Beijing banned crypto mining, so Chinese miners went underground

Beijing’s decision to ban cryptocurrency mining in September last year seemed like the end of an industry where China led the world. That’s not the case, it seems, as the companies that exploit the power-hungry computers used in mining find ways to evade the authorities.

“I still have more than 20 mining machines scattered in five rural areas across China,” said a Chinese crypto miner. Forkast in a Telegram call. He asked to use the pseudonym Lee to discuss his activities and refused to disclose the location of his operations.

Lee said he started mining in 2017 and then set up a bitcoin mining company with a few partners, but when China cracked down last year, they moved the company’s machines to the United States and Canada. However, he kept his own gear and operated it in rural areas to avoid authorities.

Bitcoin “mining” is a metaphor for using computer networks to verify transactions on the blockchain, for which miners receive Bitcoin. Besides the revenue from mining itself, the industry generates other substantial revenue streams, such as sales of used high-end computers, known as rigs.

Meta-Luban, the largest Bitcoin mining rig repair company in China, “sold about $1.5 billion worth of rigs last year and expects to sell another $1 billion this year” , Meta-Luban CEO Mark Zhou said in an interview. The company posts annual revenue of US$2 billion on its website.

Zhou told Forkast that about 80% of his customers come from China, but like Lee, they’re mostly looking to move their company’s machinery to North America, Central Asia and Africa.

Hash trails

However, other evidence indicates that Bitcoin mining continues in China. The so-called Bitcoin “hashrate” is a measure of the computing power used by the network and can often be identified geographically.

Bitcoin’s hashrate share in China fell after the crypto crackdown began in May 2021, but surged again in September, suggesting that “significant underground mining activity has formed in the country.” according to the Cambridge Center for Alternative Finance (CCAF).

In January this year, China controlled 21.1% of the global Bitcoin hashrate, to become the second-largest producer of Bitcoin, behind just 37.8% in the United States, the CCAF said.

Meta-Luban engineers repair mining rigs in Sichuan Province, southwest China. Image: Meta-Luban

The People’s Bank of China is one of the most vocal opponents of cryptocurrencies, saying they create economic instability and facilitate financial crime. Other commentators said the central bank is more concerned that crypto encourages capital flight from China and poses a threat to plans to launch its own digital currency which it will control.

Another argument against the miners is that the computers they use consume huge amounts of electricity and as this is mostly generated by fossil fuels in China, this undermines the country’s carbon neutrality goals. Miners have repelled that they often use excess electricity generated by renewable energy sources.

Chinese authorities have taken various approaches to identify and dismantle hidden mining operations. They looked at unusual power consumption and computer IP addresses associated with mining pools to locate mining farms.

cat and mouse

But such measures have their limits.

“When the ban first came out, I was extremely nervous,” Lee said. “But after discussing with other industry players, I have decided to withdraw my machines from large mining operations,” he said, adding that it took him less than a month to install. its platforms in new locations in rural areas.

“One way for us individual miners to continue mining in the dark is to find houses in rural areas and only install a few rigs in one household to keep power consumption down to a certain range,” Lee said. “It’s like mining from home.”

To stay under the government’s radar, Lee said he uses virtual private networks, a way to keep his platforms connected to the internet, while hiding his location from authorities.

Lee said some miners are still operating in factories, such as metal processors, and buying up the factories’ excess electricity consumption. “Many machines are still in operation, mainly in southwest and northwest China,” he added.

“Of course, I still have concerns, but it’s very unlikely that all of my rigs will be broken,” Lee said.

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A Meta-Luban engineer repairs mining rigs in southwest China’s Sichuan province. Image: Meta-Luban

Gustavo A. De La Torre, director of operations and marketing at Bitcoin mining pool BTC.com, said Forkast that he is “pleased to see that Chinese miners continue to thrive under a government ban”.

De La Torre said BTC.com does not require users to submit know-your-customer information, giving access to minors regardless of geographic status.

An official from an overseas Bitcoin mining company, who declined to be identified to discuss the situation in China, said Forkast that they are still working with Chinese miners.

“The ban is circumvented by various techniques by both the miner and the mining pool,” the official said. “Some of these techniques include transport layer security from miner to pool. Others include private proxies with encryption technology created by mining pool development teams.

“It’s a game of cat and mouse. When something turns out to be no longer useful, they go ahead and update or change it,” the official said, adding that mining bans simply don’t work because “many would risk possible lawsuits to continue confirming transactions, building blocks and securing the network for bitcoin reward.

heading offshore

While some crypto mining operations have gone underground in China, many other companies are relocating their machines overseas.

Mark Zhou, the head of Meta-Luban, said he has about 100 engineers at repair centers in southwest China’s Sichuan province and southeast China’s Shenzhen city, and that they were managing around 20,000 mining rigs per month. But most of the equipment is destined for other countries, he said.

“Chinese mining projects that we know of, including ourselves, operate overseas,” Zhou said.

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Piles of mining rigs at the Meta-Luban repair site in the southeast city of Shenzhen. Image: Meta-Luban

Zhou said miners moving to North America want new, high-end machines, while those moving to Central Asian countries such as Uzbekistan and Kazakhstan prefer second-hand rigs.

Business favors

Bitcoin miner Lee said China’s trading practice guanxi (the culture of exchanging favors and optimizing relationships) plays a role in preventing local governments from frustrating mining projects.

“My first reaction when I learned of the ban was that it would all be about playing ‘guanxi’,” Lee said. “Whoever has better ‘guanxi’ or stronger networks might stay.”

Lee said that before the mining ban came into effect, many local governments worked with miners to earn extra money that would go into government coffers.

In November, Xiao Yi, a former provincial official in the southeastern province of Jiangxi, was removed from his post and expelled from the Communist Party after being accused of abusing his power to support the activities cryptocurrency mining.

In March, the country’s anti-corruption watchdog warned that authorities were closely monitoring possible corruption behind underground crypto mining. He noted that some officials are using state resources to mine crypto.

Chinese regulators tend to take a “one-size-fits-all approach” first when policing an emerging sector, then make adjustments to relax certain rules, Lee said.

“Generally, I’m not as pessimistic about the outlook for the industry as how the media has portrayed it,” Lee added. “It is impossible to ban all operators.”

Bonny J. Streater