Bitcoin mining is very popular in China. Why Investors Should Worry
Critics of Bitcoin’s almost ubiquitous digital currency often focus on its environmental impact. After Tesla recently announced that it had bought about $ 1.5 billion worth of bitcoin, which led to a sharp rise in the value of the cryptocurrency, sustainability investors denounced the level of carbon dioxide emissions generated by bitcoin mining. Of course, mining the energy-intensive process by which computers solve complex algorithmic problems to validate blockchain transactions for which they are rewarded in digital currency is an undeniable environmental violator.
But there is another worrying aspect of Bitcoin that should make investors think twice before incorporating it into an ethical investment strategy. A large amount of new bitcoin comes from Xinjiang, a region in northwestern China where over a million Muslim Uyghurs and other minorities have been imprisoned in concentration camps. According to the Cambridge Bitcoin Electricity Consumption Index, as of April 2020, China accounted for 65% of all bitcoin mining. And of this, 36% is in Xinjiang, the largest regional component. Why? Cheap coal is cheap energy for Bitcoin mining machines.
Xinjiang is rich in coal, and the region’s relative remoteness means it is much cheaper to use the resource locally than to move it to other parts of China. The problem is not that the Chinese government is using forced labor in Xinjiang’s coal mines reports are inconclusive. Rather, due to the atrocities taking place in Xinjiang, any product manufactured there carries a high ethical and regulatory risk.
In what Beijing calls vocational education and training centers, guards try to de-radicalize Uyghurs for crimes such as wearing long dresses, refusing to eat pork or alcohol, or praying. While the complexity of the communication in the region means little concrete evidence, camp survivors described systemic torture, forced sterilization and rape. (Beijing denies committing atrocities.) In January, just before leaving office, Secretary of State Mike Pompeo announced that Beijing was committing genocide in the region. His successor Anthony Blinken agrees.
In summary, roughly 20% of new bitcoins are mined in Xinjiang, home to some of the world’s most egregious human rights violations.
Bitcoin’s connection to Xinjiang is hardly discussed today. But that could change. For government funds considering investing in a knowingly unstable asset, there are two more risks to consider. First, because of American public concern about human rights violations in Xinjiang, the ownership of assets tied to the region is at risk of a public relations disaster.
Activists have already criticized Olympics sponsors for participating in the Olympics on Genocide the 2022 Winter Games in Beijing. Years of campaigns to disconnect Xinjiang from the global supply chain are already under way. In July, more than 190 organizations, including the AFL-CIO, called on clothing brands to stop shipping from Xinjiang over the next 12 months. (In 2020, approximately 20% of the world’s cotton came from Xinjiang.) It’s not hard to imagine that Bitcoin will be another frontier in their campaigns.
Investors must be prepared for regulatory action. Bitcoin’s relationship with Xinjiang provides an opportunity for those in the US government who may want to continue monitoring or restrict transactions. Analysts expect the Biden administration to pay close attention to Bitcoin. In mid-February, Treasury Secretary Janet Yellen criticized the misuse of cryptocurrencies for money laundering or terrorist financing.
At the same time, Bitcoin’s connection to Xinjiang could bring it to the attention of various departments of the ministries of commerce, government and defense, which seek to reduce the US dependence on physical and digital Chinese goods. If this trend intensifies, the Treasury Department could impose sanctions on bitcoin mining companies that have large operations in Xinjiang, or issue recommendations that it examines Bitcoin’s ties to the region, signaling to global financial institutions another risk of holding cryptocurrencies.