For analysts at financial services firm Galaxy Digital, the crackdown that miners and Bitcoin trading in China are currently experiencing is more tied to a desire to restrict the market than to concerns about carbon emissions.
The company ensures that the decisions made by the Committee on Development and Financial Stability (FSDC) based on political rather than economic considerations, feeling unable to censor the network.
In a report published a few days ago, the US firm analyzes the effects of the closure of bitcoin mining farms in several Chinese provinces, along with the consequent migration of miners and the drop in the hash rate, on the development of the cryptocurrency.
The document qualifies the actions of the government body that coordinates financial regulation in China as part of a plan to “end bitcoin mining and trading in the country.”
Galaxy Digital makes particular reference to the recent ban by the People’s Bank of China (PBoC), whereby since last June it prevents banks from providing services for transactions with cryptoassets.
The new regulations were preceded by a series of measures against mining that began to be announced since May 21, with the argument that these activities represent a threat to China’s green plans.
In this regard, the report details the negative impact of PBoC regulations on OTC trade (over the counter).
“Average Chinese citizens are already excluded from the cryptocurrency trading ecosystem, but the new crackdown threatens to close the remaining side doors,” the paper notes, regarding the OTC market.
Cracking down on the OTC market shows the seriousness of China’s new effort to stifle cryptocurrency trading, which had been largely closed to most Chinese citizens. This, because major financial institutions already had bans on providing connectivity to cryptocurrency exchanges.
Galaxy Digital Research Report.
Trading in over-the-counter markets was, until now, one of the best alternatives for Chinese investors. Even until the most recent repression of the miners, this route facilitated the exchange of China’s local currency, the renminbi (RMB), with tether (USDT). The stablecoin could be deposited on exchanges and used for cryptocurrency trading.
“For years, this solution proved to be viable, but it is hampered by the new threat of closing the OTC trade route,” the report comments, in which an image is inserted to illustrate the situation.
The Chinese effect and the Tether case
Galaxy Digital reiterates that the current ongoing crackdown in China is leaving a significant footprint on the Bitcoin blockchain. Many of these consequences have been reported in this medium.
Especially mentioned, among the repercussions, is the slowness in the aggregation of blocks in the blockchain, seen as the largest delay in 10 years. To the above is added the crash of the hash rate.
On this last fact it is highlighted how, before the first announcements of the closure of farms, the hash rate had reached 160 Eh/s, then beginning a decline that has reached 64 Eh/s in recent days, according to BitInfoCharts.
The analysis not only mentions these figures, but also explains how Chinese repression could impact the safety of stablecoins. They cite the case of Tether, being the popular vehicle to access the cryptocurrency market in the Asian country, as explained above.
After crossing the $ 100 billion in total supply, the supply of stablecoins is advancing at a slow pace. This is mainly due to the pause in the USDT broadcast (…) No new USDT have been printed since May 31 on any of the main channels used by the platform. In fact, on June 6, 4.5 million USDT were burned, in an event that did not occur since March 2019.
Galaxy Digital Research Report.
For analysts, the pause in the USDT issue, paired with a token burn, is somewhat unusual. That is why they relate these events to what is happening in China.
“The reduced demand for the asset is indicative of a broader slowdown in the Chinese ecosystem,” they explain.
Migration of miners, a new bottleneck
Another effect of restrictions is migration of miners out of China, an event currently underway.
The research coincides with what other analyses indicate, indicating that the main destinations are nearby countries in Asia, such as Kazakhstan, Ukraine and Kyrgyzstan; in addition to Canada and the United States, in North America.
However, it is thought that ” there is not enough accommodation capacity available outside of China to cope with the onslaught of new machines looking for a home.”
Consequently, Galaxy Digital foresees that the difficulties in getting hosting space (hosting) they will continue to be a bottleneck in bitcoin mining in the coming months.
In this context, migration is also seen as the opportunity to further decentralize the blockchain. “It will take several months for the dust to settle, but in the end, Bitcoin will have proved too strong for even the world’s largest nations to suppress it.”
China’s interests behind repression
In relation to restrictions on Bitcoin mining, Galaxy Digital’s analysis points out that closure orders have been issued for both coal-dominant provinces (Inner Mongolia, Xinjiang and Qinghai) and those using hydropower (Yunnan and Sichuan).
Particularly striking is the case of Sichuan, where electricity is derived almost entirely from the hydroelectric power plant. This is an important province for Bitcoin miners.
Statistics highlight Sichuan as the second largest center for mining in the country –after Xinjiang. Both account for 45% of Bitcoin hash rate in China.
Sichuan particularly rebounds in the rainy season from May to October, a period in which many miners go to this area in search of hydroelectric power.
In total, the five provinces affected by the prohibitions handle 60% of hash rate in China.
Based on the above, there is talk of other interests that could be behind these restrictions.
China is currently in the process of modernizing its electricity grid to allow efficient long-distance electricity transport (…) and excess power in the inland provinces, which are currently captured by cryptocurrency miners, could potentially be transferred to coastal population centers with consistently higher demand.
Galaxy Digital Research Report.
Overall, analysts view China’s crackdown on Bitcoin as a response to the inability to ban and control the functioning of the blockchain, seeing cryptocurrency as a new geopolitical force.
Despite the attack, researchers are confident that the network will pass the test and claim that it has so far shown resistance.
“The blocks have slowed down, but they are still entering. The hash rate is low, but the network is protected. Prices have fallen, but bitcoin is a volatile asset. Nations are simultaneously censoring and adopting cryptocurrency, so it is expected to face more challenges as the importance in its use increases,” the report concludes.