Under heavy regulatory crackdowns, what is the attitude of countries around the world towards cryptocurrencies?

Original title: "The cryptocurrency industry under heavy regulatory pressure"

Author | Sui Qilin Editor | Jiang Zhaosheng Layout | Wen Xin

This report is intended for information purposes only and does not constitute any investment advice.

In the past month, the regulation of the cryptocurrency market has been strict, and the country has taken a heavy blow to the virtual currency market. First, there was a joint announcement from the three major financial industry associations, and then the Financial Committee proposed to crack down on Bitcoin mining and trading. It was also accompanied by the release of measures by several local governments in the southwest to resolutely crack down on virtual currency "mining". These successive developments all show that the domestic supervision of the virtual currency market is being raised to a new level.

Affected by multiple factors such as regulation, the prices of mainstream cryptocurrencies continue to fluctuate violently. Bitcoin has plummeted by more than 35% in the past month, and the price of Ethereum has fluctuated by nearly 40%.

The state has taken action and supervision has arrived

On May 18, the China Internet Finance Association, the China Banking Association, and the China Payment and Clearing Association jointly issued the "Notice on Preventing the Risk of Virtual Currency Trading Speculation", which pointed out that virtual currency does not have monetary attributes. As early as the "Notice on Preventing Bitcoin Risks" in 2013, Bitcoin was identified as a specific virtual commodity that does not have the same legal status as currency and cannot and should not be circulated as currency in the market. In addition, the announcement also emphasized that relevant institutions shall not engage in business related to virtual currency, and member units such as financial institutions and payment institutions shall not use virtual currency to price products and services, and shall not directly or indirectly carry out business related to virtual currency. Obviously, even though many foreign institutions including Tesla have previously announced support for the use of Bitcoin for payment, this behavior is still not feasible in China at present. The announcement also reminds consumers to strengthen their risk awareness and calls on consumers to invest cautiously.

The overall business model of the current virtual currency market has basically taken shape, and many well-known projects in the industrial chain have also gone through several rounds of trials and tribulations. However, for most ordinary investors, the virtual currency market is still in its early stages of development, and the speculative attributes of participating in virtual currency transactions are significantly higher than the investment attributes. The market driven by Animal Coin has amplified the market's enthusiasm. Some virtual currency "novices" who did not understand and have relevant investment experience before were attracted by the legendary wealth effect of 100x and 10,000x coins and blindly participated in related investment activities. This has further expanded the financial risks brought by virtual currency transactions and has a tendency to spread. In this situation, it is very necessary to remind consumers to strengthen their awareness of risk prevention. This is also the original intention of the announcement, to prevent overheated currency speculation.

On the same day that the three ministries issued the announcement, the Inner Mongolia Autonomous Region Development and Reform Commission issued the "Announcement on the Establishment of a Reporting Platform for Virtual Currency "Mining" Enterprises", comprehensively cleaning up and shutting down virtual currency "mining" projects, giving full play to the role of mass supervision and guarantee, and comprehensively accepting letters and visits reporting on problems of virtual currency "mining" companies.

Inner Mongolia is an important energy and power base in my country. Power plants in Inner Mongolia are mainly coal-fired, and many are built near coal mines. The cost of power generation is low, so the low electricity price attracts a large number of "miners" to mine here. The reason why Inner Mongolia became the first place to ban Bitcoin "mining" is related to the deployment requirements of the "Several Guarantee Measures of the Inner Mongolia Autonomous Region on Ensuring the Completion of the "14th Five-Year Plan" Energy Consumption Dual Control Target Task". Inner Mongolia needs to achieve the dual control target of energy consumption and promote low-carbon development.

On May 21, the Financial Stability and Development Committee of the State Council held its 51st meeting, continuing to emphasize the resolute prevention and control of financial risks, "cracking down on Bitcoin mining and trading, and resolutely preventing individual risks from spreading to the social field." This is the first time that the State Council has clearly put forward a crackdown on Bitcoin mining and trading. If the announcement of the three major associations is an appeal, then this meeting of the Financial Committee has released a strong signal to strengthen supervision and resolutely prevent the spread of risks.

This is not the end. On May 25, in order to further clean up virtual currency "mining" and strengthen the crackdown and punishment, Inner Mongolia immediately issued the "Eight Measures on Resolutely Cracking Down on and Punishing Virtual Currency "Mining" (Draft for Comments)".

On May 26, the National Development and Reform Commission issued the "Implementation Plan for the Computing Hub of the National Integrated Big Data Center Collaborative Innovation System", which stated that it is necessary to deploy national computing hub nodes, implement the "East Data West Computing" project, support large-scale computing scheduling, and build a new computing network pattern oriented towards data flow. The proposal of the "East Data West Computing" project is highly strategic, leading and innovative, and is of great significance to accelerating the construction of digital infrastructure, implementing the requirements of carbon peak and carbon neutrality, and coordinating the coordinated development of the east and west.

On May 27, the Sichuan Supervision Office of the National Energy Administration issued a notice on holding a research seminar on virtual currency "mining". The notice stated that according to the relevant requirements of the National Energy Administration, in order to fully understand the relevant situation of virtual currency "mining" in Sichuan, a research seminar will be held on June 2.

It can be seen from this round of policies that mining has been stopped, not only because virtual currency itself is not recognized by current laws, but also because its huge energy consumption characteristics run counter to the policy of carbon neutrality, so the rectification of the mining industry is imperative. While the state is strongly regulating mining activities, it is also actively promoting the construction of digital infrastructure. The "East Data West Computing" project plays an important supporting role in achieving green development and the coordinated development of the digital economy in the east and west. The implementation of this project will enable data centers across the country to form a new pattern of integrated infrastructure with a reasonable layout and green and intensive.

Why did the country strike so hard?

From an environmental protection perspective, the Chinese government proposed at the 75th United Nations General Assembly: "China will increase its national independent contribution, adopt more forceful policies and measures, strive to peak carbon dioxide emissions before 2030, and strive to achieve carbon neutrality before 2060." Under the joint initiative of global environmental protection, this is a major strategic decision based on the responsibility of promoting the building of a community with a shared future for mankind and the inherent requirement of achieving sustainable development.

Obviously, in the context of carbon neutrality, the energy-intensive industry of cryptocurrency mining has become an obstacle to achieving this goal. According to data from the Cambridge University Center for Alternative Finance, as of May 19, 2021, the annual electricity consumption of global Bitcoin "mining" is approximately 133.68TWh. What does this number mean? The electricity consumption of the entire country of Sweden in 2020 was only 131.8TWh.

Source: FINANCIAL TIMES

Moreover, mining not only consumes a lot of electricity, but also increases carbon dioxide emissions if thermal power is used to mine Bitcoin. Domestic virtual currency mining sites are mainly located in Inner Mongolia, Xinjiang and western Sichuan. Inner Mongolia and Xinjiang use more thermal power generation, while Sichuan mainly uses hydropower. Thermal power generation converts heat energy into electricity by burning coal or other fossil energy. In the process of burning coal, carbon dioxide is emitted, causing environmental problems. In the long run, this is not conducive to the sustainable development of the blockchain industry, and of course it will hinder carbon neutrality.

In addition, the current energy distribution in the east and west of my country is uneven. The energy is tight in densely populated and economically developed areas (such as Beijing-Tianjin-Hebei, Yangtze River Delta, Guangdong-Hong Kong-Macao Greater Bay Area, Chengdu-Chongqing), and energy is rich in western regions and economically underdeveloped areas. Inner Mongolia has the important task of transmitting electricity to the power grids in Beijing-Tianjin-Hebei and other places, and is an important area for sending electricity from west to east. Moreover, the rapid development of 5G, industrial Internet of Things and smart cities will also generate considerable energy consumption demand. If Bitcoin "mining" is allowed to proliferate in Inner Mongolia, it will affect the power balance of Inner Mongolia and the strategy of sending electricity from west to east to a certain extent.

For Sichuan, which mainly uses hydropower, the energy structure of Sichuan is mainly hydropower. In addition, Sichuan has a rugged terrain and a large river drop. The power generated by nearby small hydropower stations cannot be sent online. In addition, the water volume is large during the flood season, so the large energy abandonment phenomenon in Sichuan is a real problem. Therefore, waste energy utilization and mining with hydropower do not pollute the environment, which is helpful for consuming excess electricity during the flood season. Although mining is good during the flood season, there is not so much electricity during the flat and dry seasons. Therefore, how to solve this problem will probably be discussed at the symposium on June 2.

In addition to the environmental protection perspective, the crazy trend of cryptocurrencies in recent months has made the market a little overheated, and the bubble is very large. Affected by market speculation, a large number of ordinary investors have participated in the cryptocurrency market investment, which is mostly a speculative behavior. A large amount of money invested in Bitcoin transactions will weaken support for the real economy and make financial risks spread. More importantly, Bitcoin is a specific virtual commodity that has no real value support and does not have the same legal status as currency. Therefore, Bitcoin investment transactions are not protected. At this time, increasing regulatory efforts is to cool down the overheated market.

What impact will it have on the cryptocurrency industry?

After the Financial Committee meeting, the cryptocurrency market bubble suffered a major blow. Bitcoin prices have been falling. On May 23, the lowest price of Bitcoin hit $31,815.67. As of 2:45 am Beijing time on June 8, the price of Bitcoin rebounded to $35,544.78, a drop of 0.97% in the past 24 hours. On May 23, other cryptocurrencies also collapsed collectively. Ethereum fell from above $2,400 to a low of $1,739.03. XRP fell by about 12.94%, and Dogecoin fell by more than 10%.

In addition to having a huge impact on the price of cryptocurrencies, this round of policies also has a certain impact on mining-related companies. Relatively speaking, this series of policies has a greater impact on the top and large mining farms and mining pools. Many top mining farms have stepped up their overseas mining layout, with Central Asia and North America being the main layout directions, while some small mining farms or individual miners have not been greatly affected.

In addition to the evacuation and closure of mining farms, many mining machine service platforms have announced that they will block IP addresses in mainland China. On May 23, Huobi, which owns a mining pool, suspended the provision of mining machines and derivative services to users in mainland China, and suspended the provision of mining machine hosting services to users who have purchased BTC mining machine products. On May 26, the cloud mining platform BitDeer blocked all IP addresses in mainland China and stated that it would ensure that the platform would not provide services to residents in mainland China. The physical mining machine mining platform Mars Cloud Mining also announced that Mars Cloud Mining will block access to IP addresses in mainland China from 20:00 Beijing time on May 26.

Global attitudes towards cryptocurrencies

Not only China, but countries around the world have recently strengthened regulation of the cryptocurrency market.

USA:

On May 19, Sherrod Brown, Chairman of the U.S. Senate Banking, Housing and Urban Affairs Committee, published an open letter proposing that the Office of the Comptroller of the Currency (OCC) stop issuing bank trust licenses to cryptocurrency institutions and review several licenses issued by the previous government. On May 20, the U.S. Office of the Comptroller of the Currency (OCC), the Federal Reserve (Federal Reserve) and the Federal Deposit Insurance Corporation (FDIC) are considering setting up an "interdepartmental sprint team" to regulate virtual currencies.

Türkiye:

On May 1, Turkey included cryptocurrency asset companies in the list of institutions that need to comply with money laundering and terrorist financing regulations, according to a presidential decree published in the Official Gazette. The decision takes effect immediately and will make it easier for financial regulators to investigate cryptocurrency assets. On May 7, Turkish Finance Minister Lütfi Elvan announced that the country's cryptocurrency exchanges must report any transactions exceeding 10,000 Turkish liras (about $1,200) to the Financial Crime Investigation Committee (MASAK). Elvan pointed out that MASAK will be given the power to audit and supervise cryptocurrency exchanges in the future.

Iran:

On May 7, Iran’s central bank banned the trading of cryptocurrencies mined abroad. Local media said the move was intended to prevent capital flight from the country, which could be due to the devaluation of the country’s currency, the Rial.

Most countries are strengthening regulation of the cryptocurrency industry, but some countries are encouraging it. For example, in India, on May 31, the Reserve Bank of India said that India does not prohibit cryptocurrency trading, "Investing in cryptocurrency has always been 100% legal in India, and the central bank's new announcement clearly confirms the right to trade with cryptocurrency companies." Avinash Shekhar, co-CEO of ZebPay, India's oldest cryptocurrency exchange, said that the Reserve Bank of India's statement will attract more Indian investors to buy virtual currencies.