Xiao Lei: Why does the central bank want to close Bitcoin mines?

A piece of news spread like wildfire this afternoon. Some media learned from insiders that the central bank held a closed-door meeting today to rectify some mines with irregular electricity usage.

In fact, this news is nothing, judging from the wording, because the rectification and treatment of mining farms began last year, especially after the closure of domestic exchanges last year, the relevant regulatory agencies also discussed the issue of the existence of mining farms, but the conclusion was that the reasons for closing the mining farms were not sufficient, and the mining farms did not cause more social problems, and the risk points were not clear, so no specific arrangements were made. However, all localities received "window guidance", which means that local companies cannot participate in digital currency mining.

To understand many of China’s policies, we must first analyze the logical relationship behind them. The issue of mining farms has nothing to do with the central bank. This is a completely local issue related to the business management of real enterprises related to the industrial and commercial business departments. If the mining farms really need to be closed, it should not be the central bank that issues the order. Therefore, if the central bank’s meeting mentioned the issue of Bitcoin mining, then it is definitely not just about studying mining.

At the beginning of the new year, the entire macro policy is implementing a new plan, including the central bank level, on exchange rates, capital projects and other issues. One of the signals released is that in 2018, capital controls must be tightened to ensure the independence of my country's monetary policy.

If we want to further strengthen capital controls, we must first study what poses a potential threat to capital control policies. Currently, China's bitcoins and other digital currencies produced by mining account for more than 70% of the world's total output. The monthly output of various digital currencies in China may exceed US$1 billion based on current prices. This will arouse the vigilance of financial institutions such as the central bank. These digital currencies produced will have an impact on capital controls and the flow of funds in the international market in some form. In this case, will the effectiveness of capital controls be strengthened by shutting down mining farms?

In fact, fundamentally speaking, China's mining is unlikely to lead to the loss of foreign exchange reserves, because if the domestically produced Bitcoin is sold on the international market, it will be exchanged for US dollars. Even if these US dollars stay in the international market and do not return, it will not cause the loss of China's foreign exchange reserves. The most common problem may be that it will lead to the concentrated flow of part of the domestic funds. In fact, this kind of flow is similar to investors putting funds from the real estate market to the stock market and from the stock market back to the real estate market. It is still circulating in the domestic pool. As long as it does not involve illegal fundraising and other issues, it is difficult to say that it will have a huge negative impact.

However, China's overall policy environment is changing. If there is a huge asymmetric interest in a certain market, a lot of funds will flock in, causing impacts on other industries. If all kinds of listed companies go to mine Bitcoin, or if people are keen to buy mining machines to mine digital currencies, then the government will be very worried, because various investment guidance strategies will fail, directly affecting certain industrial planning and development goals.

Having said that, everyone should understand what I mean.

First of all, in terms of willingness, the central bank and other relevant institutions are very eager to shut down various Bitcoin mining farms. However, the method, reason and steps of the closure should be carefully considered. According to Reuters, the central bank requires local governments to take measures from the perspectives of energy, electricity consumption and environmental protection to guide Bitcoin mining companies to reduce their scale. The People's Bank of China also stated that it cannot directly limit the power supply to Bitcoin mining, but can only ask local governments to take action.

What I mean is, I really want to shut you down, but the local government needs to find the reason. The central bank said that it cannot directly limit the power supply to Bitcoin mining, also considering the issue of authority, this matter must rely on the local government.

Secondly, do local governments have the motivation to shut down Bitcoin mining farms? This requires considering the current policy environment. According to the current policy implementation strength, local governments may act faster than expected. No local government is willing to bear the name of "supporting Bitcoin mining farms". It is enough to know what it means.

Third, the central bank’s instructions are relatively mild, and they also take into account the negative effects of the policy, because this industry was not formed overnight and involves a wide range of people. If it is shut down across the board, it is indeed not justified and completely violates the logic of the legal system. If Bitcoin is not defined as an illegal asset (such as drugs) from a legal perspective, then the simple act of producing Bitcoin is difficult to be defined as illegal. Therefore, the next step is to focus on what reasons the local governments will find at the specific implementation level.

Fourth, no matter how you interpret today's news, you can see the government's attitude. This needs to be taken seriously. Even if the domestic mines cannot be closed quickly, it will lead to a sharp increase in hidden costs. The biggest impact may be on the larger mines. If some are not closed as "typical", it may be meaningless for the policy makers to issue policies. However, for smaller mines, as well as various decentralized mines organized by retail investors, the impact will not be too great, but the expansion speed will definitely slow down.

Fifth, from another piece of news, "At the same time, people inside the central bank expressed that they do not encourage the power sector to supply electricity to the mining farms." This guiding policy may be a "qualitative" policy. What I mean by qualitative is that the matter of closing the mining farms may have been decided. The three words "discouraged" are a warning to the power sector. At the same time, it also shows that it is very difficult to completely shut down the mining farms. First of all, the central bank itself cannot put pressure on the power sector. You have to know that those large miners all purchase hundreds of millions of kilowatt-hours of electricity at a time, which is a huge support for the local economy.

Of course, just like the closure of Bitcoin exchanges, the closure will not happen overnight, and there is enough time for the market to make various interpretations, but I can only tell you that the attitude of the central bank and others is already very clear.

For me personally, the focus of my thinking is not whether to close the mining farm or not, but how to understand the mining itself.

Mining is actually a computer using its maximum computing power to find a certain data. It can be figuratively compared to finding a grain of gold from a pile of sand. The larger the pile of sand, the more difficult it is to mine. Therefore, the so-called mining is actually a super-large calculation of the computer. This calculation can be used in mining, scientific computing, and various research.

Humans have only invented electricity for 300 years, but its applications have expanded to countless forms, from replacing steam engines to lighting to information transmission. What is the most efficient application of electricity today?

If a country is very short of electricity, electricity will be used to produce very necessary supplies to meet various transportation and government needs. If a country is relatively wealthy, what will electricity be used for? For example, singing in KTV, street neon lights, large amusement parks, etc. In fact, the application of electricity is enough to judge the level of economic development of a country or region.

In 2016, China's electricity generation ranked first in the world, and its total electricity generation accounted for 25% of the world's total. In this case, according to common sense, mining electricity is indeed the most abundant in China, especially as China's economic growth rate declines, the amount of electricity resources wasted is increasing.

The electricity from power stations cannot be stored, but if it is converted into digital currency, it can be stored. In fact, if all the excess electricity generated in China can be converted into Bitcoin for storage, it should be the most efficient way of production and operation. It is equivalent to using electricity to produce US dollars, which is a processing and export method with the highest added value.

In addition, if history continues to develop, most of the electricity in the future may be consumed by computers. This is a judgment I made, and our generation can bear witness to it. The proportion of electricity consumption in human daily life will become lower and lower. In the future, humans will use digital and blockchain methods to solve various problems, and the number of "mines" will only increase, not decrease. Especially with the development of artificial intelligence, space exploration and other fields, the demand for computing power will show exponential growth.

Electricity is just a kind of energy. Just like a person, the place that consumes the most energy is not the limbs, but the brain. The human brain is a machine that works 24 hours a day. The brain of a person who loves to think consumes 75% of the blood sugar stored in the liver every day, and the oxygen consumption accounts for 20% of the body's oxygen consumption. The more the brain thinks, the more glucose its neurons need.

When the electric light was invented 200 years ago, people thought the best use of electricity was to light a light bulb. In the future, the market will have the final say on where electricity is most effectively used.

No one can see electricity. Even now, many people find it difficult to understand the mystery of its existence, but electricity has changed the world. Many virtual things often have a greater impact than physical things. I think it is difficult for many people, including the government, to figure out what "digital assets" mean to China and the world. What we need to reflect on is that in addition to the four great inventions, electricity, electric lights, telephones, computers, digital currencies, etc., which are driving mankind forward, how many of them were invented by China?

When a phenomenon appears, we must study the big background and logic behind it. The future competition can be said to be a military competition, economic development competition, and financial competition, but it can also be said to be a competition of ideas and computing power. It is easy to close a mine, but it is difficult to stop the trend.