak in 2030 and carbon neutrality in 2060, the virtual currency "mining" industry has no room for survival and development.

Rectifying virtual currency "mining" activities is of great significance to promoting the optimization of industrial structure, promoting energy conservation and emission reduction, and achieving the goals of carbon peak and carbon neutrality as scheduled.

Reporter: my country has stepped up efforts to crack down on virtual currency "mining" activities, and supervision has continued to escalate. What is the practical significance? What does it mean that "mining" has been officially included in the list of eliminated industries?

Deng Jianpeng: From the perspective of promoting the optimization of my country's industrial structure, promoting energy conservation and emission reduction, and achieving the goals of carbon peak and carbon neutrality as scheduled, it is of great practical significance to intensify efforts to regulate virtual currency "mining" activities.

The Notice requires multi-departmental coordination and full-chain governance, which will help promote the rectification work in all directions. Of course, this rectification is not to deny the blockchain technology related to virtual currency. The Notice specifically clarifies that it is necessary to distinguish between "mining" and the industrial boundaries of blockchain, big data, cloud computing, etc. It can be foreseen that the implementation of the Notice will help encourage capital to better serve the real economy, prevent more private capital and even listed companies from following the trend of "mining", and prevent the further expansion of financial risks brought by individual "cryptocurrency speculation".

The virtual currency "mining" activity has been officially included in the eliminated industries, which means that my country will further strictly implement energy conservation and emission reduction policies to reduce carbon emissions. This will help reduce speculation on the one hand, and on the other hand, it will help reduce the risk of investors who have no financial risk-bearing capacity being "scammed" and maintain financial market and social stability.

Guo Yungao: Virtual currency "mining" has been officially listed as an eliminated industry, which will release a large amount of electricity resources squeezed by ineffective and harmful production capacity, so that efficient and beneficial production capacity can obtain relatively sufficient electricity guarantee, which is conducive to reducing the degree of power shortage, narrowing the scope of power restriction, and effectively reducing greenhouse gas emissions caused by ineffective energy demand. It is also conducive to promoting the development of new industries such as energy storage, supporting the construction of new power systems, serving the large-scale access to the grid of renewable energy such as wind power and photovoltaic power generation, and realizing the large-scale replacement of fossil energy with low-carbon renewable energy. It is of great significance to promote the optimization of my country's industrial structure, promote energy conservation and emission reduction, and achieve the carbon peak and carbon neutrality goals as scheduled.

Clarify the "clear" and "turbid" aspects of the blockchain field, strengthen the guidance and regulation of blockchain technology, and actively promote the integrated development of blockchain and the economy and society

Reporter: What issues should be paid attention to in rectifying the chaos of virtual currency "mining" and virtual currency trading? What is the focus of the work?

Deng Jianpeng: I think there are two major focuses at present. One is to investigate the problem of state-owned units and others using the resources or other convenient conditions to directly or indirectly participate in "mining". The second is that virtual currency has become a payment tool for some money laundering and illegal economic activities. We must severely crack down on illegal and criminal activities such as money laundering, terrorist financing, and fundraising fraud through virtual currency transactions.

The long-term mechanism to regulate the chaos of virtual currency transactions should be the key consideration for future policy making. There are two issues worth paying attention to: first, clarify the "clear" and "turbid" in the blockchain field, and strictly crack down on illegal activities in accordance with the law; second, in the face of the rapid development of cutting-edge technology and the blockchain industry, the regulatory approach should be forward-looking, and new forms of virtual currency chaos in the future should be predicted in advance, and then effective regulatory measures should be studied and deployed.

In general, promoting high-quality development is the theme of economic and social development during the 14th Five-Year Plan period. For local governments, in the process of attracting investment, they should carefully identify the business characteristics of various types of enterprises and comprehensively consider their contribution to the national economy, their role in industrial development and scientific and technological progress, and their impact on natural resources and the social environment. For enterprises, when making investment plans, they should also consider whether this business can truly promote the innovation of related industries, thereby jointly promoting high-quality economic and social development.

Reporter: Not long ago, the Central Cyberspace Affairs Commission and 17 other departments and units issued a public notice on the list of selected national blockchain innovation application pilot projects. It mentioned that "it is strictly forbidden to speculate on coins, mine, and raise funds illegally in the name of blockchain innovation". How do you understand the relationship between virtual currency and the underlying technology of blockchain? While promoting digital technology innovation such as big data and blockchain, how can we prevent the improper use of related technologies and do both promoting development and regulating regulations?

Deng Jianpeng: Blockchain is a new technology that relies on distributed database storage, peer-to-peer transmission network and asymmetric encryption algorithms. The issuance and trading of virtual currencies rely on the underlying blockchain technology.

Blockchains are roughly divided into two types: one is a blockchain that does not require permission and can be accessed by any user at will, also known as a public chain, such as Bitcoin and Ethereum. The other is a blockchain that requires approval and permission from specific network nodes before entry and access, also known as an alliance chain, such as Ant Chain and JD's blockchain. The former requires an economic incentive model to stimulate unspecified "miners" around the world to operate and maintain the blockchain system, so it is necessary to "issue coins", such as obtaining Bitcoin rewards through "mining"; the latter can obtain economic benefits through joint operation and maintenance by a number of specific network nodes (alliances), and does not require additional economic incentive models to "issue coins".

At present, the country's industrial policy and financial regulatory policy are mainly to promote the development of "non-coin blockchain", that is, alliance chain, which has positive significance for preventing financial and speculation risks. However, the alliance chain mainly uses the distributed ledger technology of the blockchain, which is relatively mature, and the research and development of the world's cutting-edge blockchain technology is mainly concentrated in the public chain, especially the "blockchain + finance" application. How to prevent its risks while encouraging the development of cutting-edge technology is an issue we need to focus on.

In the various sub-industries involved in blockchain, the chaos of virtual currency transactions can easily infringe on the rights of investors, and in extreme cases may even lead to financial risks. However, some other sub-sectors of blockchain may have positive value in improving social welfare, such as blockchain judicial evidence storage, which has low-cost and high-efficiency value for parties to obtain evidence and courts to identify evidence. The blockchain-based judicial evidence storage system Tianping Chain has been used by the Beijing Internet Court and others.

At present, the application of blockchain technology has extended to many fields such as digital finance, Internet of Things, intelligent manufacturing, supply chain management, digital asset trading, etc. Many countries around the world are accelerating the development of blockchain technology. Blockchain is also listed as a key industry of the digital economy in the "14th Five-Year Plan", and clear requirements are put forward for improving the level of supervision.

We should carefully distinguish between the "positive and negative" sides of the blockchain field, accelerate the innovation and development of blockchain technology and industry, actively promote the integrated development of blockchain and the economy and society, and at the same time strengthen the guidance and regulation of blockchain technology, and implement "governing the Internet according to law" in blockchain management.