A Chinese flag flies in front of the People’s Bank of China headquarters in Beijing, China, on Monday, Jan. 7, 2019. The central bank on Friday announced another cut to the amount of cash lenders must hold as reserves in a move to release a net 800 billion yuan ($117 billion) of liquidity and offset a funding squeeze ahead of the Chinese New Year. Photographer: Giulia Marchi/Bloomberg

© 2019 Bloomberg Finance LP

Recently, the National Development Reform Commission, China’s top economic planning body, proposed banning all cryptocurrency miners within its borders. China has banned initial coin offerings since 2017 and made it harder for domestic citizens to transact on cryptocurrency exchanges by banning them domestically. It is clear that the Chinese state is not a fan of permissionless blockchains and cryptocurrencies built on top of them. The rationale was posted in a listed of industries the Commission was looking to eliminate because they seriously “wasted resources” or damaged the environment.

This has massive implications for the cryptocurrency ecosystem. Nature did an analysis that shows that three-quarters of cryptocurrency miners are based in China. With cheap computing power, hardware and reasonably cheap electricity and a strong pool of people who were incentivized by the level of profit that could be made, many of the miners who are dedicating their computing power to validating blocks on Bitcoin, Ethereum and other cryptocurrencies did most of their mining in China and were compliant with Chinese laws. Many miners have subsequently gone on to Iran and other jurisdictions, but found many of the same restraints that had led them to leave China, with their mining rigs banned at the border, or with unscrupulous players looking for a share of their profits.

Does any of this have much to do with the environment?

No, and a simple fact belies that truth.

While the Chinese state has made an effort to address environmental and energy concerns, tagging cryptocurrency mining as wasteful doesn’t make sense when you consider the blockchain pilots the Chinese government is running as well.

The Central Bank in China (the PBOC or the People’s Bank of China) is racing to do trials of its own version of centralized blockchain currency and has completed one already on a permissioned blockchain along with several other major commercial banks. The central bank was one of the first in 2014 to start unleashing pilot studies towards the first digital central currency and in 2016 put out a call for blockchain and cryptocurrency experts in order to learn more about the field. It’s clear that the central bank in China (which unlike other many other central banks, is not nominally independent from political pressure) is moving to adopt blockchain in some capacity, and is at the forefront of monetary authorities studying blockchain.

The Communist Party of China doesn’t think that blockchain and its useful properties (from traceability of transactions to immutability) are a waste or environmentally damaging when it comes under their control. It’s not the technology that is being decried as wasteful, but rather the distribution of power from centralized state to decentralized miners.

In fact, it’s not hard to see how a currency that traces every transaction throughout the country and is able to build a complex map of relationships between different people might then feed into the very many different ways the Chinese government traces data and uses it to rank its citizens: everything from the Social Credit score to facial recognition for jaywalking. The energy output of creating this massive ongoing surveillance apparatus much outweighs printing physical paper copies of currency once — but it’s not deemed useless because it is politically useful.

China has capital controls in place in order to keep the domestic currency (the Yuan) and domestic stock indexes stable. The country is also very watchful for economic elites trying to bring money out of the country, with 60% of them expressing an interest in emigrating out. It is of critical concern to the Chinese state to keep capital within its borders and in its control. In that respect, it can be easy to see how public, permissionless cryptocurrencies would counteract that goal.

The cryptocurrency mining ban China proposes has little to do with environmental waste: the surveillance system the Chinese state is trying to build on top of its every citizen, a system that seeks to ingest monetary information, transactions, and every communication would consume infinitely more power than their analog equivalents.

This move has much more to do with control: who has control over the blockchain in use and capital flows within and without China. Paradoxically, with the centralization of mining pools in China becoming a concern when it came to consolidation of network hash rate (60-70% of Bitcoin’s network hash power was contained in China), China’s proposed ban on cryptocurrency miners, if it comes to pass, may actually strengthen blockchains, Bitcoin and other cryptocurrencies in the long run.



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