Beijing banned crypto mining, so China miners went underground

Beijing’s decision to ban cryptocurrency mining in September last year seemed to be the end of an industry in which China led the world. This is not the case, as companies that use energy-using computers used in mining are finding ways to evade the authorities.

“I still have more than 20 mining machines scattered in five rural places all over China,” said a Chinese mining crypto. Forkast in a Telegram call. He asked to use the pseudonym Lee to talk about his activities and did not want to reveal the location of his operations.

Lee said he started mining in 2017 and later set up a Bitcoin mining company with some 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 equipment and sent it to the countryside to avoid the authorities.

Bitcoin “mining” is a metaphor for the use of computer networks to verify blockchain transactions, for which miners receive Bitcoin. In addition to the revenues of mining itself, the industry generates other substantial sources of revenue, such as sales of high-end used computers, known as platforms.

Meta-Luban, the largest Bitcoin mining platform repair company in China, “sold about $ 1.5 billion in platforms last year and plans to sell another $ 1 billion this year,” said Meta-Luban’s CEO. Mark Zhou, in an interview. The company lists $ 2 billion in annual revenue on its website.

Zhou told Forkast that about 80 percent of his customers are from China, but as Lee seeks to move his company’s machines to North America, Central Asia and Africa.

Hash tracks

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

China’s Bitcoin hashrate share plummeted after cryptographic crackdowns first began in May 2021, but rose again in September, suggesting that “significant underground mining activity has formed in the country.” 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, just behind 37.8% in the United States, according to the CCAF.

Meta-Luban engineers repair mining platforms in southwest China’s Sichuan Province. Image: Meta-Luban

The People’s Bank of China is a vocal opponent of cryptocurrencies, arguing that they create economic instability and facilitate financial crime. Other commentators said the central bank is more concerned that cryptocurrencies will encourage capital flight from China and pose a threat to plans to launch its own digital currency that it will control.

Another argument against miners is that the computers they use consume huge amounts of electricity and as this is mainly generated by fossil fuels in China, it undermines the country’s carbon neutrality targets. Miners have denied that they often use surplus electricity generated from renewable energy sources.

Chinese authorities have taken various approaches to identifying and destroying covert mining operations. They analyzed the unusual electricity consumption and IP addresses of the computers associated with the mining pools to locate mining farms.

Cat and rat

But such measures have their limits.

“When the ban came out, I was very nervous,” Lee said. “But after talking to other industry players, I decided to get my machines out of the big mining operations,” he said, adding that it took less than a month to set up their platforms in new locations in rural areas.

“One way for individual miners to continue mining in the dark is to find homes in rural areas and put only a few platforms in a single house to keep energy consumption within a certain range,” Lee said. “It’s like mining at home.”

To stay below government radar, Lee said he uses virtual private networks, a means of keeping his platforms connected to the Internet, while hiding his location from authorities.

Lee said some miners still operate in factories, such as metal processors, and buy excessive electricity consumption from the plants. “Many machines are still in operation, mainly in the southwest and northwest of China,” he added.

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

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

Gustavo A. De La Torre, operations and marketing manager for Bitcoin mining group, said Forkast who is “happy to see Chinese miners still flourishing under a government ban.”

De La Torre said does not require users to submit information about your customer, which gives miners access regardless of their geographic status.

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

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

“It’s a cat-and-mouse game. When it is discovered that something is no longer useful, go ahead and update it or change it,” the official said, adding that mining bans simply do not work as “many would risk being prosecuted.” To continue confirming transactions, building blocks and securing the network for the reward of Bitcoin “.

Heading out to sea

Although some cryptographic mining operations have been underground in China, many other companies are relocating their machines abroad.

Mark Zhou, Meta-Luban’s chief, said he has about 100 engineers at repair centers in Sichuan Province in southwest China and Shenzhen City in the southeast, and who operate about 20,000 mining platforms a month. But most of the equipment is destined for other countries, he said.

“The Chinese mining projects we know of, including ourselves, are mining abroad,” Zhou said.

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Piles of mining rigs at Meta-Luban repair site in southeast southeast Shenzhen city. 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 would prefer second-hand platforms.

Trade in favors

Bitcoin miner Lee said China’s trading practice guanxi (the culture of trading favors and taking advantage of relationships) plays an important role when it comes to local governments busting mining projects.

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

Lee said that before the mining ban went 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-level official in southeastern Jiangxi Province, was removed from office and expelled from the Communist Party after being accused of abusing his power to support cryptographic mining activities.

In March, the country’s anti-graft control agency warned that authorities were closely monitoring possible corruption behind underground cryptographic mining. He noted that some government officials use state resources to undermine cryptocurrencies.

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

“Overall, I’m not as pessimistic about the industry perspective as the way the media has portrayed it,” Lee added. “It is impossible to ban all operators.”

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