Interpreting the new regulations of the National Development and Reform Commission: Is virtual currency mining allowed or is it classified as restricted or eliminated?

Author’s note: The National Development and Reform Commission’s latest “Industrial Structure Adjustment Catalogue” does not list virtual currency mining as an elimination category. So is it classified as permitted, or is it likely to be included in the restricted or eliminated category?

"Virtual currency 'mining' activities (the production process of virtual currencies such as Bitcoin)" was listed as eliminated in the "Guidelines for Industrial Structure Adjustment (2019 Edition, Draft for Comments)" ("Draft for Comments") issued by the National Development and Reform Commission ("NDRC") on April 8, 2019. However, this item disappeared from the "Industrial Structure Adjustment Catalogue (2019 Edition)" ("Catalogue"), which was reviewed and approved at the second meeting of the Commission on August 27, 2019 and officially announced on October 30, 2019.

When the Draft for Comments was first released, I briefly analyzed the impact of the new policy on mining companies in the article "Where will the virtual currency mining industry go? A brief review of the new regulations of the National Development and Reform Commission". After the release of the Catalogue, some friends in the mining circle came to consult about the impact of the official version of the document, saying that many people currently believe that the fact that the Catalogue does not include virtual currency mining in the elimination category means that the country no longer opposes virtual currency mining, and even believes that the spring of virtual currency mining companies has arrived.

Based on the author's understanding of the relevant clauses of the Catalogue and the actual situation he has learned, the Catalogue does not explicitly list virtual currency mining as being to be eliminated. This should be considered a good thing for the mining community as a whole. At least there is no clear ban in black and white, so there will be some room and leeway for survival.

However, I wonder if you have noticed that the Catalogue continues a setting in the Draft for Comments - there are catch-all clauses in both the elimination and restriction categories; and the regulatory authorities in Inner Mongolia, one of the main locations of virtual currency mining companies, are still carrying out regulatory actions to clean up and rectify virtual currency mining companies after the release of the Catalogue. So, is virtual currency mining allowed, or is it caught in the restriction or elimination category?

1. The catch-all clause in the Catalogue

According to the "Decision of the State Council on Issuing and Implementing the Interim Provisions on Promoting Industrial Structure Adjustment", the "Catalog" consists of three categories: encouragement, restriction and elimination. Those that do not belong to the above three categories and comply with relevant national laws, regulations and policies are in the permitted category, and the permitted category is not included in the "Catalog".

The author noticed that there is an identical catch-all clause in both the restriction and elimination categories under the Catalogue: processes, technologies, products and equipment that do not comply with national laws and regulations such as the Air Pollution Prevention and Control Law, the Water Pollution Prevention and Control Law, the Solid Waste Pollution Prevention and Control Law, the Energy Conservation Law, the Work Safety Law, the Product Quality Law, the Land Management Law, and the Occupational Disease Prevention and Control Law, and do not comply with mandatory standards for national safety, environmental protection, energy consumption, and quality, and do not comply with the requirements of international environmental conventions.

The head of the Industry Development Department of the National Development and Reform Commission mentioned in a recent press conference the reason why the country has set up such a safety net clause in the Catalogue: for items that cannot be fully covered by existing items and do not comply with laws, regulations and industry standards, a safety net clause is set up in the restriction category and elimination category respectively. [1]

From the wording of the catch-all clause, I understand that if a process, technology, product or equipment does not meet any one or more of the following requirements, it is likely to be classified as restricted or eliminated:

(1) Failure to comply with national laws and regulations such as the Law on the Prevention and Control of Air Pollution, the Law on the Prevention and Control of Water Pollution, the Law on the Prevention and Control of Environmental Pollution by Solid Waste, the Energy Conservation Law, the Work Safety Law, the Product Quality Law, the Land Management Law, and the Law on the Prevention and Control of Occupational Diseases;

(2) Failure to comply with mandatory national safety, environmental protection, energy consumption, or quality standards; or

(3) Failure to comply with the requirements of international environmental conventions, etc.

As for virtual currency mining, the Catalogue does not list it under any item. Does it mean that it is categorized as permitted, or is it likely to fall into the restricted or eliminated category? In comparison with the above-mentioned catch-all clause, judging from the current operating status of most mining companies in terms of land use, electricity use, energy consumption, environmental protection, and safety, it is probably difficult to say that it is categorized as permitted.

2. Relevant regulatory policies and actions in Inner Mongolia

Due to its rich power resources, the Inner Mongolia Autonomous Region has always been one of the concentrations of virtual currency mining companies. According to public information, as of now, Inner Mongolia has issued at least two notices on the rectification of local virtual currency mining companies: one is the "Notice on the Inspection, Cleanup and Rectification of Virtual Currency "Mining" Enterprises" (Inner Mongolia Industry and Information Technology Department (2019) No. 384) ("Document No. 384") jointly issued by five departments including the Inner Mongolia Autonomous Region Department of Industry and Information Technology, the Inner Mongolia Autonomous Region Development and Reform Commission, the Inner Mongolia Autonomous Region Public Security Department, the Inner Mongolia Autonomous Region Local Financial Supervision and Administration Bureau, and the Inner Mongolia Autonomous Region Big Data Development Management Bureau on August 30, 2019; the other is the "Notice on the Joint Inspection of the Cleanup and Rectification of Virtual Currency "Mining" Enterprises" ("Joint Inspection Notice") issued by the Inner Mongolia Autonomous Region Department of Industry and Information Technology on November 11, 2019.

(1) Requirements under Circular 384

According to the content of Document No. 384 ( not publicly released ) that I have seen, five departments including the Inner Mongolia Development and Reform Commission have put forward requirements to the Industry and Information Technology Bureau, Development and Reform Commission, Public Security Bureau, Financial Office, and Big Data Bureau of each league and city under their jurisdiction, pointing out that the virtual currency mining industry is a pseudo-financial innovation that has nothing to do with the real economy and should not be supported. It was decided to carry out relevant work to clean up and orderly withdraw virtual currency mining companies in the entire Inner Mongolia region; and, in the "improve the system, source control" under the inspection requirements, it is required to include virtual currency mining companies in the list of restricted industries.

It is interesting to note that the "Draft for Comments" published by the National Development and Reform Commission on April 8, 2019 listed virtual currency mining in the elimination category; on August 27, the entry was deleted from the elimination category in the "Catalog" that had been reviewed and approved by the National Development and Reform Commission's executive meeting; and three days later, on August 30, Document No. 384 jointly issued by relevant departments including the Inner Mongolia Development and Reform Commission required that virtual currency mining companies be included in the restricted industry catalogue.

Although the "Catalog" that had actually been reviewed and approved at that time no longer explicitly mentioned virtual currency mining, and the local Development and Reform Commission and other departments in Inner Mongolia did not have the authority to adjust the content of the "Catalog" and add virtual currency mining to the restricted category, the regulatory policy issued by Inner Mongolia at that time may indicate that the Development and Reform Commission, a regulatory system from the national to the local level, and other relevant departments in Inner Mongolia that jointly issued the policy, generally held a non-supportive regulatory attitude towards virtual currency mining.

(2) Requirements under the Joint Inspection Notice

According to the joint inspection notice issued by the Department of Industry and Information Technology of the Inner Mongolia Autonomous Region on November 11, 2019, Inner Mongolia will, in accordance with the deployment of Document No. 384, have the autonomous region's joint inspection team go to some leagues and cities to conduct joint inspections on the cleanup and rectification of virtual currency "mining" enterprises, focusing on finding out virtual currency "mining" enterprises that have nothing to do with the real economy, evade supervision, consume a lot of energy, and use "big data industry" as a package to enjoy local electricity prices, land and taxation preferential policies. The autonomous region has formulated unified technical standards for the inspection of "mining" enterprises, and the inspection team will conduct inspections in accordance with the unified standards when inspecting the entire region. Individual companies that unreasonably obstruct and fail to cooperate with the inspection team in carrying out normal inspections will be treated as "mining" companies, and those that cause adverse effects will be held accountable for the legal responsibilities that the companies should bear.

The author noticed that the joint inspection notice was issued more than ten days after the release of the Catalog, and the joint inspection notice clearly mentioned that the basis for the relevant departments to conduct joint inspections on virtual currency mining companies was the previously issued Document No. 384. It can be seen that even if the Catalog does not explicitly include virtual currency mining in the elimination or restriction categories, the recently issued policy (joint inspection notice) of the Department of Industry and Information Technology of the Inner Mongolia Autonomous Region is actually still in line with the previous local policy (Document No. 384), and the regulatory actions it has already carried out are still being promoted. The relevant government departments in Inner Mongolia still generally do not support virtual currency mining.

Cryptocurrency mining is not explicitly listed in the elimination category in the NDRC's Catalogue, nor is it listed as restricted or encouraged. Does this mean that it is of course permitted, or is it included in the restriction or elimination category? At present, it is difficult to generalize.

Judging from the latest policies and actions released by relevant departments in Inner Mongolia after the publication of the Catalogue, the author understands that the removal of virtual currency mining from the elimination category in the Catalogue does not mean that mining companies can embark on a bright future. For many mining companies, it does not even mean the opening of the door to life.

The catch-all clause of the Catalogue is like a pocket. Whether or not something can be put into this pocket depends on legal standards and room for interpretation. Legal standards refer to whether the enterprise is compliant in terms of pollution prevention and control, energy conservation, production safety, product quality, land management, and occupational disease prevention and control, and whether the process, technology, product or equipment meets the mandatory standards for national safety, environmental protection, energy consumption, and quality, and whether it meets the requirements of international environmental conventions. The room for interpretation lies in the specific grasp and enforcement of the above legal standards by local government agencies.

In the context of the country encouraging the development of blockchain technology, and in the scenario where blockchain and virtual currency are often intertwined, the current Catalogue does not mention virtual currency mining, which reflects the flexibility of supervision to attack or defend. The bottom line pocket is already there, and the regulators will decide whether to tighten it, how to tighten it, and how tight to tighten it.

(This article was first published on Babbitt Information. If you need to reprint it, please indicate the source.)

Author: Zhang Ling, Partner at Hanyi Law Firm

Disclaimer: This article only represents the author's personal views and does not represent the opinions of the institution. The content of this article does not constitute legal opinions or investment advice. If you need to reprint or quote any content of this article, please indicate the author's name.

[1] The head of the Department of Industrial Development of the National Development and Reform Commission answered questions from reporters on the “Guidelines for Industrial Structure Adjustment (2019 Edition)”: http://www.gov.cn/zhengce/2019-11/06/content_5449198.htm