Chinese Bitcoin miners are a Trojan Horse in US crypto infrastructure

Cryptocurrencies, led by Bitcoin (BTC), are rapidly gaining significance in the US economy and financial markets. The introduction of exchange-traded funds (ETFs) has opened up access to this asset class for a large number of new investors, resulting in an increase in Bitcoin’s value. This development is usually positive as it broadens the reach and acceptance of cryptocurrencies.

Yet, Bitcoin’s surge in popularity necessitates stricter regulations, like those implemented in advanced tech fields such as AI. In today’s interconnected world, potential threats to national security and essential digital infrastructure call for immediate action.

The issue of China’s potential risks has taken the spotlight in recent discussions. In response to perceived technology dangers posed by companies such as Huawei, TikTok, and Chinese electric vehicle manufacturers, the U.S. has taken firm actions. However, the risk associated with cryptocurrencies is particularly concerning. Bitcoin miners could covertly create a hardware layer within U.S. energy and telecommunications infrastructure, making them a potential silent and intelligent presence.

Due to the significant risks posed by Chinese crypto mining technology to essential U.S. utilities and financial systems, it is past due for regulatory action to prevent any potential damage.

The process of Bitcoin mining introduces new Bitcoins into circulation. At the same time, it plays a crucial role in maintaining network security by verifying and recording all transactions on the blockchain, which is Bitcoin’s public transaction history. Miners attempt to solve intricate mathematical puzzles; the miner who solves the puzzle first gets to append the next block to the blockchain and receives newly created Bitcoins and transaction fees as a reward.

Bitcoin mining is an energy-intensive process that relies on powerful computing systems, known as mining rigs, which run on sophisticated ASICs or Application-Specific Integrated Circuits. ASICs are semiconductors specifically designed for this purpose and offer superior performance. The majority of these chips, approximately 98%, are produced in China by a few key manufacturers, including Bitmain. TSMC, a Chinese semiconductor manufacturing company, fabricates these chips using their most advanced processes, such as the 3nm technology.

A major concern for U.S. trade and business success, as well as a potential danger to national security, is this issue.

The US imposes tariffs on Chinese imports due to trade disagreements, but some Chinese businesses like Bitmain are circumventing these tariffs by establishing subsidiaries or affiliates in other countries and using aggressive pricing strategies to undermine US-based ASIC suppliers. This not only weakens the impact of the tariffs but also thwarts the CHIPS Act’s objectives of growing domestic semiconductor manufacturing in the US.

With the rapid growth of mining facilities in the U.S., many of which are owned by Chinese companies and use Chinese-made equipment, there is growing concern among national security experts about their proximity to essential American infrastructure. The major worry is that these facilities could serve as cover for Chinese intelligence agencies to carry out cyber attacks, potentially threatening military bases, power plants, or communication systems.

In simpler terms, Chinese businesses, including state-owned and private ones, are obligated by law to assist China’s intelligence agencies when needed. This increases the concern that Chinese officials could exploit their power within apparently harmless cryptocurrency mining activities to collect sensitive information about American internal matters.

Additionally, the intricacy of cryptocurrency mining machinery increases the risk of concealed vulnerabilities. Cautious advisors raise concerns over mining equipment manufactured in China, as it may incorporate hidden security loopholes in its firmware or software. These could enable surreptitious data transfer or even enable remote damage to essential infrastructure.

The significance of Bitcoin and associated blockchains to the U.S. financial system and economy is expanding rapidly. Approximately 40% of American adults currently hold some form of cryptocurrency, and the Bitcoin mining sector is predicted to expand at a rate of 9% annually until 2029. The potential consequences of significant disruptions in trading, mining operations, or price instability are becoming increasingly severe.

It’s regrettable that relying on Chinese suppliers for Bitcoin transaction verification puts the U.S. financial system at risk. Given China’s substantial involvement in the U.S. crypto mining sector, it holds the power to interfere or even disrupt its operations during geopolitical tensions. For instance, if China were to prohibit Bitcoin mining rig imports to the U.S. or manipulate the network using its influence over Chinese suppliers, it could cause Bitcoin’s functionality and stability to falter, negatively affecting American users, investors, and financial institutions.

So, the risks are clear. Now, what can be done?

To safeguard U.S. interests in the Bitcoin mining industry, it’s crucial that policymakers take immediate action. This involves creating tougher regulations and enforcing current policies more rigorously. Some key steps include:

An important second step is to foster a strong Bitcoin mining tech sector in the U.S. by encouraging American companies to create innovative semiconductors for Bitcoin mining. The CHIPS Act offers a great starting point for this initiative, and it’s crucial for both public and private sectors to invest heavily in this area. This investment will not only reduce security and economic risks but also ensure a reliable supply chain, boost economic growth, and establish long-term technology dominance within the burgeoning Bitcoin mining industry.

To ensure security and protect American interests in the Bitcoin mining industry, the US should adopt similar measures as taken in the communications sector by prohibiting the use of Chinese-manufactured mining hardware and preventing the existence of Chinese-owned Bitcoin mining operations on US soil. The existing Committee on Foreign Investment in the United States (CFIUS) framework could be expanded to cover Bitcoin mining as well.

Authoritarian governments are frequently wary of power-sharing. The ethos of Bitcoin is built on the principles of open access and international cooperation, fostering a dynamic and extensive network that transcends national boundaries. However, establishing a highly centralized supply source in an unstable country goes against these core values. Moreover, it could potentially endanger the entire Bitcoin system’s longevity and create an opportunity for China to infiltrate U.S. territory with a hidden technological threat disguised as a cryptocurrency.

Sriram Viswanathan is the founding managing partner of Celesta Capital, a deep-tech venture capital firm based in Silicon Valley. He holds an MBA from UCLA and a degree in computer science from the Indian Institute of Science.

The following article is meant to provide basic information and isn’t intended as legal or financial guidance. Please consult with a professional for advice related to legal matters or investments. The perspectives, ideas, and opinions shared are solely those of the author and may not align with those of CryptoMoon.

2024-04-13 02:13

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