In early 2017 China was the biggest and most influential market for bitcoin worldwide, as the bulk of both mining and trading was conducted in the People’s Republic. Since then, much has changed as global bitcoin adoption and changes in regulations — both in China and in neighboring jurisdictions — have led to a shift in China’s influence on the bitcoin ecosystem.
For a long time, China has been the country where the largest percentage of bitcoin miners are located — accounting for about 70 percent of the Bitcoin network. In addition, China’s mining pools are also the most dominant. This dominance is explained by the fact that electricity in China is comparatively inexpensive. China's government subsidizes the price of electricity to its citizens.
Moreover, the country has an abundant supply of energy from a number of hydroelectric dams as well as coal-based facilities (which it plans to build hundreds more of over the next decade. Due to these facilities, electricity is plentiful in the country and can sometimes go unused.
The proof-of-work consensus mechanism utilized in the Bitcoin network is very energy-intensive due to the increasing mining difficulty. For bitcoin mining operations, electricity generally accounts for more than 60 percent of the total costs.
That means that cheap electricity is a major factor in determining whether mining is profitable or not. Therefore, Chinese citizens capitalized on the availability of cheap and subsidized electricity to participate in the network as miners in order to earn the 12.5 new bitcoins set to be released with each block.
The largest mining operation in the world is the Chinese company Bitmain. The privately owned company mines bitcoin as well as operates two mining pools. In addition, it also develops and sells ASIC chips designed to optimize the mining process for users. Bitmain is headquartered in Beijing though it has offices around the world.
Recently, however, regulators within the country have begun clamping down on bitcoin mining. Following the circulation of a leaked document online, it became apparent that the Chinese central bank, the People’s Bank of China (PBOC), was attempting to control bitcoin mining operations within the country. While the bank is unable to directly stop miners, it can control the amount of electricity available to the miners by collaborating with local authorities.
While the country still has the largest portion of mining operations, a successful crackdown on bitcoin mining would most likely only lead to a shift of operations into other low-cost electricity countries. In fact, Several bitcoin mining operations are already moving to other countries where there is cheap electricity but a more favorable regulatory climate. For instance, Bitmain recently announced the registration of a subsidiary in Switzerland where it plans to continue its operations.
Towards the end of 2017, China set a ban on the trading of bitcoin, and all cryptocurrencies, through domestic exchanges. While it is unclear exactly why Beijing came to this decision, the general consensus is it was to have greater control on the outflow of the Yuan and it may also have had something to do with the development of the country's own state sanctioned cryptocurrency.
Following the directive, many Chinese citizens took to international exchanges in order to buy and sell their cryptocurrencies. Due to the fact that the ban was not having the desired effect as Chinese citizens were still able to trade, the country further expanded the regulation to include all exchanges. All websites that are related to cryptocurrency trading, whether they be domestic or otherwise, are blocked in the country.
Given China was one of the biggest markets in the bitcoin economy, the regulations did contribute to the drop in the price of bitcoin. Moreover, these regulations led to the closure of a large number of exchanges in the country such as the oldest bitcoin exchange BTCC. While many of these still operate outside of the country, the loss of their Chinese market has led to a significant drop in revenue and relevance.
Initial Coin Offerings
In September 2017, a joint statement released by a group of Chinese regulatory bodies revealed that the country had banned initial coin offerings (ICOs). Released via a circular issued by the PBOC, the country defined its stance on ICOs stating: “The tokens or "virtual currency" used in coinage financing are not issued by the monetary authorities, do not have legal and monetary properties such as indemnity and coercion, do not have legal status equivalent to money, and cannot and should not be circulated as a currency in the market use.”
The circular went on to add that ICOs were dangerous and harmful to those who participated in them. This follows after a number of projects were found to be holding crowdfunds without a viable product or plans to develop one. Furthermore, many of the regulators believed that most ICOs were created with the primary aim of defrauding customers. In an effort to protect citizens from the increasingly fraudulent Chinese ICO space, the country outlawed the activity.
How does this affect China’s global position?
Initially, Chinese citizens gravitated towards acquiring and storing bitcoin because it offered them a hedge against inflation as well as a currency free from government control. Moreover, bitcoin mining gave people a way to supplement their incomes and make use of easily available cheap energy. However, with the increasingly hostile regulatory climate, the Chinese dominance on bitcoin, and the wider cryptocurrency market is diminishing.
Having said that, some remain optimistic that the government will lift the ban. BTCC’s co-founder Bobby Lee has expressed his belief that the regulatory climate will change saying: "One day I think it's possible they'll lift the ban [...] and they might reinstitute it and license it.”
However, because trading on exchanges and ICOs are currently prohibited, and the PBOC making mining more difficult by restricting access to reliable energy sources, it is hard to imagine the government changing its stance anytime soon.