Will China Ban Cryptocurrency Mining?

A government body in China has put forward a proposal to ban cryptocurrency mining.

With the proposal currently open for public comment, we analyze the likely reasons

for the proposal and the impact, it would likely have if it goes through.

 

Key Takeaways:

● China’s NDRC is considering banning cryptocurrency mining
● With 60% of bitcoin mining estimated to be taking place in China, such a ban would likely result in a drastic drop in hash rate
● There is the possibility that a ban may be a net positive for Bitcoin and serve to make it more decentralized.

 

The possibility of China banning cryptocurrency mining has been causing quite a stir recently in the crypto world. With 60% of bitcoin mining estimated to be taking place in China, such a development is likely to have a large impact in the crypto industry.

The decision lies at the hands of China’s National Development and Reform Commission (NDRC), a body which holds the power to dismantle entire industries in China. How the decision would impact the strength of proof-of-work networks such as Bitcoin is highly uncertain.

 

With many factors at play, we analyse what impact such a ban would likely have. We also analyse the likely reasons for such a ban and the key dates to bear in mind.

 

Why Ban Crypto Mining?

 

Noted reasons by the NDRC for proposing such a drastic stance include the excessive energy waste formed from cryptocurrency mining. With an estimated 50 TWh of consumption annually, the Bitcoin network does consume more energy annually than countries the size of Denmark.

 

On the other hand, recent research has indicated that 77.6% of this is sourced from renewable energy suppliers. MinerUpdate, a mining publication, have further noted that China’s history burning large amounts of coal makes excessive energy an unlikely reason.

Another reason put forth by the NDRC is that bitcoin mining does not currently comply with regulations set forth by the Chinese government. This may very well be a driving reason with strict laws put in place to keep close control on industries.

 

However, the most likely reason driving the consideration to ban mining is China’s strict capital controls. With bitcoin transactions being pseudo-anonymous, the widespread adoption of the protocol would pose a significant risk to a jurisdiction that is trying to prevent anything greater than $50,000 from any one individual leaving the country.

 

What impact would a ban have?

 

It is uncertain how much of global mining is based in China but it is estimated to be 60% with the vast majority of this based in the Sichuan provinces. A ban in China would likely result in a drastic drop in the hash rate of the Bitcoin network.

 

Hash rate measures the computing power that is mining the Bitcoin network. A higher hash rate makes it more expensive to attack the network.

A ban on mining in China would almost surely catalyze a drastic drop in the hash rate with miners forced to go offline or transition operations elsewhere. There is already some evidence of miners migrating to jurisdictions with more friendly crypto regulations.

 

However, the impact of such an event may not be all bad. With the vast majority of the hash rate condensed in China, a shut down in these operations would result in a network with a more widely distributed hash rate.

 

This lowers the chance of attacks from a small number of groups that represent the majority of the hash rate on a network. As it stands, the potential for successful collusion attacks from large Chinese miners is much higher.

 

The Bitcoin network is also smartly designed to adjust to cater for such drops in hash rate. Approximately every two weeks, the difficulty of mining on the Bitcoin network adjusts based on adjustments in hash rate.

 

A drastic drop in the hash rate would result in the difficulty of mining on the network also dropping, incentivising more miners to compete to append blocks.

 

The impact of a ban on the price is uncertain. On the one hand, the network may be less secure due to a drop in hash rate.

 

On the other hand, the network may be more decentralized due to the remaining hash rate being more distributed. With decentralization being one of the main value propositions of bitcoin, this factor is not to be overlooked.

 

When Ban?

 

The 7th of May is the date the Chinese miners are saving in their crypto calendars. The resolution is open for public comment up until this date.

An article by Reuters noted that there is no target date or phaseout plan to ban mining so the ban could take place immediately after this date. Until then, Chinese miners have a brief period of time to either migrate or wield the power of public comment to persuade against the ban.