China crackdown forces crypto mining operators to end operations

China crackdown forces crypto mining operators to end operations

After Friday’s crackdown, several firms said they are looking to move their business overseas, especially North America.

Cryptocurrency mining operators, including Huobi Mall and BTC.TOP, are suspending their China operations after Beijing stepped up its efforts to crack down on Bitcoin mining and trading, sending the digital currency tumbling.

A State Council committee led by Vice Premier Liu He announced the efforts late on Friday – the first time the council has targeted virtual currency mining, a big business in China that accounts for as much as 70 percent of the world’s crypto supply.

Crypto miners use increasingly powerful, specially-designed computer equipment, or rigs, to verify virtual coin transactions in a process that produces newly minted cryptocurrencies such as Bitcoin.

Bitcoin took a hammering after the latest Chinese move and is now down nearly 50 percent from its all-time high. It shed as much as 17 percent on Sunday, before paring some losses and was last trading steady in Asia.

Investor protection and prevention of money laundering are particular concerns of governments and financial regulators who are grappling with whether and how they should regulate the cryptocurrency industry.

US Federal Reserve Chairman Jerome Powell turned up the heat on cryptocurrencies last week, saying on Thursday that they pose risks to financial stability and indicating that greater regulation may be warranted.

A shift to overseas

Huobi Mall, part of cryptocurrency exchange Huobi, said in a statement late on Sunday that all its custody businesses have been suspended.

“Meanwhile, we’re contacting overseas service providers, to pave way for exports of mining rigs in the future,” Huobi Mall said via its official Telegram community, and asked clients “not to worry and calm down”.

BTC.TOP, a crypto mining pool, also announced the suspension of its China business, citing regulatory risks.

Founder Jiang Zhuoer said in a microblog post via Weibo that in the future, BTC.TOP will mainly conduct crypto mining business in North America.

“In the long term, nearly all of Chinese crypto mining rigs will be sold overseas, as Chinese regulators crack down on mining at home,” he wrote.

China has already lost its position as a global cryptocurrency trading centre after Beijing banned crypto exchanges in 2017.

“Eventually, China will lose crypto computing power to foreign markets as well,” Jiang said, predicting the rise of US and European mining pools.

HashCow, another crypto miner that owns 10 mining sites in Chinese provinces including Xinjiang and Sichuan and sells computing power to investors, said it will fully comply with government regulations.

In a statement to clients, HashCow said it will suspend buying new Bitcoin rigs, and promised a full refund to those investors who had placed orders for computing powers but had not yet started mining.

Risk-adjusted returns

Aside from the sheer scale of the slump in virtual currencies last week – the Bloomberg Galaxy Crypto Index fell almost 40 percent, the most since the pandemic turmoil in March last year – significant intraday price swings have also captivated investor attention.

Still, RBC derivatives strategist Amy Wu Silverman argued in a note Sunday that, based on a measure of risk-adjusted returns known as the Sharpe ratio, Bitcoin has done better than shares in Tesla Inc., the SPDR S&P 500 ETF Trust or Invesco QQQ Trust Series 1.

Bitcoin, Ether and meme virtual currencies like Dogecoin are still sitting on major gains over longer time-frames, such as the past year – about 12,000 percent in the case of Dogecoin.

For Ben Emons, managing director of global macro strategy at Medley Global Advisors in New York, Bitcoin is “firming its grip on markets through volatility, liquidity and correlation”.

Crypto miners halt China business after Beijing cracks down, bitcoin tumbles

Representations of the virtual currency Bitcoin and Ethereum stand on a motherboard in this picture illustration taken May 20, 2021. REUTERS/Dado Ruvic/Illustration

Cryptocurrency miners, including HashCow and BTC.TOP, have halted their China operations after Beijing intensified a crackdown on bitcoin mining and trading, hammering digital currencies amid heightened global regulatory scrutiny of them.

A State Council committee led by Vice Premier Liu He announced the crackdown late on Friday as part of efforts to fend off financial risks. It was the first time the council has targeted virtual currency mining, a big business in China that accounts for as much as 70% of the world’s crypto supply. read more

Cryptocurrency exchange Huobi on Monday suspended both crypto-mining and trading services to mainland Chinese clients, adding it will instead focus on overseas businesses.

BTC.TOP, a crypto mining pool, also announced the suspension of its China business citing regulatory risks, while crypto miner HashCow said it would halt buying new bitcoin rigs.

Crypto miners use increasingly powerful, specially-designed computer equipment, or rigs, to verify virtual coin transactions in a process which produces newly minted crypto currencies such as bitcoin.

“Crypto mining consumes a lot of energy, which runs counter to China’s carbon neutrality goals,” said Chen Jiahe, chief investment officer of Beijing-based family office Novem Arcae Technologies.

The crackdown is also part of China’s stepped-up drive to curb speculative crypto trading, he added.

Bitcoin took a beating after the latest Chinese move, and is now down nearly 50% from it’s all-time high. It shed as much as 17% on Sunday, before paring some losses and was last trading steady in Asia. Elsewhere, Ether fell to a two-month low on Sunday, down 60% from a record peak hit just 12 days ago,

Investor protection and money laundering are particular concerns of global financial regulators who are grappling with whether and how they should regulate the cryptocurrency industry.

The latest shakeout in digital currencies also stems from tighter scrutiny in the United States. Last Thursday, U.S. Federal Reserve Chairman Jerome Powell said they pose risks to financial stability, and indicating that greater regulation of the increasingly popular electronic currency may be warranted. read more

Huobi made the announcement via its official Telegram community for Huobi Mall, as well in a statement to Reuters. BTC.TOP and HashCow could not be immediately reached for comment

DIRTY BUSINESS

The annual energy consumption of China’s cryptocurrency miners is expected to peak in 2024 at about 297 terawatt-hours, greater than all the power consumption by Italy in 2016, according to a study recently published in Nature Communications.

Chinese President Xi Jinping has pledged carbon neutrality by 2060.

China has already lost its position as a global cryptocurrency trading centre after Beijing banned crypto exchanges in 2017.

“Eventually, China will lose crypto computing power to foreign markets as well,” BTC.TOP founder Jiang wrote in a micro blog post via Weibo, predicting the rise of U.S. and European mining pools.

Chen of Novem Arcae said the crypto craze, if not curbed, could turn into froth similar to the Dutch tulipmania in the 17th century - often regarded as the first financial bubble in recorded history.

“The only difference is that after the tulip bubble burst, there were still some beautiful flowers left,” Chen said.

“But when the virtual currency bubble bursts, what would be left are merely some computer codes.”

Our Standards: The Thomson Reuters Trust Principles.

UPDATE 3-Crypto miners halt China business after Beijing cracks down, bitcoin tumbles

Bloomberg

(Bloomberg) – It was past 9 p.m. on Financial Street in Beijing by the time the figure inside Huarong Tower there picked up an inkbrush and, with practiced strokes, began to set characters to paper.Another trying workday was ending for Wang Zhanfeng, corporate chairman, Chinese Communist Party functionary—and, less happily, replacement for a man who very recently had been executed.On this April night, Wang was spotted unwinding as he often does in his office: practicing the art of Chinese calligraphy, a form that expresses the beauty of classical characters and, it is said, the nature of the person who writes them.Its mastery requires patience, resolve, skill, calm—and Wang, 54, needs all that and more. Because here on Financial Street, a brisk walk from the hulking headquarters of the People’s Bank of China, a dark drama is playing out behind the mirrored façade of Huarong Tower. How it unfolds will test China’s vast, debt-ridden financial system, the technocrats working to fix it, and the foreign banks and investors caught in the middle.Welcome to the headquarters of China Huarong Asset Management Co., the troubled state-owned ‘bad bank’ that has set teeth on edge around the financial world.For months now Wang and others have been trying to clean up the mess here at Huarong, an institution that sits—quite literally—at the center of China’s financial power structure. To the south is the central bank, steward of the world’s second-largest economy; to the southwest, the Ministry of Finance, Huarong’s principal shareholder; less than 300 meters to the west, the China Banking and Insurance Regulatory Commission, entrusted with safeguarding the financial system and, of late, ensuring Huarong has a funding backstop from state-owned banks until at least August.The patch though doesn’t settle the question of how Huarong makes good on some $41 billion borrowed on the bond markets, most incurred under Wang’s predecessor before he was ensnared in a sweeping crackdown on corruption. That long-time executive, Lai Xiaomin, was put to death in January—his formal presence expunged from Huarong right down to the signature on its stock certificates.The bigger issue is what all this might portend for the nation’s financial system and efforts by China’s leader, Xi Jinping, to centralize control, rein in years of risky borrowing and set the nation’s financial house in order.“They’re damned if they do and damned if they don’t,” said Michael Pettis, a Beijing-based professor of finance at Peking University and author of Avoiding the Fall: China’s Economic Restructuring. Bailing out Huarong would reinforce the behavior of investors who ignore risk, he said, while a default endangers financial stability if a “chaotic” repricing of the bond market ensues.Just what is going on inside Huarong Tower? Given the stakes, few are willing to discuss that question publicly. But interviews with people who work there, as well as at various Chinese regulators, provide a glimpse into the eye of this storm.Huarong, simply put, has been in full crisis mode ever since it delayed its 2020 earnings results, eroding investor confidence. Executives have come to expect to be summoned by government authorities at a moment’s notice whenever market sentiment sours and the price of Huarong debt sinks anew. Wang and his team must provide weekly written updates on Huarong’s operations and liquidity. They have turned to state-owned banks, pleading for support, and reached out to bond traders to try to calm nerves, with little lasting success.In public statements, Huarong has insisted repeatedly that its position is ultimately sound and that it will honor its obligations. Banking regulators have had to sign off on the wording of those statements—another sign of how serious the situation is considered and, ultimately, who’s in charge.Then there are regular audiences with the finance ministry and the other powerful financial bureaucracies nearby. Among items usually on the agenda: possible plans to hive off various Huarong businesses.Huarong executives are often kept waiting and, people familiar with the meetings say, tend to gain only limited access to top officials at the CBIRC, the banking overseer.The country’s apex financial watchdog—chaired by Liu He, Xi’s right-hand man in overseeing the economy and financial system—has asked for briefings on the Huarong situation and coordinated meetings between regulators, according to regulatory officials. But it has yet to communicate to them a long-term solution, including whether to impose losses on bondholders, the officials said.Representatives at the People’s Bank of China, the CBIRC, Huarong and the Ministry of Finance didn’t respond to requests for comment.Focus on BasicsA mid-level party functionary with a PhD in finance from China’s reputed Southwestern University of Finance and Economics, Wang arrived at Huarong Tower in early 2018, just as the corruption scandal was consuming the giant asset management company. He is regarded inside Huarong as low-key and down-to-earth, particularly in comparison to the company’s previous leader, Lai, a man once known as the God of Wealth.Hundreds of Huarong staff, from Beijing division chiefs to branch employees in faraway outposts, listened in on April 16 as Wang reviewed the quarterly numbers. He stressed that the company’s fundamentals had improved since he took over, a view shared by some analysts though insufficient to pacify investors. But he had little to say about what is on so many minds: plans to restructure and shore up the giant company, which he’d pledged to clean up within three years of taking over.His main message to the troops: focus on the basics, like collecting on iffy assets and improving risk management. The employees were silent. No one asked a question.One employee characterized the mood in his area as business as usual. Another said co-workers at a Huarong subsidiary were worried the company might not be able to pay their salaries. There’s a widening gulf between the old guard and new, said a third staffer. Those who outlasted Lai and have seen their compensation cut year after year have little confidence in the turnaround, while new joiners are more hopeful about the opportunities the change of direction offers.Others joke that Huarong Tower must suffer from bad feng shui: after Lai was arrested, a bank that had a branch in the building had to be bailed out to the tune of $14 billion.Dark humor aside, a rough consensus has begun to emerge among senior management and mid-level regulators: like other key state-owned enterprises, Huarong still appears to be considered too big to fail. Many have come away with the impression—and it is that, an impression—that for now, at least, the Chinese government will stand behind Huarong.At the very least, these people say, no serious financial tumult, such as a default by Huarong, is likely to be permitted while the Chinese Communist Party is planning a nationwide spectacle to celebrate the 100th anniversary of its founding on July 1. Those festivities will give Xi—who has been positioning to stay in power indefinitely—an opportunity to cement his place among China’s most powerful leaders including Mao Zedong and Deng Xiaoping.Huarong is “nowhere near” defaulting, the managing editor of Caixin Media wrote in an opinion piece on Saturday. Neither the Ministry of Finance nor Chinese regulators would allow it, Ling Huawei wrote.What will come after that patriotic outpouring on July 1 is uncertain, even to many inside Huarong Tower. Liu He, China’s vice premier and chair of the powerful Financial Stability and Development Committee, appears in no hurry to force a difficult solution. Silence from Beijing has started to rattle local debt investors, who until about a week ago had seemed unmoved by the sell-off in Huarong’s offshore bonds.Competing InterestsHuarong’s role in absorbing and disposing of lenders’ soured debt is worth preserving to support the banking sector cleanup, but requires government intervention, according to Dinny McMahon, an economic analyst for Beijing-based consultancy Trivium China and author of China’s Great Wall of Debt.“We anticipate that foreign bondholders will be required to take a haircut, but it will be relatively small,” he said. “It will be designed to signal that investors should not assume government backing translates into carte blanche support.”For now, in the absence of direct orders from the top, Huarong has been caught in the middle of the competing interests among various state-owned enterprises and government bureaucracies.China Investment Corp., the $1 trillion sovereign fund, for instance, has turned down the idea of taking a controlling stake from the finance ministry. CIC officials have argued they don’t have the bandwidth or capability to fix Huarong’s problems, according to people familiar with the matter.The People’s Bank of China, meantime, is still trying to decide whether to proceed with a proposal that would see it assume more than 100 billion yuan ($15.5 billion) of bad assets from Huarong, those people said.And the Ministry of Finance, which owns 57% of Huarong on behalf of the Chinese government, hasn’t committed to recapitalizing the company, though it hasn’t ruled it out, either, one person said.CIC didn’t respond to requests for comment.The banking regulator has bought Huarong some time, brokering an agreement with state-owned lenders including Industrial & Commercial Bank of China Ltd. that would cover any funding needed to repay the equivalent of $2.5 billion coming due by the end of August. By then, the company aims to have completed its 2020 financial statements after spooking investors by missing deadlines in March and April.“How China deals with Huarong will have wide ramifications on global investors’ perception of and confidence in Chinese SOEs,” said Wu Qiong, a Hong Kong-based executive director at BOC International Holdings. “Should any defaults trigger a reassessment of the level of government support assumed in rating SOE credits, it would have deep repercussions for the offshore market.”The announcement of a new addition to Wang’s team underscores the stakes and, to some insiders, provides a measure of hope. Liang Qiang is a standing member of the All-China Financial Youth Federation, widely seen as a pipeline to groom future leaders for financial SOEs. Liang, who arrived at Huarong last week and will soon take on the role of president, has worked for the three other big state asset managers that were established, like Huarong, to help clean up bad debts at the nation’s banks. Some speculate this points to a wider plan: that Huarong might be used as a blueprint for how authorities approach these other sprawling, debt-ridden institutions.Meantime, inside Huarong Tower, a key item remains fixed in the busy schedules of top executives and rank-and-file employees alike. It is a monthly meeting, the topic of which is considered vital to Huarong’s rebirth: studying the doctrines of the Chinese Communist Party and speeches of President Xi Jinping. (Updates to mention Caixin managing editor’s opinion piece on the matter. )More stories like this are available on bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.