Chinese bitcoin miner exodus faces hurdles as equipment remains stuck from shipment delays, tariffs and legal quagmire
A massive exodus of bitcoin mining equipment from China is facing hurdles as millions of machines remain stuck over complex relocation procedures, according to lawyers handling such cases.
The country’s cryptocurrency mining industry continues to deal with delays in getting their operations up and running again since the government started clamping down on related activities last May. The bitcoin mining crackdown has already pushed much of this activity offshore, but large mining operations are finding it difficult to get their pricey, specialised hardware out of the country.
Compounding their troubles is the fact that miners are losing potential revenue each day the machines are offline, to the tune of about 170 yuan (US$26.70) in profit per machine by one estimate. For the largest operations, this means a loss of millions of dollars that can never be recuperated.
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Bitcoin miners look overseas amid crackdown in China
One lawyer representing a mining farm owner who once ran hundreds of thousands of machines told the South China Morning Post that his client is under a lot of pressure to get the machines up and running again outside of China. There were at least 2 million mining machines stuck in China’s southwestern Sichuan province by the end of 2021, by his estimate.
Mining farms used to enjoy local government support in Sichuan, where abundant hydropower made it cheap to run such energy-intensive operations. Each mining machine, usually weighing more than 15kg, uses multiple chips to solve complex mathematical problems and process massive amounts of data. This means cheap electricity is critical to eking out a profit. But now a new type of lucrative business has cropped up in the province: logistics and legal services that help miners relocate.
Since the national government made cryptocurrency mining illegal, large mining farms have been left with no option but to relocate. It is nearly impossible to find buyers for all their equipment. While smaller projects may sell what they can and buy new equipment abroad, big operations have found their search for a new destination to be tricky.
The ideal mining locations in China had cheap electricity provided by natural gas or hydropower. The combination of affordable power and an amiable local government has been difficult to find overseas. Russia and Kazakhstan were initially popular options, but they have proven risky locations because of power shortages and inconsistent policies.
Kazakhstan has cut power supplies to several miners, President Kassym-Jomart Tokayev earlier this week called for a much higher tax on crypto mining. Last month, Russia mulled banning bitcoin mining and other cryptocurrency activities. However, the government is now moving to regulate cryptocurrencies as an “analogue of currencies” rather than a digital asset.
Hash functions like SHA-256, which is used in the bitcoin blockchain, convert data into values of a fixed size. These values can then be used to verify the integrity of the original data, ensuring it hasn’t been tampered with. However, the constant hashing by mining machines eats up a lot of power, making it difficult for Chinese miners to find a new home for their equipment. Graphic: SCMP alt=Hash functions like SHA-256, which is used in the bitcoin blockchain, convert data into values of a fixed size. These values can then be used to verify the integrity of the original data, ensuring it hasn’t been tampered with. However, the constant hashing by mining machines eats up a lot of power, making it difficult for Chinese miners to find a new home for their equipment. Graphic: SCMP>
Since then, the mining farm represented by the lawyers who spoke with the Post have started looking at options for getting their equipment to Canada or Texas – the only state in the US with its own power grid, which was a factor in widespread blackouts last winter.
Despite its power woes, Texas has become one of the fastest-growing destinations for cryptocurrency miners in the world. Governor Greg Abbott welcomed the industry last year, tweeting, “Texas will be a crypto leader.” Some hope that new mining activity will spur new wind and solar energy production to mitigate power woes.
For Chinese miners, though, getting to Texas, or anywhere in North America, is not as straightforward as it seems. Picking a new destination is just the first step of a long process.
It’s happening! Texas will be the crypto leader. Cryptocurrency is now coming to Texas grocery stores. H-E-B is putting cryptocurrency kiosks into some Texas grocery stores.#cryptocurrency @HEB https://t.co/e4CNsSbd0s via @chron
– Greg Abbott (@GregAbbott_TX) June 19, 2021
A Chinese mining farm, as an external investor, has to negotiate power prices with the local suppliers at the new chosen site, one of the lawyers said. Even once all the terms are settled, logistical issues remain and are exacerbated by transport disruptions during the recent surge in Covid-19 cases.
Direct shipping to the US is also costlier than to other locations because of a 25 per cent tariff put in place by the administration of former president Donald Trump. To avoid this, some owners of mining equipment going to the US are preparing to ship through Malaysia, according to the lawyers. Equipment going to Canada will follow the same path just in case, they said.
With the pit stop in Malaysia, moving machines from China to North America is expected to take one to two months and cost more than US$10 per terahash of processing power, they estimated.
The abrupt closure of cryptocurrency mining operations in China is one of the final legs in Beijing’s crackdown on cryptocurrencies, which the government views as a threat to financial stability. Since bitcoin was introduced in 2009, the Chinese government’s approach has shifted from one of apparent tolerance to increasingly severe crackdowns that have largely kept domestic investors away from crypto assets, including non-fungible tokens (NFTs), which have created a booming market for digital artwork outside the country.
A bitcoin mining facility with a blue tin roof sits next to a hydroelectric power plant in Ngawa (Aba) Tibetan and Qiang Autonomous Prefecture, Sichuan province, on September 27, 2016. Photo: EPA alt=A bitcoin mining facility with a blue tin roof sits next to a hydroelectric power plant in Ngawa (Aba) Tibetan and Qiang Autonomous Prefecture, Sichuan province, on September 27, 2016. Photo: EPA>
“China’s strict regulations of crypto mining and trading is linked to China’s simultaneous implementation of sovereign digital currency,” said Winston Ma, an adjunct professor at the New York University School of Law and author of The Digital War: How China’s Tech Power Shapes the Future of AI, Blockchain and Cyberspace.
The push for China’s digital fiat money, known as e-CNY, has seen some initial success. The number of people using it nearly doubled to 261 million in the last two months of 2021, before the official app’s broad roll-out on app stores this year and promotions at the Winter Olympics in Beijing this month.
As the US Federal Reserve now looks into options for its own central bank digital currency, regulators in the country have also raised concerns about so-called stablecoins, which are cryptocurrencies backed by fiat currencies that can facilitate money transfers. Ma said China and the US are in agreement in this area.
“The US and China have many conflicts today, but there’s one issue on which both superpowers see eye-to-eye: the regulation of stablecoins,” he said.
China’s bitcoin mining crackdown has put a halt to virtually all such activity in the country, with much of it shifting to the US. alt=China’s bitcoin mining crackdown has put a halt to virtually all such activity in the country, with much of it shifting to the US.>
Decentralised cryptocurrencies like bitcoin, however, behave more like commodities, with valuations fluctuating wildly. When prices surge, it helps offset the high energy costs that go into mining.
In bitcoin’s early days, mining operations cropped up around China, where such activity proved profitable owing to the country’s cheap electricity. As a result, China emerged as an important market for cryptocurrency trading, investment and mining, with some of the world’s largest exchanges like Binance and Huobi having been founded in the country. Several major mining machine manufacturers, including Bitmain, Canaan and Ebon International, are also backed by Chinese entrepreneurs.
Local authorities in places with sufficiently cheap electricity, like Inner Mongolia and Sichuan, even welcomed investors, hoping the burgeoning industry would boost the economy.
In the mountainous areas of Sichuan that border the Tibetan plateau, installations of small hydropower stations made electricity particularly cheap, which was a big lure for mining farms. Average electricity prices could be as low as 0.15 yuan per kWh, according to investors and industry insiders. In the summer, when the region’s valleys are filled with torrential rainfall, electricity is “almost free” because the surplus cannot be stored and would be wasted if not used for cryptocurrency mining, they said.
A worker at a bitcoin mine in Sichuan province inspects a malfunctioning mining machine during his night shift on September 26, 2016. Photo: EPA alt=A worker at a bitcoin mine in Sichuan province inspects a malfunctioning mining machine during his night shift on September 26, 2016. Photo: EPA>
A number of local governments in Sichuan created special industrial parks to house these farms to attract local investment and potentially increase tax revenue. In 2019, Sichuan named six remote areas as “model zones” to absorb extra hydropower. The model was replicated in other areas of the country, which accounted for two thirds of the world’s mining power as late as April 2020.
The top mining regions at the time were Xinjiang, Sichuan, and Inner Mongolia, which contributed 55.18 per cent, 14.91 per cent and 12.45 per cent of China’s total hash rate, respectively, according to the Cambridge bitcoin Electricity Consumption Index (CBECI).
The high energy consumption of mining activity proved to be a problem for the national government, which aims to reach peak carbon emissions by 2030. The crackdown that kicked off last May has also targeted people supporting the industry.
In one high-profile case last year, the government disciplined Xiao Yi, a provincial official in Jiangxi, for allegedly supporting cryptocurrency mining while he was Communist Party secretary of Fuzhou, a city in the province. Fuzhou chose cryptocurrency mining as a key industry to grow while Xiao was party secretary, according to a report by the China News Weekly, a magazine run by China News Services. In 2017, when a cryptocurrency mining company asked the local authority to provide a plant of 150,000 square metres and a 200,000-volt special power supply system as a condition for setting up a mining farm there. The local authority approved the request within 24 hours and provided the resources within 28 days.
Xiao was found to have “abused his power” by supporting related enterprises, according to an official statement. He was the first senior party member to be punished for supporting cryptocurrency mining.
Now China has become largely irrelevant to the cryptocurrency world. Even related companies backed by Chinese entrepreneurs have been forced to move their headquarters to other countries.
The abrupt closure of mines throughout China has caused it to quickly lose its status as a global mining hub. By the end of last summer, the US was the world’s top mining location in terms of hash rate, a measure of the network’s processing power used for verifying transactions and mining new cryptocurrency tokens.
In August, the US made up 35.4 per cent of the global hash rate, followed by Kazakhstan and Russia with 18.1 and 11.2 per cent, respectively, according to data from the CBECI.
China’s proportion fell to approximately zero, as anyone involved in cryptocurrency mining now faces criminal charges.
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.
Copyright (c) 2022. South China Morning Post Publishers Ltd. All rights reserved.
