Why China's Ban on Crypto Mining Is More Serious Than Before

In recent weeks, China has come down hard on crypto mining by shuttering operations across at least five provinces or regions that are rich in either coal or hydropower.

China’s own environmental policy is a key factor in the mining crackdown, industry pros said. Specifically, China’s carbon neutrality policy created an energy shortage within the country due to its drastic reduction in coal-fired power, which contributed over 57% of the country’s energy use.

“The carbon neutrality policy cuts back coal power, which has been a major energy source for the country,” said Winston Ma, an adjunct law professor at New York University and author of “The Digital War – How China’s Tech Power Shapes the Future of AI, Blockchain and Cyberspace.” “China will have to search the edge of its power grid to make up that gap.”

China’s carbon neutrality policy has two goals. It aims to make the nation’s carbon emissions peak before 2030 and realize carbon neutrality by 2060, which means reaching net-zero carbon dioxide emissions at some point before that deadline.

According to that policy, China needs to halve its carbon dioxide emissions from coal-based power plants by 2030. To that end, it must shut, retrofit or put into reserve capacity as much as 364 gigawatts (GW) of coal-fired power, a third of the country’s total, according to London-based climate data provider TransitionZero.

“For financial stability and energy security reasons, the government would want to crack down on crypto mining and trading,” said Arthur Lee, founder of SAI, a Beijing-based clean energy mining company.

A hard cap

China has set hard caps on carbon emissions and will strive to meet the climate targets, according to a report by state media People’s Daily on Sept. 30, 2020, which was reposted on the central government’s official website.

Local governments, especially those that are dependent on coal-fired power in northern China, have been struggling to meet aggressive climate targets set by the central government. Major coal-based power producers such as Inner Mongolia and Xinjiang, which were previously the top two crypto mining hubs in China, have been among the first regions that received directives to crack down on high energy consumption companies, including bitcoin mining businesses.

Such drastic changes have faced backlash from companies and local governments, China’s state media Oritental Outlook reported. The general manager of a coal liquefaction company said it had to completely shut down its factories to meet the planned coal power reduction, according to the report.

One local government in North China even turned off street lights at night to comply with the carbon neutrality policy, the report said.

In the People’s Daily report, senior government officials said there are “voices” that call for lower emission caps. But the officials did not directly respond to whether the central government would make any concessions on these absolute caps on carbon emission, while calling for unity between different authorities and stressing the importance of meeting the targets.

Against this backdrop, the Financial Stability and Development Committee of China’s State Council called for a crackdown on crypto mining and trading on May 21.

“Members of the committee are senior officials from key government agencies such as [National Development and Reform Commission], the Ministry of Public Security, China Securities Regulatory Commission,” Lee said.“The crackdown is well coordinated between these departments and historically policies of such scale have been fully carried out and can hardly be reversed in the future.”

Not only crypto mining

The total energy consumption by all the bitcoin mining operations in China combined is about 2.2 GW, according to estimates by Nick Hasen, CEO of Seattle-based crypto mining firm Luxor.

That number pales in comparison to the 364 GW energy gap created by China’s forced reduction in coal-based power. To meet climate targets, crypto mining is apparently just one of many high energy consumption industries that have been targeted by the policy.

Tangshan, one of the largest steelmaking centers in Hebei province of central China, scaled back as much as 50% of its production to meet its carbon neutrality targets in March. Construction, manufacturing, transportation and petrochemicals are also on the list of high energy consumption industries.

“The policy aims to drive out coal-fire power, while using more hydropower and developing wind and photovoltaics,” Lee said. “One reason why crypto mining has been explicitly pointed out is that a significant portion of energy use for crypto mining is coal-based.”

While Chinese miners take advantage of excessive hydropower in southern provinces during the rainy season, they tend to move to major coal-based power producers like Xinjiang and Inner Mongolia in the dry season.

Crypto mining could also be an easy target because of how the business operates.

“You can go to a building (mining farm) and see the building using 100 megawatts (MG), where that is generally not very common unless you go to a mega factory,” Hasen said. “So that does make it an easy target.”

Firm stance

The central government’s website reposted another People’s Daily article titled “China Is Serious About The Realization of Carbon Neutrality”on March 29, shortly after the policy was officially passed by the National People’s Congress during the Two Sessions, which is the largest political gathering every year to make major policies, and discuss and pass new laws.

In that article, the Chinese government touted that it has cut its coal-fired power down below 50% of the total energy use, while doubling down on developing wind and solar power to replenish the nation’s power grid in the long term.

Chinese miners are wasting no time in leaving the country, given the magnitude of the ban on crypto mining.

“From my conversations (with Chinese miners), I don’t think anyone is waiting in China,” Dave Perrill, CEO and founder of Compute North, a crypto miner hosting services provider. “I think the writing is on the wall, the shutdown is there and it is not going away.”

“In recent weeks, 85% of miners that have been asking about hosting services are Chinese miners and that is really due to the mass exodus,” Perrill said.

The Minneapolis-based firm now has three data centers in Nebraska, Texas and South Dekoda with over 100 megawatts computing power combined. It aims to build out five new mining sites and increase its total capacity to 1.2 gigawatts by the second quarter of 2022.

“What I see more is, I don’t think they necessarily need or want to go to the U.S., they simply want out of China,” Perrill said. “The big push now is the acceleration to bring forward those sites for our Chinese customers and make sure they are happy.”

The firm has provided services to at least five public mining companies, including Bit Digital and Marathon.

A 180-degree turn

The carbon neutrality goals were written into the 14th Five-Year Plan in late 2020. The plan is China’s blueprint for social and economic developments.

However, the mention and magnitude of this climate initiative in the plan struck a stark contrast with the central government’s attitude on coal from a year ago.

China has made energy security and economic growth top priority since 2019 by encouraging energy companies to increase fossil fuel output and revive coal-fired power plants. In 2020, the country commissioned 76% of the world's new coal plants, up from 64% in 2019, according to the report by TransitionZero.

The country planned to increase coal production, and the capabilities to transport and store coal in the coming years, according to a guideline issued by the National Development and Reform Commission (NDRC) on June 18, 2020.

Government researchers expected China to have a coal-fired power plant construction spree before September 2020. However, they have been forced to revise their old drafts and prioritize the climate initiative in the five-year plan later that year, Reuters reported.

It remains to be seen whether there will be a sharp drop in coal-fired power given how recently the carbon neutrality policy has been implemented.

While it remains unclear whether China would continue to enforce these hardline energy policies on the local level, the central government appears to be intent on fully implementing related measures to meet climate targets.

Why hydro

China’s carbon neutrality policy may explain why it's cracking down on coal, but it doesn’t explain why the country is also clamping down on bitcoin mining supported by moving water, or hydropower.

“China sees a better way to use the excessive hydropower in the southern provinces is to transit it to the eastern provinces and cities that do not have enough electricity supply,” Lee said. “While crypto mining has been suspended in hydro-based mining hubs such as Sichuan, China continues to build out the infrastructure that enables hydro-rich regions to transmit electricity to the eastern cities.”

Guangdong province of South China, which is home to one of the world’s largest factories Dongguan, has faced an energy crunch in May due to the summer heat wave and manufacturing companies’ sudden demand for electricity because of China’s economic recovery from the coronavirus pandemic.

Several cities in the province ordered factories to suspend operations for hours or even days due to the electricity shortage. Local electricity firms issued notices to stop the factories’ production during the peak hours from 7 a.m. to 11 p.m. local time. Spot electricity prices in the region soared as much as three times of the benchmark during the period, according to local media reports.

The shortage in coal supply is one of the contributing factors to a slowdown in factory activity growth in China in June, according to a June 30 statement from China’s National Bureau of Statistics.

The Guangdong energy bureau asked neighboring regions to give more electricity to the province, including one of the major hydro-based crypto mining hubs, Yunnan province.

However, Yunnan has faced power shortages itself due to the delayed rainy season to generate hydropower, which is the province’s main energy source. Not only some of the crypto mining farms but aluminum and zinc smelters in Yunnan were also shut down due to the power shortage.