200 days of virtual currency mining "disappearing" in China: the myth of making wealth can no longer be replicated, and it can't wait until the second half

Text｜Han Maxi, Caijing Tianxia Weekly

Editor: Mao Shiyang

Under strict supervision, mining still exists in a hidden way

"Now one-third of domestic miners have gone overseas, one-third are in a wait-and-see attitude, and the other one-third have left the industry." On December 27, 2021, a mining machine sales person told Caixin Tianxia Weekly.

The situation behind this is that since May 2021, the regulatory authorities have been cracking down on virtual currency mining. At present, the mining farms in Sichuan, Yunnan, Xinjiang and Inner Mongolia, which are important mining towns in China, have already been closed one after another. Most of the mining farms, mining machine manufacturers and mining pools with a certain scale and operating capacity have moved overseas to continue operating, while the remaining small mining farms and mining pools with poor operating capabilities can only be closed.

However, under strict supervision, the former miners still exist in a relatively hidden way. Caijing Tianxia Weekly learned that the domestic virtual currency mining industry, which was fragmented at the beginning, has now moved to North America, Central Asia and other regions on a large scale and continues to operate.

Wang Dongxiang, the owner of a domestic mine, told Caijing Tianxia that domestic regulatory policies do not have much impact on veteran miners. Their mentality will be affected at first, but now miners are distributed all over the world. There are very few domestic mining machine transactions, and most of them are shipped from Hong Kong, China and Malaysia.

"Mining machine manufacturers no longer produce in China, and have all moved overseas." The above-mentioned mining machine salesperson said that the mining machines moved overseas are not affected, and all operations are currently proceeding normally. He believes that cryptocurrencies represented by Bitcoin will undergo another round of adjustments, and the price of Bitcoin may reach a new high by then, so BTC mining is still profitable. This is why domestic mine owners hope to transfer mining machines overseas as soon as possible to continue mining.

Market data shows that the price of Bitcoin fluctuated between $30,000 and $67,000 in 2021, with an average annual price of around $47,000. On February 10, 2020, Bitcoin fell below $10,000, and within a short period of time, it dropped to around $5,000. In the following months, it began to fluctuate and rise, and by the beginning of 2021, it had exceeded $50,000.

In May 2021, after the introduction of domestic regulatory policies, Bitcoin fell from $60,000 per coin to $35,000 per coin. On November 10, Bitcoin hit a new record high, reaching $69,000 per coin. From less than $4,000 in 2014 to nearly $70,000 now,

Bitcoin's market value has soared, and in 2021 its total market value ranking once surpassed companies such as Facebook, Tencent, Alibaba, and Tesla.

However, some people are deceived by the huge wealth effect brought by virtual currency in a short period of time, and thus become the "leeks" harvested by some companies, which lays many hidden dangers.

Recently, a certain mining company called Xingji has been illegally mining and raising funds by recruiting people offline, claiming that it provides FIL cloud computing mining services and "annual investment return rate of 300% and no loss of principal." Lawyer Xiao Sa believes that this behavior may be suspected of organizing and leading pyramid schemes and fundraising fraud.

However, the myth of getting rich quickly packaged by the company was full of loopholes and was soon complained by users. Some Star Coin users told the media that they had bought FIL computing power on the platform before and everything was normal, but in the past six months, they could only withdraw 10% of the total number of coins produced, and the rest could not be withdrawn. The company said that they lost money on investment and did not have that many coins to pay to miners.

In this regard, Xiao Sa said that in the currency or mining business, there are often exaggerated and "defrauding property" propaganda methods. Once the legal conditions are met, the operation of FIL mining mines will be alienated into a crime. At the same time, if the operation of the Star XX's fund disk is for the purpose of illegal possession, using fraudulent methods to illegally raise funds, and the amount is large, it constitutes the crime of illegal fund-raising.

An industry insider told Caijing Tianxia that in the mining industry, it is not uncommon to see online pyramid schemes that use the guise of "blockchain" to mine and speculate on cryptocurrencies. Although the dispute involving the above-mentioned company has yet to be determined by the court, similar cases have been identified as "pyramid schemes."

In September 2019, Yancheng police uncovered a 50 billion yuan blockchain scam. In the case, Chen, Ding, Peng and others set up the "PlusToken" platform, developed more than 2 million members, and the platform absorbed more than 9.48 million digital currencies such as Bitcoin and Ethereum from members. According to the market conditions at the time, the total value was equivalent to more than 50 billion yuan.

Finally, on November 26, 2020, according to the Supreme People's Court's China Judgment Documents Network, the second-instance criminal ruling of the Intermediate People's Court of Yancheng City, Jiangsu Province, found that 14 defendants, including Chen Bo, Ding Zanqing, and Peng Yixuan, were guilty of organizing and leading pyramid selling activities, and the defendant Chen Tao was guilty of concealing and hiding the proceeds of crime. They were sentenced to fixed-term imprisonment ranging from two to eleven years and fined separately. Because of the large number of people involved and the large amount of money involved, this case is called the "biggest case in the cryptocurrency circle."

There are countless scams of this kind in the cryptocurrency world. Since 2021, there have been 15 blockchain funding scams publicly reported by the media, including well-known mining projects such as IPFS, chia, and Swarm bzz. The above three are all very popular mining projects in 2021, but without exception, they all collapsed.

Swarm bzz mining was hailed as a "king-level" project from the beginning, but it is not a foreign blockchain project, and it does not even have much to do with Swarm. It was designed by a well-known domestic tycoon in conjunction with multiple computing power mining farms. After harvesting traffic and retail investors' funds, the biggest black hand behind the scenes - Jiangxing Technology has shut down the network and run away.

In essence, it is not difficult to find that whether it is StarCraft or Swarm, their routines are exactly the same, using "blockchain technology as a gimmick and providing high rebates of virtual currency" to attract users who are unaware of the truth to participate.

For ordinary people, the key to this type of scam lies in "low threshold and high return". For example, in the cloud mining provided by StarCraft, users do not need to buy mining machines themselves, they only need to deposit coins as collateral. The simple and crude way of promoting wealth has made a large number of ordinary people outside the circle who want to get rich overnight become the targets of harvesting.

Not only the above companies, on December 15, 2021, a case of "invalidity of Bitcoin mining contract" pushed virtual currency mining to the climax of public opinion again. Beijing Chaoyang Court held a public hearing and pronounced a verdict on a service contract dispute caused by the delay in the return of Bitcoin "mining". The court ruled that the contract was invalid at first instance and rejected the plaintiff's request for payment of huge Bitcoin income.

In this case, the court held that Fengfu Jiuxin Company and Zhongyan Zhichuang Company signed an agreement to "mining" on behalf of others even though they were fully aware of the risks involved in "mining" and Bitcoin transactions and that relevant departments had expressly prohibited Bitcoin-related transactions. This agreement should be invalid because it harmed the public interest, and the related property rights and interests arising from it should not be protected by law. The consequences of the above-mentioned actions should be borne by the parties themselves.

This is the first case in which a Bitcoin mining contract was invalidated. After the verdict was announced, Chaoyang Court sent a judicial suggestion to the Sichuan Provincial Development and Reform Commission, providing feedback on clues of virtual currency "mining" activities involved in the case and suggesting that relevant departments conduct a cleanup and rectification.

The domestic myth of getting rich through mining can no longer be replicated

Behind the "scam", the mining profits that the outside world "covets" have become difficult to achieve in the country.

In fact, before the regulatory policy was implemented in April 2021, Chinese miners had always dominated the global Bitcoin mining network. Data released by the Cambridge Center for Emerging Finance (CCAF) last year showed that Chinese miners accounted for 71% of the world's total mining power. After the withdrawal policy, that is, in June and July, the global share of domestic Bitcoin network computing power was almost zero. At present, as domestic miners transfer mining equipment overseas in large numbers, China's mining computing power has been replaced by North America.

In other words, the United States has replaced China as the world's largest Bitcoin mining region. The Cambridge Bitcoin Electricity Consumption Index (CBECI) shows that the United States ranks first in the world's total Bitcoin computing power, accounting for 35.4%, followed by Kazakhstan and Russia, accounting for 18.1% and 11.23% respectively.

On October 11, Bitmain, the world's largest mining machine manufacturer, announced that its Antminer will stop shipping to mainland China. This shipping policy adjustment does not affect Bitmain's overseas customers. For mainland customers who have purchased forward products, Bitmain said it will contact them and provide alternative solutions.

In addition to mining machine manufacturers and miners, mining pools and exchanges are also not immune to this wave of regulation. Spark Pool issued an announcement stating that "in order to comply with China's latest industry regulatory policies, Spark Pool has decided not to provide mining pool services to users in mainland China." Spark Pool is currently the largest Ethereum mining pool, mainly serving Ethereum miners. Data shows that Spark Pool currently accounts for 22.7% of the total network computing power, ranking first in the entire network.

Another of China's earliest Bitcoin mining pools, F2Pool, has connected more than 1 million mining machines and millions of users around the world. After the regulatory policy came out, it announced that the mining pool would no longer provide services to Chinese users. If it is detected that the user is from China, his account may be frozen or terminated.

From the perspective of transactions, large domestic exchanges are also clearing out domestic users on a large scale. On December 31, Huobi, one of the three largest domestic exchanges, will close its RMB OTC business and completely withdraw from the Chinese market. Data shows that as of last year, Huobi's user base had reached 15 million, of which domestic users accounted for a relatively high proportion. The scale of this round of withdrawal is at least in the millions. In fact, it is not just Huobi that is being cleared out. The remaining exchanges such as Binance, MEXC, Bitget, KuCoin, and Poloniex are also in the process of clearing out.

The huge wave of regulation has affected almost the entire industry chain of virtual currency mining. Crypto financial service institutions in the middle of the industry chain have also stopped providing financial services in China. "As soon as the policy came out, we sensed the direction of the wind and started to close our business in China. Now we are focusing on overseas crypto financial business." A crypto financial service provider told Caijing Tianxia Weekly.

Wang Dongxiang believes that this strong regulatory policy is relatively thorough, and high-pressure crackdowns on virtual currencies and mining will become a normal situation in the future.

"Strike" is still the main theme, and the mining industry cannot wait until the second half

On December 3, 2021, at the Sohn Hearts & Minds investment conference held in Sydney, Charlie Munger said, "I think the Chinese made the right decision, which is to ban them, and my country made the wrong decision." The "right decision" Munger mentioned refers to the high-pressure crackdown on virtual currency mining and trading by domestic regulatory authorities.

In June 2021, a document entitled "Notice on Clearing Virtual Currency "Mining" Projects" appeared in multiple WeChat groups. Subsequently, an incident occurred that the industry called "the largest mining accident in Chinese history." This was the final "fall" of Sichuan, China's largest virtual currency mining center after Inner Mongolia, Xinjiang, Qinghai, Yunnan and other places.

A miner lamented on Weibo: "8 million tons of load in Sichuan were collectively shut down at 0:00 today."

In fact, mining is a very energy-intensive industry. As of May 10, 2021, the annual power consumption of global Bitcoin mining is about 149.37 terawatt hours (1 terawatt hour is 1 billion kWh), which has exceeded the power consumption of Malaysia, Ukraine, and Sweden. Taking the 35 mining companies that were suspended and cleared in the Inner Mongolia Autonomous Region at the end of April 2021 as an example, according to preliminary statistics, these mining companies can save 5.2 billion kWh of electricity annually, equivalent to more than 1.6 million tons of standard coal.

In the view of industry insiders, the complete suspension of domestic mining projects in 2021 is related to the carbon neutrality goal. In 2020, at the United Nations General Assembly, China pledged to strive to peak carbon emissions before 2030 and achieve carbon neutrality before 2060. In order to achieve this environmental protection goal, mining, a high-energy-consuming industry, will naturally be cut first.

Cai Kailong, a senior researcher at the Institute of Financial Technology at Renmin University of China, said in an interview that carbon neutrality was one of the reasons for the devastating blow to virtual currency mining in 2021, but more importantly, the official used this opportunity to reiterate its statement on Bitcoin mining and transactions, that is, domestic officials have never recognized virtual currency transactions represented by Bitcoin.

In order to prevent the resurgence of virtual currency mining, on September 24, 2021, the regulatory authorities once again launched a strong attack. The National Development and Reform Commission and 11 other departments issued the "Notice on the Rectification of Virtual Currency "Mining" Activities", proposing to strengthen the supervision of the entire upstream and downstream industrial chain of virtual currency "mining" activities. On the same day, the People's Bank of China and ten other departments also issued new regulations to rectify "virtual currency speculation", clarifying that virtual currency-related business activities are illegal financial activities.

“Banking supervision is becoming increasingly strict. After exchanges cleared out mainland Chinese users, all domestic bank card transactions for virtual currencies were frozen.” A person familiar with the industry told Caixin Tianxia Weekly.

Not only that, the crackdown by regulatory authorities is still ongoing. On October 8, the National Development and Reform Commission publicly solicited opinions on the "Negative List for Market Access (2021 Edition)" and re-listed virtual currency "mining" in the elimination list. Industry insiders said that if virtual currency mining projects are included in the eliminated industries, once they are truly included in the negative list, it will basically be impossible for local governments to approve projects for mining industries, and virtual currency mining will face greater cleanup efforts.

In this context, whether it is Xingji, who is suspected of leading pyramid schemes and organizing fraud, or the court's ruling that the Bitcoin mining contract is invalid, they are actually clearly conveying a message: in China, there is no second half for virtual currency mining. This was made very clear at the 51st meeting of the Financial Stability and Development Committee of the State Council on May 21: "Crack down on Bitcoin mining and trading activities, and resolutely prevent individual risks from spreading to the social field."

After shutting down the local mining industry, regulatory authorities have also stepped up their crackdowns on the private virtual currency mining activities of party and government agencies. In November, the National Development and Reform Commission stressed the need to strictly investigate and punish mining activities involving computer rooms of state-owned units.

On December 21, 2021, Luo Shunquan, former member of the Party Working Committee and former deputy director of the Management Committee of Fuzhou High-tech Industrial Development Zone, was officially punished by the Jiangxi Provincial Commission for Discipline Inspection and Supervision for "introducing, supporting and directly participating in enterprises engaging in virtual currency mining activities that did not comply with national industrial policy requirements, abusing power for personal gain, colluding with mining companies, forming a community of interests, and resisting organizational review."

This is not the first official case of an official being punished for "engaging in virtual currency mining". In May 2021, Xiao Yi, then vice chairman of the Jiangxi Provincial Committee of the Chinese People's Political Consultative Conference, was reported to be under investigation. In the "double dismissal" notice released on the website of the Central Commission for Discipline Inspection and the National Supervisory Commission in November, it was mentioned that Xiao Yi "abused his power to introduce and support enterprises to engage in virtual currency mining activities that did not comply with national industrial policy requirements".

This was the direct trigger for Xiao Yi's downfall. When he was in charge of Fuzhou, he introduced Fuzhou Genesis Technology Co., Ltd. and, together with the company's boss, Fujian businessman Lin Qingxing, built the Fuzhou Genesis Supercomputing Center for virtual currency mining. According to data, Lin Qingxing himself entered the cryptocurrency circle very early, and it was rumored that he owned more than 100,000 bitcoins. In the same month that Xiao Yi was investigated, Lin Qingxing was also detained.

At present, hundreds of millions of yuan of funds of the company have been frozen, and related projects have been suspended. The Fuzhou High-tech Zone Management Committee has also sent a working group to the company, and many suppliers have also taken legal action due to funding issues.

From the closure of local businesses to high-level investigations by government officials, domestic policies on virtual currency mining are no longer as ambiguous as they were in the past. The domestic virtual currency mining industry may end forever in the winter of 2021.

(Wang Xiangdong is a pseudonym in this article)