Sometimes the more one tries to control something the more uncontrollable that thing gets.
Last September, China raised the stakes of its crackdown on cryptocurrency, announcing a blanket ban on all crypto transactions and mining.
The country's largest financial entities, including the People's Bank of China (the central bank), announced a coordinated effort to stamp out crypto activity that the central government deemed illegal.
This effort came after the country banned financial institutions and payment companies from providing crypto related transaction services in May 2021.
The September follow up was "the most direct, most comprehensive regulatory framework involving the largest number of ministries," NYU Law School adjunct professor Winston Ma told Reuters last year.
The idea was to "resolutely clamp down on virtual currency speculation... to safeguard people's properties and maintain economic, financial and social order," the PBOC said, according to Reuters.
For a while, the strategy worked.
China went from being the world's largest bitcoin mining country, with local BTC hash rate power accounting for more than 74% in 2019 before dropping to 0% in July and August 2021, according to Cambridge data.
A lot of the miners fled to neighboring Kazakhstan and Russia and U.S. mining operations took the top spot, accounting for more than a third of the global mining hash rate distribution, according to the Cambridge Bitcoin Energy Consumption Index.
But new data from Cambridge suggests that China's attempts to control crypto activity in the country is backfiring with the resurgence of bitcoin mining.
China's Bitcoin Resurgence
Cambridge came out with new data this week showing that between September 2021 and January 2022 the U.S. has remained the top bitcoin mining country with a nearly 38% global hash rate.
Surprisingly, China vaulted its way back into second place with a 21% share, pushing the next three countries --Kazakhstan, Canada, and Russia -- lower on the totem pole with has rate market shares of 13.2%, 6.5%, and 4.7%, respectively.
"This strongly suggests that significant underground mining activity has formed in the country, which empirically confirms what industry insiders have long been assuming. Access to off-grid electricity and geographically scattered, small-scale operations are among the major means used by underground miners to hide their operations from authorities and circumvent the ban," the Cambridge Judge Business School said.
After dropping to zero in the summer months, data showed that the reported hash rate suddenly surged back to 30.47 EH/s in September 2021, placing China back in second place at that moment.
This led to the follow up crackdown from government officials that fall who investigated whether organizations that receive subsidized power from the state (like schools, hospitals and community centers) were involved in crypto mining. Violators would be punished with higher electricity prices, according to reports.
"Virtual currency mining features high energy consumption and carbon emissions, and doesn’t play a positive role in industrial development and technological progress," Meng Wei, spokesperson for China's National Development and Reform Commission, said at the time, according to Fortune.
"[Crypto's] blind and disorderly development has a severe adverse impact on promoting high-quality economic and social development, energy conservation, and emission reduction.”
Crypto Miners Skirting the Rules
As crypto exchanges acquiesced to China's ban last year, Chinese users who wanted to continue mining and investing got creative.
According to Forkast.News, more than 30 crypto-related companies withdrew from the mainland following the ban, leaving crypto enthusiasts with no other option but to get creative.
Investors on the mainland began making efforts to register companies overseas to bypass the know-your-customer checks that crypto wallets require, the local Beijing Business Daily reported.
Other investors looked to opening accounts on decentralized exchanges with DeFi, or decentralized finance, platforms allowing trade with each other without an intermediary like a bank or broker.
"I still regularly trade crypto,” said one Chinese investor with an overseas bank account told the Financial Times last year. “How can authorities stop me when the industry has developed to evade centralized control?”
