Talking about the rise and rise of Bitcoin in China to the WEF, Eric Mu a local entrepreneur and Bitcoin miner listed the factors contributing to its popularity there: “…a large internet-savvy population, cheap and abundant hydropower, mature electrical manufacturing, capital control and a depreciating currency.”
In fact, Mu could have been describing any one of the BRIC nations, who met in China this week for their annual summit. Despite its wild price fluctuations and criminality factor, the digital currency’s benefits may prove too good for those now maturing economies in Xiamen to ignore.
But right now, the signs are not particularly promising. Earlier this week the price of Bitcoin dropped by 20 per cent (to a measly $4,000) on the back of news that the Chinese government was banning Initial Coin Offerings. These ICO’s, whereby businesses raise capital by issuing digital coins to investors, have become increasingly popular over the past year. But their attraction for scammers and lack of regulation was more than the Chinese government could bear.
The UK’s Financial Conduct Authority has now announced that it too will be looking into the unregulated ICO market, as well as the Hong Kong regulator. But rather than sounding the death knell of cryptocurrencies, this sudden interest could augur a move towards more government-backed digital currencies.
Back in Xiamen the leaders of Brazil, Russia, India, China and South Africa jointly announced a vision “for a more just, equitable, fair, democratic and representative international political and economic order”. The new economies are looking to shake up the old; potentially through new supranational institutions including the Asian Infrastructure Investment Bank and New Development Bank. But they are yet to exploit their potential for digital currency development.
Despite the authority’s hostility to it, China accounts for 20 per cent of all global Bitcoin mining – the process of approving transactions and creating new coins. At its simplest, the program issues an ever dwindling supply of digital coins to those who update the ledgers where Bitcoin transactions are logged. As more Bitcoin users have entered into the market over the last decade and the competition between miners has intensified, solving these transactions has become increasingly difficult.
Mining the currency now requires large networks of dedicated computers with specialist software. These networks are required to run continuously using up vast amounts of energy in the process. Owing to the abundance of cheap coal, China accounts for much of this activity; in Inner Mongolian, where many of the currency mining operations are based, power stations are operating at excess capacity.
But as other countries become interested, this dominance is unlikely to last for much longer. Russia, which currently only accounts for 2 per cent of the world’s Bitcoin mining, is now presenting a big challenge to the established order – as well as offering a potential new direction for government-backed cryptocurrencies.
Like China, the Russian government had previously been intensely suspicious of digital currencies. Vladimir Putin described them as a “sickness” and, in 2014 looked to ban the use of Bitcoin and other cryptocurrencies outright.
But also like China, Russia is very well-placed to take advantage of the currency. It has a hugely savvy internet population with several Russian businesses leading the way in digital mining software. It currently generates excess energy capacity of 20 gigawatts (the equivalent of 10,000 wind turbines – or enough energy to propel Marty McFly back to the future 16.5 times). The rouble has been on a downward trajectory since the incursion into Ukraine, and the country and many of its leading citizens are subject to sanctions.
It is not entirely surprising, therefore, that Vladimir Putin has changed his tune. Far from banning Bitcoin, in a meeting with rival digital currency Ethereum, he recently described it as a “promising tool to assist Russia in diversifying its economy beyond oil and gas”.
Russia’s first deputy prime minister, Igor Shuvalov, has been charged with developing Russia’s cryptocurrency infrastructure and Irkutsk in Siberia is set to become the mining hub. Not only is this near the raw supplies of Russia’s energy markets, but the freezing weather and lack of dust give it an immediate advantage over Inner Mongolia, where the conditions make computers seize up.
And now, those much-derided ICO’s have become Russian government policy. Shuvalov is planning a $100 million offering to help finance a Russian state-backed digital mining operation. The money will go into developing graphics cards and other software to help give Russia a competitive edge in digital currencies.
While Russia’s wealthy elite potentially has much to gain in evading capital controls, others may soon find that digital currencies have their own particular advantages. China faces its own financing problems with foreign investors wary of having their money trapped inside the country. Brazil has traditionally moved to whichever natural resource is the most profitable – from sugar to rubber to petrol – why not digital? India, a world leader in software technology, also holds much potential for mining.
And as its neighbour Russia looks to develop its digital currency infrastructure, how long will China be able to resist doing the same thing? It would potentially be a neat irony that in the wilds of Central Asia, Bitcoin would have moved from financing the Silk Road of the dark-web, to running the real thing.