Bitcoin regulation is "tight inside and loose outside" and many "mines" have been shut down

Reporter Song Di: Since the beginning of the year, a regulatory campaign targeting Bitcoin mines has been launched in many places. This shows that China's regulatory authorities are currently using a more "tight inside and loose outside" strategy to deal with the regulatory difficulties in virtual currency.

Currently, many provinces in China, especially Sichuan, where Bitcoin mines are concentrated, are being investigated, and the investigation is led by the Internet Financial Risk Special Rectification Office Leading Working Group. A Bitcoin miner in Sichuan told the Economic Observer that some of the mines in the area have been shut down and are waiting for the government's next regulatory policy.

The pace of this policy promotion varies from place to place. Relevant personnel from the local financial offices of two cities in Shandong and Jiangsu Province told Economic Observer that at present, neither city has received any relevant notice. One of the local financial office personnel said that this cleanup is mainly aimed at some areas in the central and western regions where mining farms are concentrated.

An insider told the Economic Observer that the supervision of Bitcoin mining pools had entered the regulatory authorities’ field of vision as early as September 2017 when the ICO policy was implemented. The insider also said that the current regulatory authorities have adopted a “tight inside and loose outside” regulatory strategy for Bitcoin, and the supervision of mining farms is only one link in the entire regulatory chain.

The Economic Observer also learned from three independent sources that many provinces including Hunan, Heilongjiang, Hebei, Guangdong and others have frozen bank accounts involved in virtual currency investment and virtual currency mining machine investment. The total known frozen amount in two places exceeds 600 million yuan.

At present, 70% of the global Bitcoin mining pool computing power is concentrated in China. The tightening of the regulatory policy for Bitcoin mining farms is expected to have a huge impact on the Bitcoin mining market. On January 12, ViaBTC, the world's fourth largest Bitcoin mining pool, issued an announcement, stating that "due to policy reasons, domestic mining farm resources are very tight, and some Bitcoin mining farms that have long-term cooperative relationships with ViaBTC are even facing the crisis of closure. The cloud contract maintenance cost of the mining pool has also suddenly increased. Therefore, the management fee of a mining machine will be temporarily adjusted from 6% to 50%.

A Bitcoin miner told the Economic Observer that the policy is still being implemented and the impact is expected to gradually increase in the future. Therefore, some large mines have begun to deploy overseas. However, the cost of "going overseas" for small and medium-sized mines may be unaffordable. "Whether it is the financial level or the resource level, 'going overseas' is not an option for us," the miner told the Economic Observer.

Mining farms usher in a wave of regulation

At the beginning of 2018, a document led by the Leading Group of the Internet Finance Risk Special Rectification Office (hereinafter referred to as the "Internet Finance Rectification Office") was successively issued to local financial offices. This document mentioned that it was necessary to actively guide enterprises under its jurisdiction to withdraw from the "mining" business, and required local governments to compile statistics on the relevant information of "mining" enterprises, including basic information of enterprises, revenue, preferential treatment, etc. Since then, some provinces have begun to tighten supervision over Bitcoin mines.

Bitcoin "mining" is actually the process of "packaging" Bitcoin transactions. A certain amount of Bitcoin transactions need to be packaged into a block. After being confirmed, they are linked to the previous blocks to form the so-called "blockchain". In this process, the "miner" responsible for packaging can obtain Bitcoin rewards generated by the system, which is also the process of Bitcoin "issuance".

Because of the existence of rewards, there will be competition for "packaging rights". The competition adopts the proof-of-work mechanism, in which computing power is the decisive factor. As Bitcoin mining equipment tends to be standardized, the main channel for increasing computing power investment is to put more "mining" machines, so large-scale mining farms with thousands of machines continue to appear. These mining farms require a lot of electricity, so they are mostly deployed in areas with abundant electricity in China, such as Sichuan, Inner Mongolia, and Yunnan.

A Bitcoin miner told the Economic Observer that since the price of Bitcoin began to rise in 2017, mining has become a high-profit industry. A mining machine can generate more than 200 yuan in net profit a day, so the number of Bitcoin mines has begun to increase.

As regulatory policies are gradually being implemented, some miners have already felt "panic." A bitcoin miner in Sichuan told the Economic Observer that government departments have recently come to understand the situation, and in order to respond to the inspection, some miners have closed their mines.

The original sin of electricity

Since the difficulty of Bitcoin mining increases with the increase of overall network computing power input, this positive correlation will cause each mining farm to continue to invest huge computing power.

The investment in computing power means the continuous increase in electricity consumption. In fact, electricity costs have become the main cost of Bitcoin mining farms. According to data from the industry website Digiconomist, the mining industry has accounted for 0.17% of the world's total electricity consumption.

The huge power consumption has become one of the reasons for regulatory concern. In the documents issued to local financial offices, it is mentioned that some of the so-called mining companies that currently produce "virtual currency" not only consume a lot of resources, but also contribute to the speculation of "virtual currency".

The above-mentioned miner told the Economic Observer that since mining requires a lot of electricity, obtaining cheaper electricity has become the core of Bitcoin mining operations. In view of this, some mines are located in areas with abundant electricity resources, and some mines are even built near hydropower stations or thermal power stations.

"Some mines received preferential conditions provided by local governments when they moved in, which is equivalent to investment promotion projects. They often build them in the name of big data centers and then enjoy some preferential electricity policies," the mine owner told the Economic Observer.

According to information from previous interviews by the Economic Observer, some mines have used "cheap electricity" from abnormal channels in order to save costs. After the electricity is generated, it will be uniformly transmitted to the national grid and then distributed by the national grid. However, these mines will bypass the national grid and directly reach agreements with some hydropower stations and thermal power stations to use electricity at extremely low prices.

"For example, some mining farms have 10,000 mining machines, of which 5,000 use the regular national grid price, and industrial electricity is about 1 yuan; the other 5,000 use some contracted electricity, and the price may be only about 30 cents, and the overall cost will be reduced." Previously, a mine owner told the Economic Observer.

These agreements have led some power plants to prioritize supplying Bitcoin mines, which has resulted in some residents facing power shortages after the winter.

“Tight inside and loose outside” chain of supervision

In 2018, multiple regulatory news about the Bitcoin market continued to emerge, and their authenticity varied. These rumors involved various fields such as Bitcoin over-the-counter transactions and Bitcoin mines.

An insider told the Economic Observer that the current regulatory authorities have adopted a "tight inside and loose outside" strategy for Bitcoin regulation. Although after the regulatory policy was implemented in September 2017, the regulatory authorities have not taken any action during the new round of currency price increases, they have always maintained attention and vigilance towards this market.

While monitoring Bitcoin mines, the Economic Observer also learned from multiple sources that since the beginning of 2018, bank accounts related to Bitcoin over-the-counter transactions and Bitcoin mining machine transactions have been frozen in Heilongjiang, Hunan, Hebei, Guangdong and other provinces. A person who had just entered the field of Bitcoin investment bought Bitcoin on the first day, and his account was frozen on the second day.

In early December 2017, the National Internet Financial Security Technology Expert Committee issued a Bitcoin OTC monitoring report. The report mentioned that since October, Bitcoin OTC trading platforms have been launched at an accelerated pace. Some of these platforms "have opened up virtual transfer channels between C2C OTC trading and currency-to-currency on-site trading accounts. To some extent, some of these platforms have achieved disguised on-site trading of RMB and Bitcoin." According to the "Announcement on Preventing the Risks of Token Issuance and Financing" issued by the central bank and other departments in September 2017, it was clearly stated that "any so-called token financing trading platform shall not engage in the exchange business between legal currency and tokens, or 'virtual currency'."

The above-mentioned person familiar with the matter told the Economic Observer that the current supervision of Bitcoin mines is also part of the supervision of Bitcoin.

Huang Zhen, director of the Institute of Financial Law at the Central University of Finance and Economics, told the Economic Observer that the current regulatory measures taken against virtual currencies mostly use a "blocking" approach, but given the characteristics of virtual currencies themselves, the "blocking" approach is unlikely to have a good effect in the long run. Therefore, Huang Zhen believes that the next step should be to adopt a "guidance" approach, such as establishing China's own digital currency system.

In July 2017, the central bank established the "Digital Currency Research Institute" to study the technology and possible applications of digital currency. Yao Qian, director of the institute, has mentioned the concept of digital currency on many occasions. He divides digital currency into "(quasi) private digital currency" and "legal digital currency", and mentioned that "the digitization of currency is actually a very dynamic and evolving thing. Some attributes may be clearly visible to us, while some attributes may not be fully visible yet and need to be fully developed. This is my solution."