Foreign media: China's subsidies for Bitcoin mining violate global free trade rules

If your only tool is a hammer, it will tempt you to see everything as a nail. Most people in the Bitcoin community believe that the solution to the increasing centralization of Bitcoin mining can only be solved through technical means. However, a significant reason for mining centralization is that Chinese government policies have distorted the digital currency mining market. The obvious argument is that China is violating its international trade obligations. Given the consequences of mining centralization, Chinese government subsidies for digital currency mining may be included in the list of prohibited activities for World Trade Organization members.

In international trade, “dumping” is a predatory pricing strategy in which manufacturers in one country export products to another country at prices below home prices or below the cost of production. Dumping is intended to eliminate competition in the importing country, so that companies in the exporting country can then raise prices to extraordinary levels. Given the consequences of mining centralization, government subsidies for cryptocurrency mining could be added to the list of prohibited activities for World Trade Organization members.

Things like Bitcoin mining, where companies in China are able to get deep discounts on chip manufacturing and government-provided energy to have an unusually powerful mining industry, are recognizable. As a result, Chinese Bitcoin mining accounts for a large share of the world's hash rate, while mining companies elsewhere, such as Sweden's KNCMiner, have gone bankrupt.

Bitcoin Magazine recently reported that chipmaker and mining company Bitmain is building a major data center complex in northwest China focused on bitcoin mining. Its location choice in Xinjiang is ideal not only for its cold, dry climate but also for access to government support and low-cost wind and solar power.

The World Trade Organization’s Agreement on Subsidies and Countervailing Measures details which subsidies are challenged by WTO members and under what conditions. Cheap energy provided by governments is subsidized under the terms of the agreement if it is: (i) a financial contribution; (ii) a subsidy by a government or any public body within the territory of any member; or (iii) a conferment of a benefit.

Subsidies must also be “specific.” If a subsidy is broadly provided, it does not distort resource allocation. However, if a government subsidy is targeted to a specific company, economic sector, region or export, then the subsidy violates the rules.

China’s hydroelectric rise is almost certainly not about supporting a bitcoin mining industry, which was unthinkable when these dams were built. But China’s electricity subsidies for mining don’t just cause economic disruption. It weakens the security of bitcoin. Blockchain systems maintained by entities under the jurisdiction of a single government carry a greater risk of political manipulation and censorship.

The SCM describes two types of subsidies: prohibited subsidies and actionable subsidies. Prohibited subsidies are those that are used to directly affect trade and thus adversely affect other WTO members. Actionable subsidies are those that are likely to adversely affect other WTO members. When there is a problem with goods, subsidies can be challenged through multilateral dispute settlement or through countervailing actions. Under WTO rules, subsidies for services require “negotiation.” The services trade agreement currently being rolled out in Geneva could be expanded to explicitly prohibit subsidies for cryptocurrency mining or general data processing.

As a category disruptor, Bitcoin and other digital currencies may not fit the traditional rules of international trade. Antidumping laws and SCM apply only to trade in goods. The new bitcoins created with each block can be said to be goods, even though they are in digital form. The rest of the mining process is best thought of as providing a transaction packaging service for digital currency users. When new bitcoins are no longer created, mining will be a purely financial and data processing service.

This means that the inclusion of any particular transaction on the Bitcoin blockchain cannot easily be proven to be a subsidized service to consumers outside of China, and Bitcoin transactions within China are subsidized to the same extent as transactions abroad. Countervailing measures such as tariffs would be difficult to administer.

On the other hand, given the large proportion of global trade and bitcoin transactions by users outside of China, bitcoin as a good and mining as a transaction service are clearly being provided to consumers outside of China. These are exports, even if the precise location of purchase, but the location of the service, may be unclear.

Bitcoin’s mathematical foundations make the case for missubsidization much easier. The electricity required to mine Bitcoin and the hash power available to various mining groups are easy to calculate, so it’s easy to measure the substantial benefits that Chinese Bitcoin miners are getting from cheap electricity.

If China were to build energy that would be more evenly distributed across its economy, the argument for subsidizing Bitcoin mining would evaporate. The Chinese government may have international trade obligations that would require it to withdraw the substantial benefits it now gives to the domestic Bitcoin mining industry. Technical measures are not the only tools in the Bitcoin community’s toolbox.

This piece is a guest post by Jim Harper. The opinions expressed do not necessarily reflect those of Bitcoin Magazine.

Jim Harper is a senior fellow at the Cato Institute, where he studies law and policy in the information age. He has served as a committee counselor for the U.S. House of Representatives and the U.S. Senate, and in 2014 he served as global policy advisor to the Bitcoin Foundation.