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Crypto Cold War: Cryptocurrency, State Sovereignty and the Changing Dynamics of the Global Political Economy

The global cryptocurrency market size has reached $2.1B in 2021 and is expected to reach approximately $5B by 2026 with a CAGR of 19.04 percent. As the market has been growing rapidly, the mining sector, which forms the supply side of the market, has seen significant disruptions in the past year due to certain country bans, particularly China. An opposition, which will have long-lasting effects, has begun against cryptocurrencies which limit the dominance of the state on money supply and monetary policy.

As the demand for Bitcoin and other cryptocurrencies increased, the market has become more complex and mining operations has turned into a giant industry. With the advancement of blockchain technology, mining has become a process performed by specialized machines in huge server pools which consume massive amounts of electricity. As the profitability of mining operations is directly dependent on energy costs, the clustering took place in countries with low energy prices. The leading country in this regard was China. The cost of electricity in China is lower than in many other nations, and more importantly, electricity is either supplied by hydroelectric facilities or subsidized by the government in industrial areas. For cryptocurrency mining, surplus or residual electricity was often used. Due to its low energy costs, China was home to the top five pool companies in Bitcoin production until last year, holding 65 percent of the global hash power (the total processing power of the Bitcoin network worldwide). China was followed by the U.S. with 7.2 percent, Russia with 6.9 percent and Kazakhstan with 6.1 percent.

However, China has banned all kinds of transactions, including mining, with the crypto money bans that started in 2020 and became the most severe in 2021. Last September, China's Central Bank announced that all cryptocurrency and token transactions were banned. After this announcement, there was a sharp decline in the crypto money markets. China has actually banned cryptocurrency trading since 2019, but investors were still able to continue their transactions through foreign exchanges. Finally, China's war on cryptocurrencies took on a new dimension with the ban on cryptocurrency mining in September 2021. China has driven more than half of the world's Bitcoin miners from their homes, causing mining operations to migrate to different countries. Before the bans, 75 percent of the world's Bitcoin energy consumption took place in China. This figure had dropped to 46 percent in May 2021, and the sharp decline continued after the bans.

Following these developments, mining companies expelled from China began looking for a new home. . According to the report published by the Cambridge Center for Alternative Finance (CCAF), the new hosts of these companies were expected to be North America, Kazakhstan, Russia and Canada. There is, however, the possibility that some of these states may lead to unexpected developments for the cryptocurrency world.

The first of these countries was Kazakhstan. Early January, the Bitcoin price crashed hard as Kazakhstan, the second-largest crypto mining nation in the world, lost Internet access dramatically due to the riots. Due to both the Kazakhstan crisis and FED's statements regarding tightening its monetary policy, investors went to sell their cryptocurrencies, which resulted in a sharp decline in the market. By "unplugging" the country's internet, the worldwide Bitcoin hash rate has fallen by 13 percent, resulting in a severe drop in cumulative transaction volume. In the aftermath of the Chinese bans, mining companies that moved their operations to Kazakhstan, where they found a stable political environment and energy supply, said they would move some of their operations to North America or Russia, out of concern for Kazakhstan's future.

The second shocking news came from Russia, which is the third-largest mining country in the world. In their statement on January 20, 2022, the Central Bank of Russia proposed to ban the use of cryptocurrencies and crypto mining within Russia's borders due to threats to financial stability, citizens' well-being, and monetary policy sovereignty. After the high-volume transactions on January 21, serious losses were experienced in all cryptocurrencies. The reflection of these decreases corresponded to a decrease of approximately 9 percent throughout the market. On the other hand, in the same week, an official from the Ministry of Finance of Russia contradicted the Central Bank, stating that they do not support the banning of cryptocurrencies. Last week, President Putin made a statement that the Central Bank of Russia sees various dangers in cryptocurrencies, but they are working on regulations instead of banning the trade or mining activities. Putin also noted that the country has competitive advantages in cryptocurrency mining due to its electricity surplus and well-trained personnel. In line with these explanations, it is seen that Russia's decision will be to avoid any prohibition in order not to hinder the development and use of these technologies in the Russian market.

Currently, the number of countries in the world that impose different levels of bans on cryptocurrencies is more than 50. Some countries only impose restrictions on the use of cryptocurrencies as a means of payment, while others completely ban all transactions and mining. The most cited reason for these bans is the use of cryptocurrencies in money laundering and financing of cybercrime and terrorism. Another reason is that mining activities contribute to the energy crisis in some countries and cause them to fail to fulfill their carbon-neutral commitments. China, for example, has suggested that crypto mining is a stumbling block on its goal of being carbon neutral by 2060[1]. On the other hand, the prohibition of trading and use of cryptocurrencies can be read as a challenge to crypto markets, which takes away the monopoly of printing and minting money, one of the greatest powers that states have, and limits the sovereignty of monetary policy. The principal reason for the bans is that the nation-state wants to preserve its most important power.

In America, which has become the new mining center of the world, different voices are rising. President Biden recently stated that both the cryptocurrency and NFT markets must be tightly regulated to prevent crypto assets from becoming a threat. The U.S. has been imposing both income and capital gains taxes on cryptocurrency earnings for some time now. On the other hand, approximately 46 million Americans invest in these markets. America is trying to strike a balance between protecting investors and preventing criminal activities while financing technology and investing in infrastructure for market growth.

The systemic change caused by blockchain technologies and crypto-asset markets is irreversible. I argue that these alternative markets are now a fact of our lives and they are capable of quickly producing alternative solutions in case of any obstruction effort. As a matter of fact, 50 percent of the global hash power was lost after China's bans, but in the next five months, the lost hash power was replaced by 113 percent. The miners who fled from China to Kazakhstan are now shifting their operations to North America and the mining companies are becoming much more resilient than ever with the experience they gain in recovering their operations.

It is not surprising that countries have taken the path of regulating their crypto markets to protect investors, as well as their level of control over the markets. However, the complete ban on the production and trading of crypto assets makes it very unlikely that these technologies can be developed and implemented in prohibitive countries. As a result, the countries that will benefit in the long run will not be those that impose bans, but those that support the advancement of these technologies by developing regulations that are consensus-driven rather than oppressive.

[1] Please remember that China vehemently opposed the clause at COP26 to stop energy production from fossil fuels

Dicle Yurdakul
Dicle Yurdakul

Dicle Yurdakul is an Associate Professor of Marketing, the founder and managing partner of WE.Q. Consulting. She has worked as a consultant to UNDP and coordinated projects on sustainable development and technology, carried out by UNDP Istanbul International Center for Private Sector in Development. Her areas of interest include deep-tech, blockchain technologies and crypto assets.

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