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Cryptocurrencies in China: Mining, Regulation and the New Digital Yuan

China aspires to be the world’s largest economy and has a significant influence in the cryptocurrency industry. In this article, you will learn not only the significant change that cryptocurrencies have undergone in China, but also what’s CBDC and how it works.

In 2017, China banned brokerages, stock exchanges and ICOs. Many people therefore got the impression that China wholeheartedly rejected the very idea of cryptocurrencies. This couldn’t be further from the truth. China is a major pioneer of a number of blockchain technologies and, until recently, also a major destination for cryptocurrency miners.

The Chinese government is exploring the possibilities blockchain as a technology can offer. A massive digital ecosystem intended to improve local administration is being built there in order to establish a highly efficient technocracy.

In this article, we explore the complex relationship that China and cryptocurrencies have with each other. The article has been updated as of 8/20/2021 to reflect the latest news that the Chinese bureau has banned cryptocurrency mining in most major provinces.

Has China banned cryptocurrencies like Bitcoin?

The People’s Bank of China sees cryptocurrencies as illegal because they are not issued by any recognized monetary institution. Cryptocurrencies are not equal to money and have no legal status. Therefore, the bank strongly recommends against the use of cryptocurrencies.

Officially, cryptocurrencies, their trading and ICO projects, have been banned since September 2017. However, banning “internet money” is easy to say, but harder to implement. Virtually every month comes news that China has cursed banks that have let money go to foreign exchanges.

Mining before July 2021

Another tricky sector is cryptocurrency mining. In July 2021, reports began to crop up that cryptocurrency mining operations in China were being shut down by the government. The ban affected most major provinces where electricity is cheap.

Before this ban, two-thirds of all bitcoins were mined in China, mostly in the provinces of Xinjiang and Sichuan. In the winter and spring months, most bitcoin was mined in Xinjiang province, which accounts for 20% of all Chinese mineral reserves. Coal and energy are cheap there in winter and spring.

From May to September Sichuan took the lead. This is because the rainy season begins and the mountainous terrain there is home to many hydropower plants.

Inner Mongolia and Yunnan produce around 10 % -20 % of Chinese bitcoin and the pattern is similar: Inner Mongolia has cheap coal and Yunnan is a mountainous region with hydroelectric dams.

The regulations related to mining in China are not very clear. For example, in 2020, the province of Sichuan banned cryptocurrency mining, but after criticism from the central government, it backtracked. A year later the government, led by President Xi Jinping, changed its mind.

Chinese miners as of March 2021

Why did China ban cryptocurrency mining?

The official reason for the regulation is the high energy demands of cryptocurrency mining. Cryptocurrencies that are mined use the Proof of Work consensus system relying on computers lending their power to the network for a chance to earn a reward from the mined blocks.

China is one of the world’s biggest polluters, but its government takes the problem of global warming and extreme weather very seriously. President Xi Jinping committed to making China carbon neutral by 2060. That is a very ambitious plan. Not least because China considers itself an industrial developing country.

Another reason for the ban might be that the Chinese government is afraid of Bitcoin and the ideals it represents. This theory has often been circulated in Western media like Forbes or Times. It makes sense, since a truly decentralised network could cause much trouble for the Chinese government and their surveillance state.

Cryptocurrencies in China after July 2021

The most credible source for tracking the energy intensity of the Bitcoin network is a small team at Cambridge University. However, as of mid-August 2021, no report has been released offering details on the disrupted mining.

Some representatives of cryptocurrency mining companies have spoken with Western journalists and investors. Their comments give us some idea of where might these projects move next.

The hottest destinations are the cold regions of North America, Kazakhstan, and Siberia. These are regions with relatively cheap electricity and a dry, cold climate perfectly suited for hundreds of mining devices running 24/7.

The complexity of bitcoin mining plunged by 28% on July 3 after the network’s performance fell to nearly half of what it was in May. Bitcoin’s algorithm is set up in such a way, that it regularly recalculates the difficulty of mining to keep the time it takes to mine one block at circa 10 minutes, regardless of how much power the network has. At the beginning of July 2021, so much power disappeared from the grid that one block was being mined for unbelievable 20 minutes.

What is CBDC?

Before we delve into the Digital Yuan, it is necessary to first discuss what the acronym CBDC (Central Bank Digital Currency) means.

It is a type of virtual currency operated by the central bank of a given country or international organisation instead of private banks.

How is CBDC different from the ones and zeros in online banking?

Both systems operate in a digital world. The numbers in the bank are not backed by any gold or cash. Instead, they are backed by trust in a system built on private banks. The banks have a financial obligation to the state and we, as users, have an obligation to the banks.

The CBDC gets rid of the private institution intermediary. The users’ responsibility is directly to the the central bank. By adopting the CBDC, the central bank could get an oversee all transactions on the blockchain, just as banks can look up client’s transactions in their systems. Most blockchains are public, meaning everyone could see everyone’s funds, however, the state may very well decide to build the network differently.

The main advantage is it makes it easier to spot illegal or suspicious transactions and lets the government easily track money from the source to the recipient. Even though banks are required to provide government with anyone’s transaction history when asked, they prolong the whole process.

But this can be a double-edged sword. While the user gains greater anonymity in routine transactions such as the purchase of goods and services, the authorities see everything. This is also why CBDC is thought of as another layer of the monetary system rather than a replacement of the current one.

CBDC accounts may find good use in cases where all users have an interest in monitoring the transactions of a particular organisation, like tracking the spending of politicians or monitoring government subsidies.

Sweden, for example, has a similar project in the works. The European Central Bank is also looking at the technology, but from a different point of view than China. It wants to introduce a new layer of the monetary system, while China is integrating CBDC right into the main layer. In economists’ terminology, this is known as M0.

The Digital Yuan and blockchain technocracy

The Digital Yuan has been in development for several years. It is the most advanced CBDC (central bank digital currency) project in the world. A state-owned cryptocurrency with such high adoption and development is unprecedented. Using blockchain technology, the Digital Yuan aims to replace some of the cash in circulation. China is integrating CBDC as M0, meaning the Digital Yuan will be equal to cash or money in a bank account.

What is the Digital Yuan?

The Digital Yuan is China’s new cryptocurrency. It aims to replace some of the cash in circulation as the use of coins and banknotes goes out of fashion. This trend has been accelerated by the 2020 and 2021 pandemics. The fact that cash cannot be traced, and internet transactions can, also plays a role in its adoption.

The system is already being tested in several cities. The pilot programs have gained momentum mainly in the second half of 2021. Each citizen has been equipped with a wallet they can use to interact with the network and pay for goods or services.

Distribution and flow of the Digital Yuan

The Digital Yuan will, as we’ve discussed, share a layer with cash and bank accounts. However, because it is issued directly by China’s central bank, it will not support financial products such as interest rate on deposits.

The entire distribution chain is pyramid-shaped.

At the very top is the central bank.

Below are the institutions that will operate and oversee the network. These are China’s 10 largest banks. These are under the full administration of the authorities, but offer financial products and instruments, among other things.

These “superbanks” will then distribute the Digital Yuan to smaller banks and regional systems.

These take care of the last and most important part: matching the wallet to the phone number and individual.

Critics of the currency describe it as an Orwellian dream because the Chinese Communist Party will have unlimited surveillance over all transactions. China can use cryptocurrencies to its maximum advantage.

Despite criticism, the Digital Yuan is an unprecedented project that is being watched with interest by both the US and the European Union.

Is the Digital Yuan like Bitcoin?

No. It has many different characteristics. Bitcoin has a decentralized network and is not directly tied to any currency. It is not controlled by any central bank.

The Chinese Communist Party will have data on every transaction. The aim is to prevent illegal trade and money laundering.

The Digital Yuan will focus more on the Chinese market. In contrast, Bitcoin is a global network.

China and its plan for the future

The centralised power of the People’s Republic of China allows for great flexibility. China is already steadily preparing for blockchain as a technology to make its way into everyday life and the digital Yuan means a several-year lead over democratic opponents.

China is not throwing cryptocurrencies under the bus, but it is far from Satoshi’s ideals. However, as the various elements of crypto get implemented into the political and economic life there, the Middle Kingdom becomes an increasingly important player.

Do you want to keep track of what we are working on? You’ll find the latest information on Telegram!

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Probinex is a crypto fintech project of a multifunctional exchange that aims to redefine the traditional form of trading cryptocurrencies, commodities or stocks.

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Probinex is a crypto fintech project of a multifunctional exchange that aims to redefine the traditional form of trading cryptocurrencies, commodities or stocks

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