Interpretation of Inner Mongolia’s clearance of “crypto mining farms”: Unveiling the disguise of “data centers”, where is the space for mining?

Source: Liandede, Author: Dawen

In contrast to the high energy consumption, the tax revenue contributed by mining farms to local finances is far lower than that of data centers. Although the overall income of mining farms is very lucrative, it mainly comes from digital currency transactions and value-added, which is also a "blind spot" for taxation.

At the end of February, the Inner Mongolia Development and Reform Commission solicited opinions on the "Several Guarantee Measures to Ensure the Completion of the 14th Five-Year Plan Energy Consumption Dual Control Targets (Draft for Comments)" (hereinafter referred to as the "Draft for Comments"). The measures proposed to comprehensively clean up and shut down virtual currency mining projects and withdraw all of them by the end of April 2021.

During the 14th Five-Year Plan period, the scale of data center construction will be reasonably and orderly controlled, and new virtual currency mining projects will be strictly prohibited.

This draft for soliciting opinions was proposed by the Inner Mongolia Autonomous Region due to the failure to complete the dual control targets for energy consumption in 2019.

On February 2, the National Development and Reform Commission, together with relevant departments, assessed the implementation of the dual control measures and target completion of the total energy consumption and intensity in 2019 in various provinces (autonomous regions and municipalities), and criticized the Inner Mongolia Autonomous Region for failing to complete the assessment results in the notice. The "Draft for Comments" also clearly pointed out that the goal is to ensure the completion of the dual control target tasks of energy consumption in the autonomous region during the "14th Five-Year Plan".

This "Draft for Comments" has a very harsh attitude towards virtual currency mining projects. In addition to proposing to reasonably and orderly control the scale of data center construction and strictly prohibit the construction of new virtual currency mining projects, it also plans to comprehensively clean up and shut down virtual currency mining projects and withdraw all of them by the end of April 2021.

It is worth noting that the "Draft for Comments" classifies virtual currency mining as "backward and excess capacity", which is on par with the elimination category in the "National Industrial Policy Guidance Catalogue" (2019 edition).

Other "backward and excess capacity" include coke (lignite), calcium carbide, polyvinyl chloride (PVC), synthetic ammonia (urea), methanol, ethylene glycol, etc. It is not the first time that virtual currency mining has been classified as backward capacity. Xinjiang, Inner Mongolia and other places have issued policies to restrict or prohibit mining operations in their local areas.

Why is mining a backward production capacity?

The main reason why virtual currency mining business is restricted in the above-mentioned provinces is that the income of the mining farms is not transparent and does not significantly promote the growth of local output value.

Taking the Inner Mongolia Autonomous Region as an example, the "Draft for Comments" clearly defines the dual control targets for energy consumption: in 2021, the dual control targets for energy consumption in the entire region are a 3% decrease in energy consumption per unit of GDP, the increase in energy consumption is controlled at around 5 million tons of standard coal, the growth rate of total energy consumption is controlled at around 1.9%, and the energy consumption per unit of industrial added value (equivalent value) is reduced by more than 4%.

The key indicator here is energy consumption per unit of GDP, which is also the main basis for judging what is backward production capacity. In other words, from the perspective of regulators, mining is a high-energy-consuming, low-value industry. But as we all know, mining can actually make huge profits against the backdrop of soaring Bitcoin prices.

Why is it that the government thinks that the mines are not profitable, but the mines are actually very profitable? This is directly related to the actual operation of the mines.

Liande App interviewed several mining practitioners and found that when mining farms are actually operating, most of them are registered in the name of data centers and report corporate income in the form of hosting fees and service fees.

Zhang Long, the owner of the mining farm, told the Liande App that it is an open secret in the industry that the project was established as a cloud computing and big data data center, and then settled in the park through the investment promotion policy of the high-tech industrial park, but the main business is actually mining. "Many regions have subsidies for data centers, especially electricity charges," Zhang Long said, "and project approval will be much easier."

Compared with real data centers, cryptocurrency mining farms have lower construction costs and more extensive management. Small mining farms are not equipped with UPS (uninterruptible power supply), cooling air conditioners and noise reduction equipment. The noise in the computer room is as high as 100 decibels or more, which may even cause hearing damage to maintenance personnel.

Tax blind spots in mines

The energy consumption of mining farms is also far greater than that of data centers. Currently, the capacity of a single cabinet server in a mainstream data center is generally 16-20, while the number of mining machines in a single cabinet of a Bitcoin mining farm can reach dozens.

On the other hand, the rated power of a single mining machine is much greater than that of a rack-mounted server. Taking the Antminer S9 as an example, the rated power of S9 is 1320W, while the rated power of a general rack-mounted server is about 500W.

Taking the Internet Data Center of Beijing Telecom Tong Sanyuan Building as an example, this data center can provide services to Beijing and parts of Hebei Province. It has 268 server cabinets. After excluding power consumption for heat dissipation, lighting, etc., the total IT power is about 944.5kW, which means that the power consumption is less than one thousand degrees per hour.

However, Zhang Long owns a medium-sized mining farm that has deployed 5,000 Ant S9 mining machines. The cabinets alone consume up to 6,500 degrees of electricity per hour, which is more than six times the Internet Data Center of Beijing Telecom Tong Sanyuan Building.

In contrast to the high energy consumption, the tax revenue contributed by mining farms to local finances is far lower than that of data centers. Although the overall income of mining farms is very lucrative, it mainly comes from digital currency transactions and value-added, which is also a "blind spot" for taxation.

Take Zhang Long's mining farm as an example. Based on the Bitcoin price of $50,000, the daily output value of 5,000 Antminer S9 mining machines is about 130,000 yuan, the electricity cost is about 50,000 yuan, and the monthly net profit is about 2.4 million yuan. However, these profits will not enter the company's account at all, will not generate any taxes for the local finance, and of course will not be included in the local GDP.

Regional differences in mining development

There is no doubt that mining farms cannot provide tax revenue for local finances and consume a lot of energy, so it is certain that they will be cleared out by local governments. So does this mean that the virtual currency mining industry will be cleared out across the country?

Take Sichuan, a major mining province, as an example. According to the announcement issued by the National Development and Reform Commission, Sichuan Province exceeded the dual control target task of energy consumption in 2019. Unlike Inner Mongolia, which mainly relies on thermal power, Sichuan Province is the largest province in my country in terms of hydropower generation. By the end of 2020, the installed capacity of hydropower reached 83.01 million kilowatts, and the scale under construction was about 40.1 million kilowatts.

However, the abundant hydropower in Sichuan Province cannot be fully consumed. Due to factors such as the imbalance between supply and demand, the obstruction of the construction of transmission channels, and the weak regulation capacity of hydropower stations in the province, Sichuan Province has experienced varying degrees of "water abandonment" every year since 2012. In 2016, as much as 14.1 billion kilowatt-hours of surplus hydropower could not be connected to the grid, resulting in the loss of about 4 billion yuan in power generation revenue for hydropower stations in the province.

In this context, the construction of mines in Sichuan Province will not affect the completion of the dual energy consumption control targets, but will help increase water and electricity consumption, reduce waste and increase fiscal revenue.

Therefore, it can be considered that the Inner Mongolia Autonomous Region's withdrawal of the virtual currency mining industry to achieve the dual control target of energy consumption is an individual case and will not be extended to the whole country. (The interviewees in the article are pseudonyms)