Those who have been around the bitcoin community long enough will remember bitcoin's price crash after it hit $1,000 for the first time in late 2013, which occurred after China banned banks from dealing with bitcoin. At the time, this news was perceived as a de facto ban on bitcoin, which caused the price of bitcoin to fall from a high of $1,149 to $544 over four weeks as China was the biggest market for bitcoin trading as well as mining.
Today, China has lost its dominance as a bitcoin trading hub after the People's Republic forced all local bitcoin exchanges to shut their doors shortly after banning initial coin offerings within its borders. While peer-to-peer trading is still big business in China, 'official' cryptocurrency trading through centralized platforms has ground to a halt.
Conversely, bitcoin mining is still heavily centralized within China's borders as cheap electricity has attracted several large-scale mining operations. This is the concern that academic researchers Ben Kaiser, Mireya Jurado, and Alex Ledger raise in their report.
The looming threat of China
In the yet to be peer-reviewed study titled "The Looming Threat of China: An Analysis of Chinese Influence on Bitcoin," the authors argue that "the security model of Bitcoin must consider the socioeconomic and political forces in addition to the underlying cryptography," especially within the context of how centralized its mining is in a country that has an adversarial stance towards the digital currency.
According to the paper, over 80 percent of bitcoin mining is performed by six mining pools of which five are operated by individuals or organizations located in China, which results in roughly 74 percent of hash power being located behind the Great Wall.
Kaiser, Jurado, and Ledger list four reasons for why the centralization of bitcoin miners in China is a cause for concern, namely its government's strong regulatory authority, ongoing internet traffic tampering and surveillance, the China-based majority hash power, and its well-connectedness within the Bitcoin network.
Moreover, the authors list several reasons why China's government would likely continue to hold an adversarial stance towards Bitcoin. Firstly, Bitcoin's decentralization stands in ideological opposition to China's centrally-controlled approach to governing. The government could attempt to take down Bitcoin purely to make a statement against decentralization and the disintermediation of central authorities.
Secondly, the Chinese authorities could attack the Bitcoin network to crack down on what it views as illicit activities — such as circumventing capital controls. And from a geopolitical perspective, as bitcoin adoption grows and becomes more integrated into national economies, China could attempt to attack the Bitcoin network to indirectly exert influence in foreign countries whose economies embrace bitcoin as a currency.
The study lists a range of attacks that China could launch on the Bitcoin network given its capabilities. Attacks range from punitive forking, user deanonymization, a brute force attack or a Goldfinger attack, selfish mining, and block withholding among others.
How real is the "China threat"?
The study's authors conclude that China's threat to the Bitcoin network is real because the digital currency's utility has grown so much that the Chinese government has an incentive to undermine it.
"We singled out China for analysis because they are the most powerful potential adversary to Bitcoin, and we found that they have a variety of salient motives for attacking the system and a number of mature capabilities, both regulatory and technical, to carry out those attacks. As future work, we suggest an analysis of existing solutions to the specific threats China poses to Bitcoin and the identification and mitigation of gaps in those protections," the paper's conclusion states.
While this sounds very doom and gloom, it is important to note that the likelihood of Chinese government-organized attacks on Bitcoin is rather low.
The Chinese government would first have to take control of its local bitcoin mining operations in a fairly covert way not to alert the remaining network participants. This alone would be a rather difficult feat.
Then, the government would have to invest a substantial amount of time, money and human resources to launch attacks on Bitcoin and it is unlikely that the Communist Party would approve this action given that Bitcoin is widely not considered to be a threat to the global financial system and that there is no evidence that bitcoin is being used to circumvent capital controls in China.
Additionally, if China were to take over local bitcoin mining operations, its bitcoin mining industry would collapse from one day to the next. This, in turn, would boost bitcoin mining in neighboring countries such as Japan, which where large corporations are mining bitcoin and developing mining hardware. It is unlikely that China would want to destroy a highly profitable industry within its borders just to pass it onto its neighbors.
Finally, China's waning influence on the Bitcoin economy should act as a relief for investors who may be concerned about a potential Chinese attack on the digital currency. Given the country's recent crackdown on cryptocurrencies, it would not be a surprise for bitcoin mining operations to also move across the Great Wall like many of its exchanges and blockchain startups have done in the past twelve months.
While the threat scenarios and potential attack vectors listed in the study are theoretically possible, it is unlikely that we will see Chinese authorities attempting to take down the Bitcoin network. Unlike many altcoin networks, Bitcoin is decentralized enough that it can withstand a wide range of attacks which is one of the drivers of its value.