The latest threat to the future of cryptocurrencies in China comes not from direct regulation but from a nod and a wink from the central bank to power suppliers to curb their provision of electricity to power-intensive bitcoin mining, following a closed-door, high-level finance meeting yesterday.
In September, as reported by International Investment, bitcoin’s value took a temporary nose-dive on the news that China’s biggest virtual currency exchange had announced that it would imminently cease trading.
The announcement by the exchange BTTC followed the news a fortnight previously that the Chinese authorities had banned initial coin offerings.
The tightening regulations were seen by some observers as a sign that the authorities are planning to outlaw virtual currencies and could be seen in light of the crackdown of bribery and corruption championed by President Xi Jinping (pictured left) who, as reported by International Investment, earlier last year had scorned “aggressive dealmakers” as “financial crocodiles”.
The latest move to clamp down on cryptocurrencies, although apparently sanctioned by the People’s Bank of China (PBOC), is not coming, however, through regulation but by the back door.
At a closed-door meeting yesterday, high-ranking bank officials outlined a plan to lean on authorities to curb power-usage by companies providing servers and storage for what is termed “bitcoin mining”.
The meeting was aid by the Reuters news agency to be one comprising “a top-level government internet finance group”, the Leading Group of Beijing Internet Financial Risks Remediation, at which bank officials told those present that, while they cannot directly regulate bitcoin miners’ power usage, it can instruct local authorities to do, having the same effect.
The Bloomberg news agency reported that the meeting took place yesterday, although Reuters suggested it might have been several days ago, “at the end of 2017”.
Either way, it seems a sign that government, central bank and regulators are united in their determination to put the squeeze on the wildly fluctuating sector of digital currencies.
The power and the glory
The reason that this new tactic is, at one level, surprising – and serves to underline the strength of the political will to curb digital currencies – is that bitcoin mining is a useful market in China, which suffers from massive over-supply of power.
Wind and solar power-generation has been curbed in regions of the country because traditional fossil-fuel power stations are said to be standing idle for as much as half of the time.
It has meant that China has been able to sell power cheaply to overseas customers, and is the world’s largest host of bitcoin mining, where “miners” solve complicated puzzles in order to win tokens, or “currency”.
Carrying out the online puzzles to win currency requires vast processing and storage power so hosts naturally set up their operations in those parts of the world where power is cheapest, namely China.
Indeed, a recent Bloomberg map of where these “mines” are located in China correlates almost exactly with maps showing where over-supply is greatest.
Any interruption in the supply of power to digital currency providers will inevitably cause greater fluctuations in its value.
“This may have contributed to bitcoin coming off its daily highs and electricity usage certainly appears to be a significant challenge for the cryptocurrency in the years ahead,” Craig Erlam, senior market analyst at online trading firm Oanda in London told the South China Morning Post.
Meanwhile, Merrill Lynch has banned bitcoin buying across the firm, the Wall Street Journal has reported.