China's crypto mining crackdown partly triggered by deadly coal industry accidents

BEIJING • China's escalating push to rein in cryptocurrency mining was triggered in part by concern that the practice has stoked a surge in illicit coal extraction, endangering lives and undermining President Xi Jinping's ambitious environmental goals.

The authorities decided to act after concluding the spike in electricity consumption from server farms underpinning Bitcoin and other tokens was a key factor behind rising demand for coal in certain parts of China, according to a source who participated in high-level government meetings on the issue and asked not to be identified.

Rising coal demand prompted some producers to restart idled mines without official approval, leading to higher safety risks and a jump in deadly accidents this year, the source said.

While China's central government has enforced a strict ban on digital-asset exchanges and discouraged crypto mining for years, the authorities in some remote areas of the country have been more welcoming of the industry as it brings in much-needed revenue.

About 65 per cent of the world's Bitcoin mining took place in China as at April last year, according to an estimate by Cambridge University.

Growing concerns about the environmental knock-on effects help explain why China's Financial Stability and Development Committee said last week it would crack down on crypto mining and trading, in what amounted to one of the government's most forceful condemnations of the crypto ecosystem to date.

The warning has fuelled a sell-off in cryptocurrencies from record highs and stoked a debate over how investors should respond to the environmental costs of digital assets.

Musings on the issue from Tesla founder and crypto advocate Elon Musk have by turns destroyed and conjured billions of dollars of market value in recent weeks. According to one estimate, each US$1 of bitcoin value created in 2018 was responsible for US$0.37 of health and climate damage in China and US$0.49 in the United States.

Bitcoin has dropped about 40 per cent since the middle of last month, paring an epic surge that drew in everyone from Wall Street pros to mom-and-pop investors. The biggest cryptocurrency was trading at US$40,904 as at 4pm yesterday.

Disentangling crypto mining's impact on coal consumption is not easy, especially during periods of economic recovery when power demand is rising broadly. But in areas like Xinjiang and Inner Mongolia, which have long been favourite destinations for the industry, Chinese authorities have drawn a direct link between crypto and coal.

A preliminary government investigation into an accident that trapped 21 people inside a coal mine in Xinjiang last month found the mine had been restarted without official permission to meet rising power demand from crypto server farms, according to a source.

There has been no official update on the coal miners' status since the state-run Xinhua news agency reported earlier this month that a rescue team had entered the mine.

Xinjiang alone accounts for nearly 36 per cent of Bitcoin's mining capacity, according to Cambridge estimates. That is thanks to inexpensive coal-powered electricity, low temperatures that keep mining rigs cool and under-developed power grids that sometimes lead to excess supply.

While previous efforts to rein in crypto mining have failed to gain traction at the local level, there are signs that may be changing.

Inner Mongolia, which banned crypto mining last month, said on Tuesday it plans to raise penalties for companies and individuals and discipline government officials who aid the industry.

BLOOMBERG