When the Chinese authorities told banks and payment platforms to stop supporting cryptocurrency transactions in June, there was parallel momentum to crack down on the bitcoin mining operations present in the country.

In Sichuan, one of the former centres of bitcoin mining powered by hydroelectricity, the local branch of the National Development and Reform Commission issued a joint statement with the province’s energy office on June 18 that it will investigate and shut down crypto mining operations. 

Crypto mainstay Xinjiang had put similar pressure on crypto miners, with other smaller mining centres Yunnan and Inner Mongolia following suit — sending miners, Chinese and Western alike — scarpering to pastures new. By the following month, crypto mining in the country had all but been shut down.

According to the Cambridge Bitcoin Electricity Consumption Index (CBECI), China’s hash rate — the speed at which a cryptocurrency miner works to develop a coin — sank from just over 50% of the global hash rate in January 2021 to 34.3% in June and 0% in July. Back in September 2019, China accounted for 75% of the global hash rate. 

Bitcoin and other cryptocurrencies have long been touted as paving the way towards a decentralised future of finance, but the fallout from the Chinese ban suggests that they have the potential to drive foreign direct investment (FDI) flows, as miners move their operations between countries. 

China less attractive

The bitcoin network needs large amounts of computational power to validate new ‘blocks’ containing a ledger of all the latest bitcoin transactions, driving the search for inexpensive access to electricity.

Up until this year, bitcoin miners were drawn to China for its cheap coal and hydro power, and the already established presence of bitcoin machine manufacturers in the country, such as Canaan. In addition, the conditions of some specific regions of China — such as Inner Mongolia, which is cold and dry — were favourable for running mining operations.

Michel Rauchs, digital analyst lead at Cambridge Centre for Alternative Finance, tells fDi that the exodus from China was due to an anticipation of regulatory constraints, in line with the growing sentiment that China was becoming a less attractive mining destination.

“Even before the ban, dating back a year and a half, it became apparent to miners that China was less attractive [than] other countries,” he says, citing political and regulatory risks. 

The increased concerns over regulatory risk shone a spotlight on the extent to which bitcoin’s operations were overseen by one central government, Mr Rauchs says.

Since the mining ban, China’s central bank, the People’s Bank of China, and nine other agencies, including the public security bureau, have made all cryptocurrency transactions illegal.

The new geography of crypto mining 

With bitcoin trading at record highs throughout 2021, bitcoin miners had strong incentives to relocate out of China as soon as possible — and deep pockets to do so. 

The exodus has shifted the geography of crypto mining. In parallel with China’s depleted hash rate in July, mining activity has increased elsewhere, CBECI data show. 

Between June to August, the US’s share of the global hash rate jumped from 21.8% to 35.4%, while it increased from 8.8% to 18.1% in Kazakhstan. In Canada, it jumped from just under 6% to 10.8% only then to fall back to 9.5%. 

A Financial Times investigation published in November has found that since the ban in June, 14 of the biggest crypto-mining companies in the world have moved more than two million machines out of China and into the US, Canada, Kazakhstan and Russia.

As one of the main drivers for bitcoin miners is electricity costs, miners have been drawn to destinations with cheap electricity and pro-crypto administrations. 

One such example is Texas, which has the biggest deregulated electric sector in the US, which typically translates into more competitive rates. Governor Greg Abbott tweeted in June that “Texas will be the crypto leader”.

US opportunity

With the biggest global hash rate of bitcoin mining, the US has also seen mining companies based in the US expand their operations since their arrival home.

US-based BIT Digital began moving its operations from China to the US in March 2020, due to “jurisdictional diversification” and “operational diversity”, says Sam Tabar, the firm’s chief strategy officer. Now, with no equipment left in China, the Nasdaq-listed company is expanding in the US, heartened by the country’s regulatory stability. It now has a facility near Buffalo in New York state, which used to be a coal mining factory that powered the making of tyres, drawing power from the Niagara River. 

“Just imagine the irony that Buffalo imploded because China took over as the centre for manufacturing globally, from where Buffalo used to be many years ago. But now you have an entire vertical being migrated from China to the US in economically depressed places like Buffalo. That’s full circle. That’s poetic.”

BIT Digital is also a signatory of the UN-backed Crypto Climate Accord, which has set an industry goal to be net-zero carbon by 2040.

Teana Baker-Taylor, chief policy officer of the Chamber of Digital Commerce, agrees that the exodus represents both “an economic and technological opportunity” for the US.

But the country is at a “potential disadvantage” in laying out regulation on crypto assets, she says, relative to Europe where the EU and European Council are working to create a regulatory framework on markets in crypto assets.

Perennial migration

As institutional capital pours into bitcoin and other crypto assets, Mr Rauchs says that the biggest risks for the sector are environmental, social and corporate governance, and compliance and regulation, no matter where the mining operations are.    

On the topic of the miner migration, he adds that “miners will always be driven by their quest to find the lowest cost of electricity”, meaning that it might not be a ban that prompts the next exodus.

“As you can see, bitcoin used to be concentrated in two regions in China and now it’s spread to Russia, Kazakhstan and the US,” Mr Rauchs says. “Unless energy markets stabilise globally, I don’t think this bitcoin migration is going to stop.”

This article was first published in the December 2021/January 2022 edition of fDi Intelligence magazine.