The Breakdown - What's Really Behind China's Bitcoin Mining Ban?

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big-picture power shifts remaking our world. The breakdown is sponsored by nexus.io and bitstamp and produced and distributed by CoinDess. What's going on, guys? It is Wednesday, May 26th, and today we're talking about what's really behind China's Bitcoin mining ban, or at least a different way to look at it. There has been so much happening so fast that you can expect a lot of these shows to be checking in on some things that we've discussed just a day or two before, and today is definitely an example of that. I'm going to first do an update on the discussion around the Bitcoin Mining Council.

Starting point is 00:00:50 Michael Saylor spoke at consensus yesterday, and I thought there were a couple interesting points that came out of it. The first is the extent to which the impetus for this mining meeting was from Elon himself, rather than Saylor dragging Elon along. Saylor said, quote, I think Elon's first order ask was, hey, can we come up with a way to publish or boost transparency for Bitcoin mining energy usage? I think the first step is let's come up with a protocol for us to publish energy information in a way that we can share it with the world and then work together to make sure that we pursue sustainable energy goals. Sailor argued basically that in the absence of there being a standard model for energy use reporting, critics come up with their own models for estimating how much energy mining is using, many of which end up painting a much bleaker picture. than the reality. If this is the case, it's a solvable information problem, and frankly, it's also one which does benefit from some amount of coordination from a critical mass of parties to agree to the type of disclosures they're going to make and the standards for how

Starting point is 00:01:46 they're going to report things to make them comparable. The other big point from his talk was the extent to which this energy reporting was the key deliverable, with all of the rest of the things that people mentioned, the notion of promoting more sustainable practices, being much more nascent and still in the discussion phase. This was strongly reinforced in a thread by Amanda Fabiano who heads mining at Galaxy Digital. I'm actually just going to quote the whole thread because I think it's pretty important. Quote, Bitcoin's energy consumption is transparent, making it an easy target for criticism. But what critics can't see is the breakdown of energy sources. Bitcoin is more carbon-free than most industries, but we need better data. Instead of standing by and continuing to write

Starting point is 00:02:26 pieces on the topic and hope this issue goes away, a group of miners came together to say, look, we need to be transparent and we should encourage others to be transparent too. Maybe the word council was too strong. Bitcoin's fungibility matters. Bitcoin's decentralization matters. No one is arguing that. I believe in transparency and I believe in moving towards a carbon-free future. But the fundamentals of Bitcoin are non-negotiable.

Starting point is 00:02:49 We at Galaxy Digital Mine with Slushpool and eagerly await the day that Stratum v2 is enacted to further protect Bitcoin's fungibility. The Mining Council's goal is to provide energy transparency. It's that simple. We haven't signed up for anything beyond that. So that, to me, much more strongly than anything we saw from even other people who are in that meeting, points to this transparency as the key deliverable of this council. One of Amanda's points actually echoed something that Niraj Agarwal tweeted as well. He said, if the Mining Council hadn't named their group, it would have been totally fine PR-wise. I sort of agree with this. I mean, I think that people still would have had questions if a group got

Starting point is 00:03:30 together that involved such powerful interests, but it was the formalization of putting a name around it that really made it feel like something bigger. Let that be a lesson, by the way, if anyone ever tells you that marketing and perception don't matter. Overall, I'm encouraged to see such strong, clear lines focused on reporting energy consumption put around it by Amanda, and we'll certainly keep watching to see what other members of this group say and do. Next up, speaking of Bitcoin mining, energy consumption, and bans, Iran has announced a temporary crypto mining ban that will last until September 22nd. Iran's relationship with Bitcoin and crypto mining is sort of schizophrenic. It has at times

Starting point is 00:04:06 been extremely hostile, but also recently Iran has allowed for certain types of goods like import goods to be paid for with crypto mined in Iran by licensed miners. Iran, it seems, is spending some serious time figuring out the game theory of what Bitcoin might mean to it in a global context. Now, for Iran, that context obviously includes international trade in a world where the dominant U.S.-led order excludes them as a matter of policy. Recently, stats came out from elliptic, suggesting that 4.5% of all Bitcoin mining happens in Iran, so this temporary shutdown is not insignificant. The president announced the ban as a way to combat power blackouts and claimed that 85% of mining remains unlicensed. Of course, though,

Starting point is 00:04:46 the Bitcoin ban that most people are interested in is the China ban that had such a massive market impact last week and over the weekend. I want to update that story on three fronts. First, I want to talk about more details of the ban specifics, at least in one region. Second, I want to provide an update on minor responses. And third, I want to provide a slightly different narrative around why it's happening now. So first, the specifics. One of the things that many have pointed out is that China's policy process isn't necessarily super clear. Someone proclaims something from on high than a sequence of institutions at an industry and often regional level provide further specifics about what that guidance entails. What the market was reacting to last week was a single line in a larger

Starting point is 00:05:26 speech, not a full policy articulation. To be fair, that reaction was also driven by watching how China-based miners were reacting themselves, which was to take it very seriously. But still, we've been low on details. Looking for the best way to unlock your crypto's liquidity? Nexo.io is exactly what you need. borrow against your digital assets at just 5.9% APR, earn passive income with yields of up to 12%, and swap between more than 75 market pairs with the instant nexo exchange. Try the Nexo wallet app to get the whole 360 degrees of crypto banking. Get started at nexo.io. Secure, regulated, and reliable, BitStamp is the cryptocurrency exchange of choice for more than 4 million investors and traders worldwide.

Starting point is 00:06:16 Since 2011, BitStamp has been a trailblazer in Secure. Head of the class in personal customer service and dedicated to making buying crypto fast and easy. Whether you are investing on our desktop platform and mobile app or trading on our speedy APIs, BitStamp gives you all the tools you need to reach your crypto goals. Visit bitstamp.net to learn more. BitStamp for all the ways we crypto. Yesterday we got our first information about how it could play out in practice. The Inter-Mongolia Development and Reformation Commission issued a proposal that articulates eight areas that could be deemed illegal.

Starting point is 00:06:52 This is the first articulated proposal to come after the meeting last week. These eight measures would effectively phase out crypto mining, and as you'll see, it's pretty comprehensive. This proposal now has a public consultation process until June 1st, and here is a brief TLDR on the eight measures. Big shout out to Wolfie Zau at the block for translating and interpreting a lot of this. One, industrial parks, data centers, and power stations aren't allowed to provide land or power support for crypto mining companies.

Starting point is 00:07:19 Two, policy perks are canceled for big data and cloud computing companies that are involved in crypto. Three, the removal of telecommunication business licenses for any communications or internet companies involved with crypto mining. Four, internet cafes that mine will have their licenses suspended. Five, criminal prosecution for any entity that privately supplies energy to crypto mining activities. Six, criminal prosecution for anyone using crypto for illegal activities like money laundering. Seven, banning of anyone using virtual currency for fundraising. And eight, any person or company at all involved in this will be put on China's list of dishonesty, with public officials also disciplined by the party.

Starting point is 00:07:57 So this is super comprehensive. It shows that they are trying to prevent the entire ecosystem around mining. It's interesting that it goes into specifics about who will handle disciplinary action and that the social credit score is a part of it. Now, the biggest question is this. Inner Mongolia had already started to discuss a mining ban a couple of months ago. They released a plan even in March. Their focus is on meeting China's carbon neutrality goal. And of course, as we've discussed, a lot of the mining in Inner Mongolia happens with coal. The question is whether other big mining provinces that are more powered by hydro will follow suit. Second, I wanted to talk about minor reactions. As I discussed a couple of days ago, part of the reason we saw such a pronounced

Starting point is 00:08:35 effect in the markets is that miners themselves were taking this potential ban seriously. One result, they were selling crypto. Now, it's been a couple of days and the question is, has there been any more evidence? Let's look to a piece from Lucas Newsie at Coin Metrics called Bitcoin Miners are escaping China. Here are some of the key lines. First, on minor Bitcoin flowing into exchanges, quote, aggregate flows sent by miners are at their highest level since March 2020 when markets crashed at the onset of the COVID-19 pandemic. This supports the hypothesis that the latest sell-off was by Chinese miners that have sold part of their holdings in order to escape the latest wave

Starting point is 00:09:08 of enforcement actions by the CCP. In other words, this suggests that miners want to have cash in order to be able to make moves quickly, such as moving their operations. Here's another quote around concern about exchanges. Quote, another interesting on-chain behavior worth highlighting is miners' potential concerns towards centralized exchanges in light of the CCP's crackdown. The current sell-off coincides with thousands of Bitcoins being withdrawn from major exchanges and deposited to minor addresses, as shown below. So clearly, some of these miners are also concerned that we'll see mainland Chinese

Starting point is 00:09:38 exchanges targeted in future actions as well. Now, when it comes to hash rate, Nuzi argues that we should be ignoring the sort of daily hash rate that publications love to focus on, and instead, instead looking at one-month implied hash rate, which cuts out a lot of the noise. So we'll have to keep watching that to get more signal. Finally, I mentioned that I wanted to discuss the idea of why China is doing this now. I've shared the obvious answers around the Digital Yuan project, around FinTech being cracked down upon for the last year and being brought more closely in line from a regulatory perspective, and about crypto feeling like it's just the next in line. And that in

Starting point is 00:10:13 some ways gets to, I think, a little bit of what I wanted to talk about. But for context, I wanted to share this write-up from an anonymous expert that was shared by Matthew Graham at Sino Global Capital. My take is that this is all about party legitimacy. Namely, the stability of China's currency and banking system is important to demonstrate that the party is in full control. Yet the rigidity of the political system is unable to comprehend any wide market swings and any volatility is an ominous sign. Any ups and downs in the system should be palatable. They always want good news. As a result, Beijing has been micromanaging the RMB, Forex, and capital controls for decades. They will do the same with digital currency, and we can thus anticipate greater regulation.

Starting point is 00:10:54 The meeting was also routine and not something that was focused on any specific issue or Bitcoin in general. The statement is more of a top-down message instructing the regulators to review the issues and possibly come up with guidelines or regulations to better manage the market. The government needs to at least pretend they are in control. It is thus important to monitor regulatory developments. Carbon neutrality is not the overall driver for the statement. Sustainability issues are relevant, but not that relevant. Besides, the State Council's Financial Stability and Development Committee has no direct responsibility over environmental issues or carbon neutrality, and the statement is just giving recognition to the so-called green transformation. The statement, again, is more of a

Starting point is 00:11:30 top-down policy directive for regulators. So I responded to Matt just to make sure I could wrap my head around it and I said, is it fair to say that the point here is that this is more about a general Chinese government pattern than anything specific about crypto? In other words, we're putting ourselves too much at the center of the story when it's just one other weird little space for them. And that was apparently a pretty accurate reading of it. So here's what I think the TLDR is. In this interpretation, this whole thing is about China. It's not about crypto. I mean, it is nominally about crypto, but we err by putting ourselves at the center of the story. Rather than seeing ourselves at the periphery of a story in which the CCP's attempt at legitimacy and the

Starting point is 00:12:11 requisite focus on stability is at the true center. This feels important to me. When we're in the industry that's being assailed, it's hard not to treat everything like a direct attack on ourselves. In this case, it may be that everything happening is just our industry getting caught up in a much larger story that is about China domestically, as well as China's international ambitions. On the one hand, this doesn't matter at all. Miners will be impacted based on the policies themselves, not the narratives around it. But it does shape how we understand and react. Every story that was written about this in the West was about a state banning Bitcoin mining because Bitcoin mining is bad. What if instead, every story about the speech was about China's hunt for legitimacy through

Starting point is 00:12:51 stability and how challenging that process was? That story wouldn't contribute nearly as much to the apocalyptic state bans Bitcoin fear. There is something similar perhaps going on with Bitcoin and ESG. We focus all our attention on the Bitcoin bad part of the story, rather than the fact that ESG has moved to the center of the national and the global concern. And really, that is the larger context, this massive shift in the national and global conversation around climate change, in which we are just one little cock. To make the right countermoves, we probably have to understand that context, and that likely means talking as much about ESG as it means talking about Bitcoin.

Starting point is 00:13:28 Anyways, just something interesting to chew on as we continue to get more details about China and as the broader narrative battles rage on. Thanks for listening. As always, guys, I appreciate you. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - What's Really Behind China's Bitcoin Mining Ban?

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