A Bitcoin mining facility operated by Bitmain Technologies in China. Qilai Shen—Getty Images
Proof of State is the Wednesday edition of Fortune Crypto where Leo Schwartz delivers insider insights on policy and regulation.
After fits and starts, the House of Representatives passed a bill last week that would force the Chinese owner of TikTok to sell the wildly popular video platform or otherwise have the app banned in the U.S. Lawmakers have long been concerned that TikTok’s ties to the Chinese government represent a security threat to the 150 million-odd Americans who use the app, although there is no proof that Beijing has used the platform to obtain user data or shape influence.
While the bill, which is moving on to the Senate, specifically targets TikTok and its owner, ByteDance, it wrestles with broader questions of which aspects of U.S. infrastructure should be exposed to foreign ownership. TikTok is top of mind because of the omnipresence of its short videos, likely shared around the dinner table at every lawmaker’s home. But lost amid the debate is another technology sector that represents a more clear and present danger to U.S. security: Bitcoin mining.
Chinese miners flooded to the U.S. after their government imposed a ban on cryptocurrency in 2021, settling in states like Texas. Chinese companies have long dominated the hardware supply chain in Bitcoin mining with the production of ASIC semiconductor chips, but they soon grew to own a sizable chunk of mining operations in the U.S. Anita Nikolich, a lead researcher at the blockchain intelligence firm Inca Digital and the author of a new report on Bitcoin mining, told me that Chinese firms now own about a third of U.S. mining infrastructure.
So why is this a concern? With uncertain returns from Bitcoin, miners diversify their profits by securing lucrative contracts with power companies, often selling energy back to the grid during periods of high demand. As Nikolich writes in her report, the connection between mining facilities and the power grid has become a “credible risk,” with any potential failures affecting consumers across the country. In February, intelligence agencies issued an advisory that the China-sponsored cyber group Volt Typhoon had compromised the computer systems of U.S. critical infrastructure, including the energy grid, with “high confidence” that they were positioning themselves to disrupt functions in the event of geopolitical tensions.
The connection between Chinese mining operations in the U.S. and the Chinese government, as well as the potential threats to U.S. infrastructure, seems more clear-cut than TikTok. The New York Times published an investigation last October detailing how the ownership of many of the companies can be traced to the Chinese government, while others use opaque corporate structures to obscure links. “We’re all worked up over TikTok, but nobody seems to be saying anything about these Chinese companies connecting to our grids,” an Arkansas state senator told the Times.
Nikolich expands on the research, demonstrating how the phenomenon likely stretches across the U.S., from Arkansas to Wyoming. The pressing issue, in her mind, is the tension many state governments face between welcoming new investment and limiting foreign ownership, with laws often standing in contradiction with each other. “There’s a rationale they use to say it’s okay to bring [miners] to the state,” Nikolich told me. “What I was trying to highlight was that’s okay until it comes to affecting critical infrastructure.”
Some Bitcoin advocates have critiqued the fearmongering around Chinese influence on mining operations, with investor Nic Carter tweeting after the Times article it was more likely that data center competitors wanted to “cast aspersions” than China “secretly spying” on the U.S. using ASICs.
Still, in her report, Nikolich recommends that the U.S. government increase the manufacturing of chips to combat the Chinese dominance of the supply chain and provide more proactive oversight of foreign investment into the energy grid. With the upcoming halving, and many Bitcoin mining operations pivoting to A.I., the problem is not going away, even as lawmakers focus on TikTok. “It’s such a diversion,” Nikolich said. “You would think senators wouldn’t understand TikTok, but they really don’t understand Bitcoin.”
Leo Schwartz
leo.schwartz@fortune.com
@leomschwartz
DECENTRALIZED NEWS
This is a handy guide to the upcoming Bitcoin halving, including how it could impact price and the long-term effects. (Fortune)
Polygon Labs reportedly paid $4 million to Starbucks for a failed foray into crypto as the coffee giant cancels its NFT-powered loyalty program. (CoinDesk)
BlackRock is launching a tokenized private equity fund with the financial services firm Securitize according to a new filing with the SEC. (The Block)
Honduran president Xiomara Castro is battling with American crypto investors who are attempting to exploit a World Bank mechanism to seize billions of dollars in public money. (The Intercept)
A judge approved the SEC‘s settlement with Digital Currency Group lending subsidiary Genesis as part of its bankruptcy plan. (Bloomberg)
MEME O’ THE MOMENT
Bitcoin’s recent downslide is hitting everyone hard:
