Trend of Global Crypto Mining: Despite the US-China Trade War, Activity Surges as Samsung and GMO Enter

Throughout 2018, the cryptocurrency market experienced the fourth worst correction in its nine-year history, as Bitcoin lost more than 69 percent of the value from its all-time high of $19,500.

Despite the substantial decline in the price of Bitcoin (BTC), which heavily affects the earnings of miners, the hash power of the Bitcoin network has continuously increased throughout the past 10 months, from 15 million TH/s to over 50 million TH/s from January to October.

As portrayed by the research of blockchain analyst Barclay James, the breakeven cost of mining Bitcoin at 35 million TH/s is around $6,900. The formula employed by James considers the hash power of the Bitcoin network, the hashing power of an ASIC Bitcoin miner, and the efficiency of each miner in producing BTC:

# units = global hashing power ÷ unit hashing power ÷ unit efficiency

Given the cost of Bitcoin mining, when its hash power is currently around 35 million TH/s and the value is $6,400, the breakeven cost of Bitcoin is in the $7,000 to $8,000 range. Which means, at $6,400, Bitcoin miners are losing money by generating BTC and are solely relying on their expectations of the price of BTC to eventually increase in the months to come.

For miners outside of China, specifically the mountainous region of Sichuan known to have the cheapest electricity in Asia and a cold climate that naturally cools down cryptocurrency mining equipment, it is even more expensive to mine BTC. The paper of Barclay James reads:

“China has some of the world’s cheapest electricity rates as well as average temperatures consistent with temperate regions. This is important as cooling is one of the largest overheads in mining. In addition, the country’s generally low operating costs also give it a competitive advantage. In fact, current estimates place 70 % of global hashing power in China, the majority of which is located in the Sichuan region.”

Since June, Bitcoin miners have been mining the dominant cryptocurrency at a significant loss. The fact that the hash power of BTC has continuously risen throughout the bear market of 2018 demonstrates large activity in the global cryptocurrency mining sector and the confidence of miners that the industry will recover as the year comes to an end.

Bitmain and its Antminer sold at a discount

BitMEX Research, a cryptocurrency firm that operates as a research subsidiary of major digital asset exchange BitMEX, disclosed in its paper in August that Bitmain, the dominant conglomerate in the cryptocurrency mining sector, has been deliberately selling its latest Bitcoin ASIC miner Antminer S9 at a lower price.

In 2017, Bitmain sold more than one million Antminer S9 miners and another 700,000 of them in the first quarter of 2018. According to the researchers, who calculated the disclosed gross profit margin of Bitmain in 2017 and the implied cost of each miner. Bitmain has set a negative profit margin of 11.6 percent for the Antminer S9, its main product.

The researchers stated that the distribution of Antminer S9 miners at such a low profit margin and the sudden increase in the sale of the miner in the first quarter of 2018 suggest the company employed a strategy to outsell its competition by underpricing its products.

“These low prices are likely to be a deliberate strategy by Bitmain, to squeeze out their competition by causing them to experience lower sales and therefore financial difficulties. In our view, herein lies the key to one of the main driving forces behind the decision to IPO. A successful IPO may increase the firepower available to continue this strategy and eliminate an advantage rivals could have by doing their IPOs first.”

The paper also proposed that the company may simply have too many Antminer S9 miners in its inventory.

In June 2018, Bitmain was criticized for shipping Antminer S9 miners caked with dust. Some miners alleged the firm of sending old or used ASIC miners. In response to this, Bitmain stated that all traders who received defective or affected Antminer S9 miners would be fully compensated.

“Any product can be imperfect, and there will be shortcomings in the process of enterprise development. We have also compensated the miners who have received mining equipment with inadequate computing power and the mining equipment are now being run properly.”

Whether the decision of the firm to sell its main ASIC miner with a low profit margin was to due to its competition or to clear its inventory, the end result was the distribution of an increased number of efficient and high performance ASIC miners to the global mining sector, which ultimately led to the increase in the hash power of the Bitcoin network.

Is Bitmain’s dominance in danger with the emergence of Samsung and GMO?

In the first quarter of 2018, Bitmain generated twice the profit of Nvidia, the world’s largest graphics card manufacturer. Nvidia generated $550 million in pure profit while Bitmain recorded $1.1 billion in profit from January to March.

The lucrative business model of Bitmain and its high profits led GMO and Samsung, two of the most influential technology conglomerates in Japan and South Korea, to enter the global cryptocurrency mining industry.

GMO introduced its own ASIC miner with competitive specifications in comparison to Bitmain’s Antminer S9. Samsung Electronics has allocated a portion of its foundry in Suwon, South Korea, to manufacture cryptocurrency ASIC miners, in partnership with emerging companies in the mining sector.

When Samsung Electronics first announced its decision to target the global cryptocurrency mining industry, it emphasized that it remains unsure whether it can improve the company’s revenues in general. But, the emphasis of the establishment on its mining venture was to engage in an emerging industry like crypto, given that it has successfully penetrated into insurance, fintech, electronics manufacturing, car making, and ship building in the past several decades. Samsung Securities analyst, Hwang Min-seong, said in January of this year:

“Samsung Electronics could increase its revenues through ASIC chip manufacturing but because the foundry only accounts for a small portion of the company’s semiconductor manufacturing plant, it is difficult to predict that the firm’s mining venture will have a significant impact on the company’s revenues.”

 Since then, Samsung has aggressively expanded its mining businesses, seeing an increased demand in the market. The uncertainty of Samsung towards cryptocurrency mining demonstrated the firm’s unwillingness to commit to the industry unless the company sees significant potential in both the short-term and long-term growth of the market.

Most recently, Samsung signed a deal with Squire, a Canada-based crypto mining corporation that raised $19.5 million in August to develop cryptocurrency mining equipment, to manufacture ASIC miners on behalf of the Canadian firm.

Around a similar period, Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s largest independent chipmaker, slashed the growth target of the cryptocurrency mining sector from 9 percent to 6.5 percent.

The conglomerate stated that the weakening of the demand for cryptocurrency mining led the firm to decrease the growth target of the industry. But, it remains unclear whether the report is exclusive to Bitmain, given that TSMC is the manufacturer of Bitmain’s ASIC miners, or to the rest of the industry.

“However, our business is also negatively impacted by further weakening of cryptocurrency mining demand. As a result, we estimate our 2018 growth rate will be about 6.5% in U.S. dollar term, which is close to the foundry industry’s growth but slightly below our 7% to 9% guidance given in the last conference.”

New multi-million dollar mining facilities open

Despite the conflicting viewpoints of Samsung and TSMC toward the demand for cryptocurrency mining, in the past several days, two multi-million dollar mining facilities have opened in Armenia and Colorado.

Local publications in Armenia reported that a new $50 million digital asset mining facility was opened on October 19 with 3,000 ASIC miners to mine Bitcoin and Ethereum. In the upcoming months, 120,000 ASIC miners are expected to be added to the facility.

It was local real estate firm Multi Group Concern (MGT) and Malta-based technology company Omnia Tech International Company which created the facility with the support of the government and local authorities.

The plan to build the facility was originally released in April, when Omnia Tech founder, Robert Velghe, said that the two companies intend to invest more than $2 billion in mining and crypto-related businesses in Armenia.

“We will also help Omnia Tech with the establishment of the Financial Technology Park and the data exchange center in Armenia. We intend to create here a blockchain-based center for the development of new information projects, which will turn Armenia into a high-tech platform.”

On October 25, MGT, the largest mining facility operator in the U.S., announced that it will establish another large-scale mining facility in Colorado equipped with 6,300 Bitmain S9 miners. Already, MGT operates 6,800 Bitmain S9 miners and 50 GPU Ethereum mining rigs in the country.

MGT COO Stephen Schaeffer emphasized that despite the decline in the price of Bitcoin, the company intends to “run into the burning building” to find opportunities, which in this case is to mine BTC.

Regulation and state of the mining sector

Many of the world’s largest economies are in the process of implementing practical regulatory frameworks to facilitate the growth of mining companies. Authorities in South Korea, Japan, and the U.S. have welcomed mining facilities to operate with low-cost energy. Countries with ambiguous cryptocurrency regulations such as China and Russia have also demonstrated a neutral stance towards mining.

Throughout the past 15 months, China has banned virtually every business and activity related to the cryptocurrency sector including trading, events, and over-the-counter (OTC) investment. However, it has opened two use cases of cryptocurrencies: processing transactions and mining digital assets.

Several regional governments in Russia have also opened up to cryptocurrency mining, leading various initiatives to convince major mining companies to launch mining farms in the country.

In August, Deputy Governor of the Leningrad Region, Dmitry Yalo, said at the opening of a new mining facility in Russia that the region intends to lure in more mining centers in the years to come with low electricity prices, qualified personnel, and a naturally cold climate to cool down ASIC miners with no additional costs.

US-China trade war

The conflict between the U.S. and China began to affect chip makers and mining equipment manufacturers based in China, including Bitmain. The 27.6 percent tariffs on the Antminer S9 has made it significantly more expensive for buyers outside Asia to purchase the miner.

Previously, Bitmain was able to ship Antminer S9 miners with no tariffs as the product was classified as a data processing machine. The sudden imposition of tariffs against electrical machinery apparatus, which includes data processing machines, has created an inefficient ecosystem for China’s ASIC manufacturers.

The imposition of tariffs by the US against China comes in a period in which U.S. President Donald Trump has expressed concerns about the lack of reciprocity between the two countries. For many years, China has been able to ship products to the U.S. with near-zero tax and fee, thus, Amazon’s Vice President of Global Policy Paul Misener said once:

“The cost to ship a one-pound package from South Carolina to New York City would run nearly $6; from Beijing to NYC: $3.66.”

South Korea and Japan remain unaffected by the tariffs, and with practical regulatory frameworks established by both countries, Samsung and GMO are expected to continue their successful run in the global mining sector.

As of current, despite the significant drop in the price of major cryptocurrencies, the demand for cryptocurrency mining remains relatively high as seen in the rise in the hash rate of the Bitcoin network and the expansion of Samsung, GMO, and Bitmain’s operations.

Major regions have established positive regulatory frameworks towards cryptocurrency miners and companies, which could lead to the increase in the establishment of mining facilities by investors that foresee a substantial surge in the valuation of the crypto market in the mid-term.

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Skirting the Great Wall: The Chequered Saga of Crypto in China, 2013-2017

Take a quick look at CnLedger, a Twitter-based Chinese crypto news information source, and a tweet pinned at the top of its profile might come as something of a surprise:

On Sept. 30 2018, China’s oldest tech journal, the Beijing Sci-Tech Report (BSTR), announced it would be offering subscriptions payable in Bitcoin (BTC). And Ethereum Hotel, reportedly the “first” Chinese hotel to accept Ethereum (ETH) as payment, is poised to open its doors in the country’s southwestern Sichuan Province.

How does all this square with Beijing’s notorious onslaught of anti-crypto regulations? How is it possible that you can buy a McLaren or Ferrari using major cryptocurrencies, and yet cannot legally operate a cryptocurrency exchange in the country?

What of official reports that China’s initial coin offerings (ICO) industry continues to find means of “reemerging,” despite a domestic blanket ban on the fundraising model? And how do all these facts align with the Chinese central bank’s exploration of issuing its own digital currency, which started as early as 2014?

Cointelegraph looks back at Chinese authorities’ cumulative attempts to make the People’s Republic impregnable to the crypto phenomenon — and the whip-smart industry response — in the first of a three-part series, spanning 2013 to the present.  

2013: Restrictions on financial institutions’ Bitcoin dealings, stark warnings about financial stability threats, but a hands-off approach to crypto trading

2013: Restrictions on financial institutions’ Bitcoin dealings, stark warnings about financial stability threats, but a hands-off approach to crypto trading

In a Dec. 3 circular, the Chinese government defined Bitcoin as a virtual commodity, declaring that it was not recognized as legal tender. The government said the directive was needed to “protect the property rights of the public, protect the status of the renminbi [RMB]* as the statutory currency, prevent risks of money laundering and protect financial stability.”

* Renminbi or [Chinese] yuan are interchangeably used to refer to China’s national fiat currency.

While warning that “excessive speculation” in virtual currencies* “harms the public interest and the legal currency status of the RMB, the government nonetheless allowed citizens to freely participate in the online trading of such commodities “at their own risk.”

* The term 虚拟货币 (“virtual currencies”) is used to designate cryptocurrencies in Chinese.

2013’s so-called ‘Notice on Precautions Against the Risks of Bitcoin’ was signed by five official entities, the People’s Bank of China (PBoC), the Banking Regulatory Commission (CBRC), the Ministry of Industry and Information Technology (MIIT), the China Securities Regulatory Commission (CSRC), and the China Insurance Regulatory Commission (CIRC).

The notice stipulated that financial and payment insitutitions were prohibited from dealings in Bitcoin, including banks, and that crypto exchanges should register with the government’s Telecommunications Regulatory Agency and comply with anti-money laundering (AML) and know-your-customer (KYC) measures. It also advocated for financial institutions to propagate investment and virtual currency education in order to “guide the public to establish correct monetary concepts and investment philosophy.”

The PBoC considered at the time that “the public lacks sufficient understanding of Bitcoin, and some individuals have been caught up by faddishness or a speculative mentality in holding, using and trading in Bitcoin,” warning that “ordinary investors who blindly follow the crowd can easily suffer major losses.”

2016: PBoC reveals it has been studying the possibility of issuing state-backed digital currency since 2014

2016: PBoC reveals it has been studying the possibility of issuing state-backed digital currency since 2014

On Jan. 20 the PBoC held a Digital Currency Seminar, attended by PBoC governor Zhou Xiaochuan, the bank’s deputy governor, and a gamut of experts from domestic and foreign research and financial institutions, as well as consulting firms — including representatives from Deloitte and Citigroup. In its official press release, the central bank stated its intent to launch a state-backed digital currency, considering the move would have “positive practical and far-reaching historical, significance”:

Since 2014, [the PBoC] has set up a dedicated research team [to thoroughly study] a framework for digital currency issuance [encompassing its prospective] circulation, environment, legal problems, the impact of digital currency on the economic and financial system, [and] the relationship between legal and privately issued digital currency.”

The central bank stated that it considered that a state-backed “legal” digital currency could bring down the high cost of distributing and circulating paper notes, as well as bring greater transparency to economic transactions — thereby reducing money laundering, tax evasion, and other criminal acts. It also proposed its issuance would have a positive impact on financial inclusion, help to improve China’s new financial infrastructure, and enhance the efficiency of payment and settlement systems .

The statement further proposed that digital currency would give the central bank greater control over the circulation of money, bolstering economic and social development. Reports at the time estimated that around $843 billion of capital had flowed out of China in the eleven months leading up to November 2015 — meaning that policy makers were being forced to inject funds into the system in order to prevent interest rates from rising.

Even as the bank lauded the “great importance” of its digital currency project and praised participants’ rigorous analyses of relevant theoretical matters, practical exploration and development prospects, it notably remained silent on the phenomenon of decentralized cryptocurrencies such as Bitcoin.

2017: PBoC exchange scrutiny

2017: PBoC exchange scrutiny

On Jan. 6, the country’s central bank, the PBoC, released a notice that it had contacted relevant regulatory authorities and ordered them to meet with major Bitcoin trading platforms to scrutinize their business operations and regulatory compliance and carry out a corresponding “clean-up” where necessary. The notice reaffirmed the official stance that Bitcoin was not considered currency by China’s government.

Renewed attention came as the estimated share of global Bitcoin trading denominated in the Chinese yuan was commonly set at between 50 to as high as 90 percent.

The day before the bank’s action, Jan. 5, the global Bitcoin market had taken a steep 21 percent price plummet, with Bitcoin tumbling from over $1190 to $938. The South China Morning Post (SCMP) reported that — in the midst of the coin’s vertiginous decline — Chinese investors were experiencing system failures on major exchanges such as BTCC and OKCoin.

PwC China Fintech Partner William Gee told SCMP that “investors suffered losses as they were unable to trade, possibly because of the sudden price fluctuation and large sell offers.” The official China Securities Journal had for its part stated that:

Regulators have noticed that some Bitcoin platforms crashed during the recent market volatilities, causing some investors, particularly those trading with leverage tools, to bear huge losses because they were unable to log on to the website during the sell-off.”

Domestic industry leaders stepped up to calm investors, as news of the on-site inspections only further unsettled market participants. Bobby Lee, CEO of the popular Shanghai-headquartered BTCC exchange, tweeted on Jan. 6:

“BTCC regularly meets with the People’s Bank of China and we work closely with them to ensure that we are operating in accordance with the laws and regulations of China. The press release put forth from the PBOC today outlines that there is significant volatility in Bitcoin trading, and also quoted from a notice released in 2013 saying that Bitcoin is a virtual good and doesn’t have legal tender status. All of our users should be aware of the current policies on virtual goods as well as the risks involved in trading in volatile markets.”

On Jan. 11, the PBoC launched spot checks into leading domestic crypto exchanges BTCC, Huobi and OKCoin. Reuters contextualized the move at the time as part of Beijing’s efforts to “stem capital outflows” and “relieve pressure” on the yuan. The agency noted that the yuan had fallen 6.6 percent against the dollar over the course of 2016 — the worst chapter in its price performance since 1994.

CNY/USD Exchange Rate in 2016

Several crypto analysts had gone so far as predict an eventual “quasi-synchronization” between the yuan’s declining fortunes and Bitcoin’s ascent, noting that Chinese investors were increasingly using the cryptocurrency as a vehicle for conveying value into more stable foreign currencies — and also as an instrument for speculative trading. The Omni Foundation’s Patrick Dugan proposed that “for every one percent that the yuan devalues, Bitcoin pops 10-15 percent.”

On the day of the inspections, PBoC’s Shanghai headquarters clarified that “in order to prevent market risks,” the central bank was scrutinizing exchanges’ business practices and regulatory compliance standards, mentioning only BTCC by name.

View of the action as being tied to escalating capital outflows was widely echoed, with China’s QQ.com reporting that the bank’s crypto exchange scrutiny was “possibly to investigate the use of the digital asset to evade capital controls.”

The trend significantly raised the stakes for Chinese crypto traders; director of the Finance and Securities Research Institution at Wuhan University of Science and Technology, Dong Dengxin, observed that “the policy risks of Bitcoin trading in China are higher” because of the country’s capital controls. “If bitcoin trading disturbs China’s financial order, there’s a possibility it will be deemed illegal or banned.”

China’s ‘big three’ exchanges, Huobi, OKCoin and BTCC — which had hitherto been zero-fee — soon announced in separate statements on Jan. 22 that they would begin charging clients a flat 0.2 percent commission fee for each transaction. The exchanges are said to have rationalized the move by stating that such fees would help “curb market manipulation and extreme volatility.”

An insider source claimed at the time that while the exchanges had not received direct instructions from the PBoC, they had decided to introduce trading fees to align with the bank’s wishes “to see the Bitcoin market cool down.” The platforms also stopped margin lending under the pressure of PBoC’s intensified scrutiny.

On Feb. 8, the central bank then warned nine smaller domestic exchanges that they faced potential closure if they violated regulations or offered margin lending. Of the larger exchanges, OKCoin and Huobi issued statements on Feb. 9 they would be halting Bitcoin withdrawals completely, with BTCC reviewing the matter and subsequently announcing on Feb. 15 it would be suspending crypto withdrawals until March 15.

The withdrawal freeze on all three platforms eventually lasted until early June, and had an almost immediately-felt impact on the Bitcoin market. As CryptoCompare.com’s Charles Hayter observed mid-February:

When China sneezes Bitcoin catches a cold. The PBoC moves to regulate Bitcoin more stringently will bring short term woes. Volumes can be expected to again slow in China as more friction is incorporated in the form of KYC and AML policies. For the duration of this transition the CNY-BTC pairs can be expected to trade at a discount to other fiat-BTC pairs.”

2017: criminalization of ICOs

2017: criminalization of ICOs

On Sept. 4, a total of seven Chinese central government regulators — the PBoC, the Cyberspace Administration of China (CAC), MIIT, the State Administration for Industry and Commerce (SAIC), CBRC, CSRC, and CIRC — jointly issued an Announcement on Preventing Financial Risks from Initial Coin Offerings (ICO Rules).

The announcement stated that ICOs that raise “so-called virtual currencies” such as Bitcoin and Ethereum “through the irregular sale and circulation of tokens” are engaging in “unauthorized” public financing, which is illegal.

It reiterated that virtual currencies involved in ICOs are “not issued by the country’s monetary authority” and therefore are neither legal nor mandatorily-valid tender. They are divested of the legal status of fiat currencies and so “cannot and should not be circulated nor used in the market as currencies.”

The ICO Rules further warned that a host of financial crimes — such as the illegal issuance of tokens or securities, illegal fundraising, financial fraud, or pyramid schemes — may be associated with ICO projects, and that, if discovered, such cases would be transferred to the country’s judiciary.

The announcement ordered all types of ICOs to “be stopped immediately” and to return any assets held in investors’ accounts to these investors as soon as possible.

2017: official restrictions on crypto exchanges

2017: official restrictions on crypto exchanges

Not only were domestic ICOs banned, but the first of a series of restrictions were imposed on cryptocurrency exchanges. Pursuant to the new rules, exchanges were forbidden from enabling clients to convert legal tender into crypto, or vice versa; from buying or selling virtual currencies as a central counterparty; and from setting a price for virtual currencies, or providing other related brokerage or commission services.

Further, the MIIT stated it would shut down websites, delist crypto-trading mobile applications from app stores, and would request that the SAIC revoke the business licenses of exchanges.

The Sept. 4 announcement also extended the existing prohibition on financial and payment institutions’ crypto dealings, stating that they were forbidden from “directly or indirectly” providing products or “services such as account opening, registration, transaction clearing or settlement” for ICOs and virtual currencies. They were also barred from providing insurance services to both ICOs and crypto-related businesses.

Lastly, the seven regulators robustly warned against investors being “fooled” by ICO and crypto-related investments, soliciting the public to “report relevant violations in a timely manner.” The announcement ordered financial industry organizations to “self-discipline” and “stay away from market chaos,” in order to collectively maintain a “normal” financial order.

Following the announcement, on Sept. 15 the Beijing Internet Finance Risk Working Group met with senior officials of crypto trading platforms in the Chinese capital, ordering them to set a deadline for ceasing their trading services; to immediately stop registering new clients; and to outline a detailed plan for how to refund clients’ assets. Authorities were also reported to have issued similar orders to crypto exchange officials based in the cities of Shenzhen and Shanghai.

“The scope of the cleanup” was not limited to curtailing major exchanges’ operations, but aimed at an internet-wide swoop of related websites, internet forums, as well as chat groups on WeChat and QQ — two of China’s most popular social media platforms. The former counted a staggering 963 million active users at the time.

In a media interview mid-September, Lokman Tsui, an assistant professor at the School of Journalism and Communication at the Chinese University of Hong Kong, noted that many hitherto active crypto-dedicated groups on WeChat were swiftly disbanding:

“If you are a group chat leader you have two choices, either you are going to super actively monitor the group, because your livelihood is at stake, or you’re going to delete the group. It’s a chilling effect.”

China’s largest crypto exchanges swiftly fell into line with Beijing’s orders. BTCC told customers on Sept. 14 it would completely shut down on Sept. 30 in accordance with the new restrictions, and would refund any renminbi, Bitcoin, Litecoin and Ethereum held in users’ accounts.

Huobi made a similar announcement on Sept. 15, stating it would be halting new registrations and deposit services, and would be ceasing all services by Sept. 30. OKCoin announced on Sept. 15 it would cease all trading on Sept. 30.

Also on Sept. 15, ViaBTC said it would deactivate the ViaBTC official website for mainland China Sept. 30 and return any holdings of renminbi or Bitcoins to clients before then.

By mid-September 2017, reports were emerging that the impact of the protracted freeze on services at major domestic crypto exchanges as they had faced scrutiny from the PBoC had seen the country’s share of global Bitcoin trading drop to just over 10 percent.

Yet even as the dust was just beginning to settle on the September ban, Chinese investors were increasingly turning to alternatives such as peer-to-peer (p2p) platforms and OTC trades; China’s LocalBitcoins market posted its highest-ever weekly volumes of 115 million yuan during the week leading up to Sep. 23.

By Oct. 27, the “second life” of China’s exiled “crypto barons” was already becoming apparent — 19 formerly China-based companies had already applied for a Japanese crypto exchange license. Other crypto-“friendlier” jurisdictions at that time were deemed to include Hong Kong, Singapore and South Korea.

As early as May, OKCoin had in fact begun to encourage domestic traders to migrate to its newly-launched Hong-Kong based fiat-crypto trading platform OKEx, beginning with futures trading.

On Nov. 1 OKEx launched an OTC platform, with the Chinese yuan tellingly the only supported fiat currency at the outset. The company’s financial market director, Lennix Lai, said that the new OTC service would aim to serve Chinese investors, many of whom had been tiding over the tumultuous 2017 fall by trading p2p.

In parallel, Huobi rebranded as Huobi Pro and incorporated its operations in the Seychelles, then rolling out its own OTC service on Nov. 4 to enable direct, p2p yuan-crypto transactions.

Alongside their relocations overseas, OKEx and Huobi’s OTC platforms thus enabled domestic investors to use mobile payment methods such as Alibaba’s Alipay or Tencent’s WeChat Pay to purchase cryptocurrencies. OTC purchases were typically made a ten or even twenty percent premium as compared with prices on global crypto exchanges, due to the intensity of demand in an increasingly stifled trading climate.

In November, the government caught up: China’s National Committee of Experts on Internet Financial Security issued a Bitcoin OTC report, remarking that “over-the-counter trading is booming,” and that “this warrants further attention.”

The report took stock of burgeoning number of OTC platforms, highlighting that whereas only four such platforms had been active before October, the number had now risen to twenty one.

Taiwan-based OTC platform OTCBTC, according to media reports, had seen $100 million in transactions in the first 50 days since its launch in October.

In an interview with SCMP, Leonhard Weese, president of the Bitcoin Association of Hong Kong, further observed that even as OTC services had not been officially banned, increasing concerns over government surveillance were pushing p2p traders to encrypted messaging services such as Telegram:

“Telegram is very popular for large over-the-counter trades. While WeChat is used by the less paranoid.”

In those last months of a turbulent year, Wesse considered that China’s “authorities are more worried about the narrative, rather than what people actually do. Once it gets widely reported that Bitcoin trading is well and alive in China, the government will again try to put a lid on it.”

2013-2017: the evolution of a toughened anti-crypto stance

Between 2013-2017, China’s authorities thus evolved an increasingly draconian stance as their perception of the financial risks posed by cryptocurrencies hardened. In 2013 they deemed Bitcoin to be a “faddish” and speculative phenomenon, thus prohibiting financial institutions’ dealings with crypto, yet allowing individual investors to bear the risks for their trades.

Pressure on the yuan and escalating capital outflows provided fresh impetus for coordinated action from the country’s regulators; they specifically targeted the ICO space, perceiving it to be rife with dangers for wider fiscal stability, and took action against online trading platforms. The measures nonetheless inadvertently fostered alternative channels such as OTC trades and did not prevent exchanges from flourishing in “friendlier” overseas jurisdictions.

Cointelegraph’s three-part series will continue to trace Chinese authorities’ continued attempts to ring-fence crypto from mainland investors, as they broadened their offensive to tackle the mining industry, as well as perceived regulatory “loopholes,” both on- and offline.

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Unconfirmed: TRON to Partner with ‘China’s Google,’ Baidu

The team of cryptocurrency project TRON (TRX) has reportedly partnered with China’s largest Internet search provider Baidu. Crypto market news service Coinness has claimed this in a tweet Thursday, Oct. 11, citing its private correspondence with TRON’s team.

Neither TRON nor Baidu have been able to confirm the partnership to Cointelegraph as of press time.

Without specifying the details of the partnership, Coinness has claimed that the deal between TRON and China’s Internet giant Baidu will be “officially” revealed by the cloud storage service Baidu Cloud “next week.”

While Coinness claims that TRON has exclusively confirmed the partnership in private correspondence with it, the crypto platform itself has not yet officially announced any details of the partnership or even the identity of its new business partner.

TRON’s CEO Justin Sun has recently hinted on Twitter at a secret partnership with an unnamed “industry giant” that is valued at “tens of billions of dollars.” In his Tweet, posted Friday, Oct. 12, Sun has similarly provided little information:

“Finally, First time to partner with tens of billions USD valuation industry giant. Guess the name.”

As mentioned on TRON’s website, the decentralized Internet company TRON Foundation was established in Singapore in July 2017, while TRON’s open source protocol was launched in December 2017. The company has dual headquarters in Beijing and San Francisco, and a team of over 100 employees working all over the globe, with some of them being formerly employed by China’s Internet giants such as Alibaba, Tencent and Baidu.

In late September, TRON released details about its partnership with a popular torrent client BitTorrent, following the earlier acquisition of the company. A collaboration between the two companies dubbed “Project Atlas” will reportedly enable the users of the BitTorrent client to receive rewards in TRON for seeding torrent files.

Earlier in August, Baidu has joined Tencent and Alibaba in enforcing new anti-crypto policies in line with China’s overall toughened stance on the industry. The firm has shut down at least two popular crypto-related forums, with a notice to their users stating that Baidu’s measures are compliant with the “relevant laws, regulations and policies.”

On Sept. 26, Baidu has released its Baidu Blockchain White Paper V1.0, aiming to create “the independent development of the ‘Super Chain’ network system.”

TRON is currently the eleventh largest cryptocurrency by market cap, according to CoinMarketCap data. On June 25, TRON celebrated its “Independence Day,” when it migrated off the Ethereum (ETH) blockchain to its own independent public blockchain.

At press time, TRON is trading at $0.023, up 2.79% on the day. The coin saw its all-time price high of $0.217 on Jan. 5, 2018, which was followed by a fall in value of almost 90% over the rest of the year – against the backdrop of an overall declining crypto market.

TRON one-year price chart. Source: CoinMarketCap

 

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China Should Consider Launching its Own Stablecoin, Central Bank Expert Says in Op-Ed

The Chinese government should consider launching its own yuan-backed stablecoin despite the current ban on cryptocurrencies, an op-ed in Chinese financial journal CN Finance reports Tuesday, Oct. 9.

An expert from the People’s Bank of China (PBoC), Li Liangsong, and professor of Fudan University Wang Huaqing wrote an article called “Analysis of Digital Stable Coins” for CN Finance — a bimonthly journal affiliated with the PBoC.

In the opinion piece, the authors provide a brief review of USD-backed coins, such as Tether, the Gemini dollar, and Paxos Standard. The researchers expect them to increase the role of dollar on a global stage and to suppress other fiats, with the yuan among them.

The authors suggested that China should analyze other companies’ experience and “double its efforts” to create a local stablecoin. However, other digital currencies have to stay prohibited in China, they stated.

Stablecoins have recently seen a boom with two USD-backed coins launching in the U.S. in September.

The Winklevoss twins, founders of crypto trading platform Gemini, acquired permission from New York regulators to release their own stablecoin, the Gemini dollar. Later, Circle — through a consortium that includes Bitmain — announced it is launching a USD-backed digital token dubbed the “USD Coin.”

Shortly after, the audit giant PricewaterhouseCoopers (PwC) partnered with decentralized lending platform Cred to offer their expertise in launching its USD-backed coin, especially in terms of transparency and “substantiation,”

The Chinese government first started its anti-crypto campaign in 2017 by closing all of the country’s cryptocurrency exchanges and banning Initial Coin Offerings (ICO). Following the move, the PBoC has repeatedly warned citizens about the risks of crypto trading.

Despite the crypto ban, the country has actively been exploring blockchain solutions. Earlier this autumn, the PBoC announced that its blockchain trading and finance platform is launching in Shenzhen. The ecosystem is also being tested in Guangdong, Hong Kong, and the Macau Bay Area and is being developed for cross-border trading. Later, the country’s official blockchain pilot zone was established in the Hainan province within a dedicated tech park.

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China: Man Gets 3.5 Years in Jail for Stealing Train Power to Mine Bitcoin, Local Media

A man in China has been been sentenced to three and a half years in jail for stealing power from a train station to fuel his Bitcoin (BTC) mining operations, local media outlet The Paper reports October 8.

According to court documents released today, the sentencing was served September 13 at the Datong Railway Transport Court in China’s northern Shanxi province. In addition to jail time, the individual, a local named Xu Xinghua, has reportedly been fined 100,000 yuan (around $14,500).

Xinghua is said to have stolen electricity from one of the factories at Kouquan Railway back in November and December 2017 to power his 50 Bitcoin miners and three electric fans around the clock. The document states that five of the mining machines were damaged during this period.

As of April 2018, Xinghua is said to have successfully mined 3.2 Bitcoin, earning 120,000 yuan (about $17,400) and running up an electricity bill of 104,000 yuan ($15,000).

In addition to imprisonment and a fine, the court has ordered Xinghua to cover the cost of the electricity charges and has confiscated his mining equipment, The Paper reports.

Charges of a similar nature are not unprecedented in China. In June, a man in China’s Anhui province was arrested for attempting to steal electricity to fund his reportedly “unprofitable” mining operations. The suspect was said to have stolen 150 megawatt (MW) of power to fuel two hundred computers that he used to mine both Bitcoin and Ethereum (ETH) – running a bill of over 6000 yuan ($930) daily.

With the country established as a crypto mining superpower due to its abundance of cheap energy and hardware, reports surfaced at the start of this year that Chinese authorities were poised to attempt to quash the industry.

A leaked memo from the People’s Bank of China (PBoC) to a top-level government internet finance regulator reportedly stated that Bitcoin miners should make an “orderly exit” from the country due to them sapping “huge amounts of resources and stok[ing] speculation of virtual currencies.”

The regulator is said to have subsequently ordered local authorities to wield all available means in their arsenal – including “measures linked to electricity price, land use, tax, and environmental protection” – to pressure miners to cease their operations.

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China's Nanjing Arbitration Commission Tests Blockchain Platform for Legal Disputes

The Nanjing Arbitration Committee is testing a new blockchain platform designed to store and process data for legal disputes. The organization officially announced this September 27.

China’s regional arbitration committees were established in 1995 with the passage of the Arbitration Law, and operate as independent non-profit organizations that offer services in arbitration, mediation, and other dispute resolution mechanisms as an alternative to litigation.

According to today’s announcement, the Nanjing Committee’s new platform:

“Makes extensive use of blockchain technology, and coexists with depository institutions, financial institutions, and arbitration institutions to deposit electronic data [and enable] real-time evidence preservation, electronic delivery, online trials and ruling.”

The Committee, based in the capital city of China’s eastern Jiangsu province, says it has “formulated a special network arbitration rule” within the system that will set a determinate time limit of thirty days for the resolution of online arbitration cases. This, the Committee notes, is shorter than existing online trial periods, and “significantly lower” than the standard for offline cases.

The new system is also presented as a means of reducing arbitration costs for all parties involved, with the new system overall expected to provide a more convenient, cost- and time-efficient  dispute resolution method for “the majority of Internet companies, especially in the financial field.”

As previously reported, on September 7 China’s Supreme Court ruled that evidence authenticated with blockchain technology is binding in legal disputes, as part of a series of comprehensive rules clarifying litigation procedures for internet courts across the country. The new ruling came into force immediately.

This January, a Hangzhou-based court dedicated to processing trials for internet-related disputes via an online “netcourt” web platform had handled its first case using legally valid blockchain-derived evidence.

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China's Central Bank Warns Investors of ICO, Crypto Risks

China’s central bank, the People’s Bank of China (PBoC), has today, September 18, issued a new public notice “reminding” investors of the risks associated with Initial Coin Offerings (ICOs) and crypto trading.

The notice, released from the bank’s headquarters in Shanghai, reiterates the severe line that has been adopted by the country’s Office for Special Remediation of Internet Financial Risks, which first introduced a blanket ban on ICOs in September 2017.

Today’s notice censures the “unauthorized” and “illegal” ICO financing model for posing a “serious disruption” to the “economic, financial and social order”:

“[ICOs are] suspected of illegally selling tokens, illegally issuing securities, illegal criminal activities, financial fraud, pyramid schemes and other illegal and criminal activities.”

The PBoC has today hailed the successes of the country’s stringent restrictions that have targeted ICOs and a broad spectrum of crypto-related activities to date, claiming that:

“[T]he global share of domestic virtual currency transactions has dropped from the initial 90% to less than 5%, effectively avoiding the virtual currency bubble caused by skyrocketing global virtual currency prices in the second half of last year in China’s financial market. The impact has been highly recognized by the community.”

Nonetheless, the bank recognizes that several challenges remain, notably the prevalence of offshore exchanges that are used by investors to circumvent the mainland ban.

The PBoC notes that the Office for Special Remediation of Internet Financial Risks has now adopted a series of targeted measures, including blocking up to 124 IP address suspected of providing a gateway to domestic crypto traders.  

It further points to redoubled efforts to “clean-up” payment channels and strengthen monitoring and inspection mechanisms, noting that around 3,000 accounts have already been closed as a result of increased oversight. Lastly the notice outlines recent measures undertaken to counter the circulation of crypto “hype” materials.

As previously reported, on August 25 the PBoC had already issued a fresh risk alert against “illegal” ICOs, warning that blockchain and the idea of “financial innovation” are being used to lure investors as a “gimmick” that conceals essentially fraudulent Ponzi schemes.

This summer has seen an onslaught of toughened anti-crypto measures from Beijing, which have included a ban on commercial venues from hosting crypto-related events in certain districts.

Alongside ‘offline’ measures, China’s tech titans – Chinese ‘Google’ Baidu, Alipay’s Alibaba and WeChat-developer Tencent – have all tightened their monitoring and acted to ban accounts suspected of engaging in or propagating crypto and even blockchain related activities.

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Despite Ban, China Keeps Trading Cryptocurrency Thanks to Tether and VPNs, Says Report

Chinese traders are using virtual private networks (VPNs) as a major tool to circumvent the ongoing government crackdown on cryptocurrency trading, local media outlet South China Morning Post (SCMP) reported September 8.

According to SCMP, referencing reports from Beijing-affiliated Shanghai Securities Times, traders have begun leveraging stablecoin Tether (USDT) as a means of entering and exiting cryptocurrency markets.

Combined with a VPN, two traders can use an exchange platform notionally registered outside China as an intermediary to swap cryptocurrency for fiat currency and vice versa.

“[T]wo individuals who have both completed a ‘know-your-customer’ procedure with an exchange would swap ‘fiat’ currencies […] to tether,” the publication reports:

“The exchange plays the role of an overseer of such trades, and stands ready to adjudicate in cases of failed trades, or transactions that are not honoured.”

A Beijing district stepped up the general ban on cryptocurrency exchanges last month, seeking on a local level to ban over 120 websites of platforms attempting to serve would-be domestic consumers.

This, Hong Kong and Taiwan exchange TideBit CEO Terence Tsang told SCMP, is “targeted at a batch of smaller exchanges that had claimed to be foreign entities, but are in fact operating in China claiming they have outsourced their operations to a Chinese company.”

At the same time, the Post notes, there is currently no successful scheme in operation to block VPNs, allowing smarter traders to maintain access to forbidden online resources.

Chinese traders have pursued various means of crypto trading since authorities first began cracking down on the practice in September 2017, Cointelegraph has reported.

These have taken the form of using Hong Kong as a home from home for platforms themselves, while traders have resorted to peer-to-peer options, something the Chinese government has now also sought to shut down.

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China’s Supreme Court Rules That Blockchain Can Legally Authenticate Evidence

China’s Supreme Court has ruled that evidence authenticated with blockchain technology is binding in legal disputes, in an official announcement released today, September 7.

The new ruling comes as part of a series of more comprehensive rules that clarify litigation procedures for internet courts across China, and comes into force immediately.

According to today’s announcement, the Supreme Court declares that:

“Internet courts shall recognize digital data that are submitted as evidence if relevant parties collected and stored these data via blockchain with digital signatures, reliable timestamps and hash value verification or via a digital deposition platform, and can prove the authenticity of such technology used.”

In what had been dubbed a “world first,” in August 2017 the Chinese city of Hangzhou in Zhejiang Province opened a court dedicated to processing trials for internet-related disputes on an online ‘netcourt’ web platform. The court handled its first case with legally valid blockchain-derived evidence this January.

As today’s announcement clarifies, China’s Internet courts conduct cases online, with “litigation acceptance, delivery, mediation, evidence exchange, pre-trial preparation, court trial, and sentencing” all settled on the web. China currently has two further internet courts slated for the country’s capital, Beijing, as well as for the southern city of Guangzhou.

As a Cointelegraph expert take has outlined, blockchain-related innovations are not only being legally recognized as capable of authenticating evidence, but even —  as in the case of smart contracts — considered to have the potential of becoming a major disruptive force to the legal sphere. The immutable, time-stamped data generated on a blockchain provides an auditable trail with which smart contracts interact according to binding, pre-specified rules.

Earlier this summer, the U.K. Law Commission announced it would review legal frameworks to ensure that British courts remain a “competitive” choice for businesses that use smart contracts, and would aim to offer the necessary flexibility and clarity to keep pace with technological developments.

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Industrial and Commercial Bank of China To Embrace Blockchain Technology

The Chairman of the Industrial and Commercial Bank of China (ICBC) has said that the bank will focus on blockchain technology development, BiaNews reported September 1.

Founded in 1984, the ICBC is reportedly the largest bank in China with over 5,000 corporate and 530 million personal customers. In 2017, the bank focused on the construction of “intelligent banking” and “accelerated deployment in the field of financial technologies.”

The ICBC Chairman Yi Huiman reportedly said that the financial institution will focus on innovations in cloud computing, big data, artificial intelligence (AI), blockchain, and Internet of Things (IoT).

According to BiaNews, the bank will work on finding use cases for “smart banking,” which reportedly helps to improve service in the financial ecosystem and secure financial data that is shared with third parties.

While China is known for its negative stance towards digital currencies, tightening regulations on crypto since September 2017, the country has embraced the benefits of blockchain, and is actively working to develop and apply the technology in various industries.

Last week, the Beichuan Qiang Autonomous County of Sichuan Province and Beijing Sinfotek Group jointly established a new blockchain company, for “forestry economic development and industrial poverty alleviation.”

In the beginning of August, the Communist Party of China (CPC) released a primer on blockchain technology and its possible applications. By introducing the book, the CPC reportedly aims to assist government authorities in understanding the concept of distributed ledger technology (DLT) and consider the benefits and challenges of adopting blockchain on a national scale.

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Hodler’s Digest: SEC May Make U-Turn on BTC ETF Rejections, While India and China Crack Down on Crypto Scammers

Coming every Sunday, the Hodler’s Digest will help you to track every single important news story that happened this week. The best (and worst) quotes, adoption and regulation highlights, leading coins, predictions, and much more — a week on Cointelegraph in one link.

 

Top Stories This Week

SEC Rejects—Then Will Review—9 Bitcoin ETF Application

The U.S. Securities and Exchange Commission (SEC) has rejected a total of nine applications to list and trade various Bitcoin (BTC) exchange-traded funds (ETFs) from ProShares, Direxion, and GraniteShares. However, the SEC then noted that it will be reviewing its decision, which was based on the claim that the products did not comply with the requirements by the “Exchange Act Section 6(b)(5), in particular the requirement that a national securities exchange’s rules be designed to prevent fraudulent and manipulative acts and practices.”

Clean Energy Researcher Claims Bitcoin Energy Consumption Isn’t That Bad

A clean energy expert has written an article explaining why she thinks that Bitcoin’s high energy consumption is not as bad as it is often made out to be. In her article, Katrina Kelly, strategy manager at the University of Pittsburgh’s Center for Energy, writes that we need to shift the debate around Bitcoin mining away from energy-intensivity focus instead on where that energy is produced and how it is generated. Kelly notes that although BTC mining consumed 30 terawatt hours in 2017, banking continues to consume an estimated 100 terawatts of power each year.

Chinese Police Arrest Hackers for Allegedly Stealing $87.3 Million in Crypto

Police in China have arrested three “highly experienced” hackers suspected of stealing up to 600 million yuan (around $87.3 million) in crypto. At the end of March, an individual with the surname Zhang filed a complaint with local police in the northwestern city of Xi’an, claiming that his computer had been hacked and BTC, ETH, and other crypto holdings worth up to $14.5 million stolen. The police hypothesize that the suspects had used a remote attack to transfer funds from Zhang’s computer without leaving a trace, in what is reportedly considered to be a “rare case.”

Indian Man Arrested for Allegedly Promoting Bitconnect Investment Scam

Indian police have arrested a man who was allegedly involved in promoting the Bitconnect investment scam. The suspect is reportedly the India head of Bitconnect, the high-yield investment program that stopped operating in January 2018 after coming under scrutiny for appearing to be a fraudulent Ponzi scheme. According to a recently filed Freedom of Information Report (FIR), this is the third case under investigation in India associated with Bitconnect. Local promoters of Bitconnect are alleged to have fled with 1.14 crore (11.4 million) rupees worth of Bitcoin from one investor.

Analysis Shows Bitcoin Cash Use in Commerce Has Decreased

A review of payments received by the world’s 17 largest crypto exchanges has shown that Bitcoin Cash (BCH) use in commerce has gone down, according to data from blockchain analytics firm Chainanalysis. They found that BCH payments dropped to $3.7 million in May from $10.5 million in March, while the volume of Bitcoin (BTC) payments was estimated $60 million in May, down from a high of $412 million in September. Chainalysis also noted that between 10,000 and 100,000 BCH are held by just two wallets.