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The Potential and Pitfalls of Cryptocurrency

26 Oct 2021
By Samantha Wong

With China banning all trading and mining of cryptocurrency, crypto miners will be seeking to move operations to other locations. States will have to reckon with both the benefits and risks this opportunity presents. 

On 24 September 2021, China declared a blanket ban on the trading and mining of cryptocurrency. This comprehensive crackdown follows years of Chinese attempts to constrain crypto-activity. This has affected various international crypto services, which are now scrambling to cut ties with mainland Chinese clients.  

Cryptocurrency is a digital currency that is usually distributed across a decentralised network based on blockchain technology (databases chained together) and secured by encryption techniques. Virtual coins are minted through crypto “mining.” That is, digital coins are produced by solving complex mathematical problems using sophisticated computers. The first and most mainstream of these coins is Bitcoin, which was released in 2009.  

Miners are financially rewarded for digitally minting and auditing coins. Auditing requires miners to verify the legitimacy of transactions as to prevent users from double spending digital tokens. Virtually minting coins is currently one of the most profitable major industries on earth.  In September 2021, one Bitcoin was valued at around $45,000. Miners could be rewarded with $281,250 for the completion of a block, which records and provides verification for a group of Bitcoin transactions. 

China’s aversion to cryptocurrency is rooted in its fear of “delegating control and power.” The decentralised crypto sector poses a threat to the highly regulated Chinese economy, with the government exercising tight control over the inflow and outflow of capital. Though China’s actions may appear sound, given the high political risk of allowing crypto trading and mining, they are in fact sacrificing significant economic benefits.  

In the first half of this year alone, $150 billion worth of cryptocurrency was going into Chinese-based digital wallets, and around 65 to 75 percent of Bitcoin mining was taking place in China. Now, because China’s ban has driven crypto miners and entrepreneurs out of the country, the $6 billion in annual mining revenue that China would have received will flow to neighbouring countries like Kazakhstan and Russia, and even as far as the US. Meanwhile, Chinese nationals have been cut off from signing up to crypto exchanges and existing users’ accounts are set to be retired by the end of the year. The ban on trading and mining crypto does not prevent Chinese investors from holding crypto.

As crypto miners disperse across the continent, the benefits and challenges cryptocurrency poses will be of ever increasing importance to states. States will have to decide whether they want to be open to the significant economic opportunities that crypto offers or institute a blanket ban like China did. At the same time, states that embrace the crypto industry must learn how to live with and manage security risks involved in allowing trading and mining to operate largely unregulated.  

Countries stand to benefit economically from allowing cryptocurrency trading and mining. For example, a rise in crypto technology and innovation has the potential to reinvigorate economies severely impacted by the COVID-19 pandemic. This extremely profitable enterprise can generate employment in rural areas, where mining operations usually take place. Further, the industry may incentivise states to improve their energy and technological infrastructure to accommodate crypto operations. This would have net benefits for other industries and the country on the whole. 

Crypto’s decentralised nature allows for greater access to financial services to people who have low social trust in third parties and institutions in their country. It allows for low-cost, international money transfers, like remittance payments. Because of these low rates, crypto promotes financial inclusion. This is especially beneficial in developing countries, where citizens often struggle with limited access to financial services, low levels of social trust due to high social inequality, and institutional corruption.  

While benefits of digital currency can be tremendous, just like China, governments around the world are understandably sceptical about the complex problems crypto trading and mining present. As crypto miners step up operations across the Asia-Pacific region and beyond, states will need to reckon with the significant environmental impact of enabling these operations. The amount of energy consumption required for crypto mining is enormous – the global Bitcoin network consumes around 80 terawatt-hours of electricity per year. To put this in perspective, more energy is necessary to mine Bitcoin than is consumed by the nation of Singapore.  

To support this energy-hungry industry and keep energy costs low, miners rely on the burning of fossil fuels, a process which releases greenhouse gasses into the atmosphere, contributing to climate change. Kazakhstan is an example of a country with cheap electricity prices, where 86 per cent of its energy comes from fossil fuels. While prices per kilowatt-hour (kWh) in larger countries like the US, China, and Russia average around nine to eleven cents per kWh, Kazakhstan averages around five cents per kWh. The availability of cheap, non-renewable energy in countries like Kazakhstan is attractive to crypto miners at great cost to the planet.   

Fortunately, current energy price trends project that this unsustainable process may be rectified in the future. Miners will naturally gravitate towards countries with the cheapest electricity costs, and favourable environmental conditions are increasingly a deciding factor. Over the past decade, the price of clean energy has dropped considerably and continues to do so. A 2020 report showed that between 2009 and 2019, the price of solar power had dropped by 89 percent and wind electricity by 70 percent. It is estimated that 50 percent of Bitcoin mining in the US is already driven by renewable energy. On top of this, miners are also looking to move to countries with cooler climates because computers tend to generate a lot of heat. One such ideal country would be Iceland, as it has a cold climate and an abundance of affordable clean energy generated by hydroelectric and geothermal energy plants. If clean energy continues to trend down, and governments push for greater clean energy production, the social benefits of cryptocurrency would no longer come at a cost to the environment. 

The other primary issue governments need to be wary of is the possibility of criminals using crypto to launder money and finance terrorist operations. As a decentralised system that allows for anonymity, crypto enables criminals to engage in international money laundering largely undetected. It also allows terrorists to conduct financial activities such as fundraising and receiving remittances without law-enforcement agencies curtailing terrorist fundraising. For example, Indonesian IS fighter, Bahrun Naim, professed to using Bitcoin as a fund-moving method , and Indonesia’s Financial Intelligence Unit found that he used PayPal to transfer funds which he had sourced from Bitcoin. This money would eventually fund a suicide attack in 2016 at a police headquarters in Java, Indonesia. Such events could become more common as cryptocurrency proliferates. In order to avoid widespread criminal activity, states need to introduce appropriate regulations to govern the use of cryptocurrency, such as assessing customer due diligence for transactions over US$1000.  

From environmental degradation to financial fraud and the financing of terrorism, the pressure on governments is mounting to introduce legislation to regulate crypto and protect their citizens. It is clear, however, that a blanket ban is not the way to go considering the benefits states stand to gain and the economic and social opportunities available to citizens. Cryptocurrency isn’t going anywhere anytime soon. Somehow, states must strike a balance between fostering innovation through crypto mining and protecting their citizens and the environment by considering more sustainable regulatory solutions.  

Samantha Wong is a third-year international security student at the Australian National University. She is interested in peace and conflict studies, gendered security issues, and diplomacy. Samantha is currently an intern at the AIIA National Office.

This article is published under a Creative Commons Licence and may be republished with attribution.