Chinese Crackdown on Crypto May Lead to Divergence between On-Exchange and On-Chain TX Volume, thus Lowering Network Congestion, Fees: Report

As widely reported, China has expanded its ongoing cryptocurrency crackdown. This reportedly includes increasing enforcement against illegal digital currency mining, as well as preventing financial transactions involving crypto-assets.

The Chinese central bank also confirmed that any trading, order matching, token issuance and derivatives on cryptocurrencies are illegal, “including services offered by overseas entities made available within mainland China,” the BitOoda team writes in their latest market report, published on September 24, 2021. The bank “explicitly excluded the digital yuan (eCNY) from this list, while naming Bitcoin and Ethereum as examples of banned tokens,” the report added.

The report from BitOoda also noted:

“This action is consistent with our assessment that China’s motivations are enforcement of capital controls, and control more generally. The ability to convert RMB into Bitcoin ASICs, and thus into BTC and other crypto or fiat currencies, is the threat Beijing is seeking to mitigate.”

The report pointed out that these actions have “broader implications for the global Bitcoin network, particularly miners.” The report also mentioned that a significant number of Chinese miners “were either secretly plugging rigs back in, or hoping to find a way to do so.”

The report added that at the same time, BitOoda believes that rig makers like Bitmain and MicroBT were “moving more rig assembly to their existing plants in Malaysia and Thailand, to bypass physical production in China.” But much of their engineering and design work is “still based in China,” the report reveals.

The BitOoda team has highlighted a few scenarios:

  • Rig pricing: In the near term, “some of the rigs held in China in the hope of plugging them back in could make their way out and into the global secondary market.” Future deliveries to Chinese nationals “who were seeking receipt at sites outside China might also face cancellations and/or inability to pay the remaining balance on those rigs.” This could “result in improved rig availability and lower prices for miners in the West.”
  • Rig Production: A crackdown on the rig manufacturers “appears to us as likely, although far from certain.” While production — and most of the supply chain — “can bypass China, the major rig makers are domiciled in China.”

Senior leadership (which “may or may not be able to relocate out”) and most of the engineering talent (who are “much less likely to be able to relocate”) are Chinese nationals, based in China, the report noted while adding that a manufacturer crackdown “could impact rig availability if production is disrupted, and slow the pace of innovation and technological advancement.” This could result in “lower availability and higher rig prices, but may take some time to play out.”

The BitOoda researchers added:

“We see a compelling window of opportunity for emerging, non-Chinese ASIC designs. We asses this crackdown could slow the growth of global Hashrate: in the near term, by driving Chinese rigs offline and slowing the restart of existing rigs, and in the longer term as well, by impacting the availability and pace of technological innovation in the rig space.”

The BitOoda team added that ultimately, they expect non-Chinese designs “to step in and take advantage of the void, should the Chinese manufacturers get shut down.”

The report added that a sudden or abrupt shut down of Chinese rig makers could be “extremely disruptive for the global mining industry, given all the deposits paid to them for future deliveries that may be at risk.”

The report also noted that the BitOoda analysts “view this as a continuation of the downward pressure on transaction fees.” They added that they believe “a large percentage of crypto transactions in Asia are on-chain, whether as a direct peer to peer transfer, or an on-exchange transaction followed by a transfer to a personal wallet.”

The report further revealed:

“This is in contrast with the West / developed markets, where we assess most transactions take place on-exchange, with the tokens held ‘in street name’. The broadening Chinese crackdown on crypto financial services could therefore result in a growing divergence between on-exchange and on-chain transaction volume, thus lowering network congestion and the fees needed to process transactions.”

They key takeaways shared by the BitOoda analysts are as follows:

  • Rig pricing is “likely going to be volatile, until the market resolves between the different possible scenarios”;
  • Global Hashrate “could see slowing growth”;
  • Transaction fees “could head lower.”
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