China attempts to stem corruption and capital outflows with crypto mining ban

By Alex Hamilton | 10 April 2019

The Chinese government has proposed a ban on cryptocurrency mining in a bid to tackle corruption and stem capital outflows prevalent in the market, believe market participants.  

“Because of rampant corruption, local authorities can make deals with miners, often without the knowledge of the central government,” said Erik Wilgenhof Plante, CCO at Maltese cryptocurrency exchange BeQuant, in an email. “Once the currency is mined, it will then find its way to the local population or be sold outside the country, effectively circumventing currency controls.”

China’s National Development and Reform Commission (NDRC) published a draft proposal this week, outlining a revision to the country’s Catalogue for Guiding Industry Restructuring - a set of lists which indicate what industries should be encouraged, restricted or outlawed. Under the revisions all cryptocurrency mining will be made illegal.

Industries marked for elimination by the NDRC are deemed to be unsafe or wasting national resources, according to the 2005 rules set down by the Chinese government. The country is home to the world’s largest cryptocurrency mining pools, with around 74% of global cryptocurrency mining connected to them, according to a 2018 Princeton University research paper.

Stanley Chao, vice president of All In Consulting and author of Selling to China, believes the control of capital outflow is a strong reason for the ban. “Mining just doesn’t fit China’s growth strategies. The Made in China 2025 project and One Belt One Road Initiative make no mention of either cryptocurrency or mining. For some reason, ordinary Chinese people see mining as a bunch of guys in a dark room doing something illegal, like black magic. [The government is] about promoting its own industries, but mining to them is serving foreign agendas that aren’t doing anything good for China. China sees mining cryptocurrency like a bad vice, [on the same level as] drinking and gambling.”

Bitmain, one of the largest cryptocurrency mining firms in China, announced plans in January to set up more than 200,000 new units powered by new hydroelectric stations built in the country’s southwest. According to Plante, when these companies have such large footprints, the mining operations are hardly difficult to find. “Although it is almost impossible to completely ban the use of cryptocurrency, banning crypto-mining is comparatively easy,” he said. “However, this action will only displace the issue of cryptocurrency in China, as the mining operations can be set up anywhere in the world. Nevertheless, for China, it would at least give the semblance of control.”

 “China's approach to cryptocurrency has always been ambivalent,” said Plante. “On one hand, the Chinese government has recognized that blockchain technology and cryptocurrency are the future for national and international payments. However, the structure of the Chinese government is hard to combine with the decentralized nature of crypto – something that’s entirely beyond the control of central authorities.”

The public will have until May 7 to leave comments on the NDRC proposals. The price of bitcoin failed to react strongly to the news, dropping by $100 to a daytime low of $5,172 before ending Tuesday at $5,202.

For Chao, Chinese business and miners are too savvy to be too badly affected by the ban, should it go ahead. “They'll take the business to other Asian countries that have more lenient financial regulations, like Singapore. It has good IT infrastructure, speaks Chinese and allows the free flow of capital.” The Singapore government, he adds, could even incentivise the movement of miners by offering lower electricity rates and tax breaks.

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