By Taras Kulyk, Senior Vice President of Blockchain Business Development at Core Scientific
There’s no debate that China has historically been the clear leader in the digital asset mining industry, capitalizing on its intrinsic strengths of inexpensive electricity, readily available labor and mass manufacturing capabilities, to dominate global hash rate generation. While as of April 2020, China still generated 65% of the world’s hash rate, a bitcoin mining map produced by the University of Cambridge has recently indicated that global diversification of hashrate has been rapidly increasing as other regions like North America, Eastern Europe and the Middle East vie for a coveted share of the pie.
It must be noted that the countries competing to become leaders in the digital mining space vary greatly in what they offer to digital mining operators. For these operators to truly thrive in the digital asset mining industry, countries need to have stable regulatory guidelines surrounding digital assets, specifically crypto mining, and access to globally competitive energy prices, typically from fixed renewable sources not reliant on highly volatile global commodity markets.
Regulatory State of Play
The regulations around digital mining in international jurisdictions have historically been capricious, creating uncertainty for digital miners and materially increasing the cost of capital for large scale investments, given the risk profiles associated with the uncertainty. However, for various countries to become leading jurisdictions in the digital mining industry, being strategically located in a geopolitically and regulatory stable region is of utmost importance as it heavily influences a digital miner’s access to renewable electricity sources. Below, we review key regions who are in the race for global hash rate and recent development in each territory.
China
China has been leading digital mining for years and this is largely attributed to the ease of access to hardware, inexpensive power during rainy seasons, and low labor costs. Recently, however, the industry was blighted by a group of illegal bitcoin miners stealing millions of dollars worth of power, which led to a sweeping regulatory clamp down on digital mining. It is evident that the geopolitical environment has become increasingly unpredictable, and investors and mining operators are now looking elsewhere in earnest. More recently, there was a flood in Sichuan which caused the country’s miners to lose 20 percent of hashrate power almost overnight due to the incredible amount of destruction of built-up infrastructure, thousands of mining units and facilities. The combination of unpredictable weather conditions and changes in the geopolitical landscape has paved the way for new competitors, particularly in North America, Russia, and Kazakhstan.
Eastern Europe
While Eastern Europe is not commonly regarded as a major digital mining hub, it possesses significant potential in the form of numerous derelict industrial sites with heavy electricity infrastructure that could be repurposed for such usage. However, the main hindering factors for companies considering this region are limited access to capital, political instability as well as high power costs. Furthermore, while the technical sophistication in Eastern Europe continues to grow, it is still very much lagging from a fleet management aspect. That being said, Eastern Europe continues to take steps forward with technical advancements happening due to localized development of engineering and developer talent. This has been accompanied with increased government support, and more specifically, with the Ukrainian government becoming the latest country to change its stance on bitcoin mining by announcing that mining would not require government supervision and intervention.
North America
North America currently possesses a variety of factors that has catapulted the region to the forefront of growth in the digital mining space. Predictable and relatively inexpensive renewable sourced electricity are one of the significant incentives for digital mining companies to operate in North America, as an overbuilt power grid and decline in industrial sites from sunset industries has freed up excess supply of which mining companies can take advantage of. With the recent collapse in energy pricing, unique project opportunities for larger scale miners have been created in lower cost power areas within the United States and Canada. It is also relatively easier to obtain financing and labor for these projects as there is ease of access to both sophisticated capital as well as top tier technical talent in the region.
Regulations have continued to evolve in a favorable manner as cryptocurrency becomes a more accepted alternative asset class. In Canada, Quebec’s energy regulator, Régie de l’énergie, recently allocated an additional 300 MW of energy to power the mining of digital assets, actively acknowledging that the country is embracing bitcoin mining. Similarly, in the United States, the Office of the Comptroller of the Currency recently introduced new regulation that digital assets are a form of financial instrument and clarifies national banks’ authority to provide cryptocurrency custody services for customers, further reinforcing that cryptocurrency and digital mining have entered mainstream financial markets.
Having these safeguards in place reinforces the stable regulatory environment that North America provides for land ownership and digital asset mining, which is vital for the region to maintain its position as a highly secure region for larger scale and more sophisticated investors in the space. This scale will allow the region to not be undermined by ultra low-cost leaders, where investors have to price in the embedded regulatory and operational risk involved.
Middle East
The Middle East has not been a major player in digital mining in large part due to environmental factors with the high temperatures being less than conducive for mining operations. However, their role in the digital mining industry is primarily driven by investors in the region who are seeking to diversify their portfolio and as such, play an important role as capital providers in the space.
The New Era
It is evident that the growth potential of the digital mining sector has attracted fierce competition from regions around the world. In evaluating options for where to build their mining operations, it is becoming increasingly evident that companies prize regulatory stability as well as receptiveness to digital assets. Regions such as North America, which are receptive to the benefits of digital mining as a means of re-accelerating economic growth in dormant regions by repurposing sunset industry assets, are generally more successful in attracting investment into their region.
There is no question that the COVID-19 pandemic has accelerated change across different industries, with one common theme being the increased emphasis on integrating blockchain into existing global financial systems. It is clear that such trends will only accelerate the need for digital asset mining, and will inevitably attract more institutional investors to deploy capital into what is a burgeoning alternative asset class. Digital asset mining is here to stay, and the regions that most quickly identify and encourage digital asset investments will benefit their economies for years to come.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.