New York Puts Bitcoin Mining in the Crosshairs
Big governments have many reasons to oppose sovereign monetary technologies like bitcoin. The existence of a permissionless money network provides escape hatches for these states' many levers of centralized control. It is not surprising that they try to throw the regulatory book at cryptocurrencies from any possible angle.
The state of New York is a good case study of this dynamic. The Empire State, home to many titans of the legacy financial system, has promulgated hostile regulations against cryptocurrency applications for years. It set the standard for innovation-killing laws with its 2014 "BitLicense," which led to a virtual exodus of bitcoin businesses from the state. New York's attorney general has turned going after cryptocurrency platforms and users into something of a sport.
Now New York is again taking the lead on the next hot wave of crypto crackdowns: environmental regulations.
Early this month, the state Assembly passed a first-in-the-nation crackdown targeting a popular "consensus mechanism," or technological method for distributed computers to agree on the state of a network, called proof of work, that is employed by cryptocurrencies like bitcoin and Ethereum. The bill is headed to Gov. Kathy Hochul's desk for final approval, but there is some doubt over whether or not she will sign the bill.
The bill sets the tone by claiming that "climate change threatens the health, welfare, and economy of the state" through a parade of horribles including "flooding, sea level rise, heat waves, coastal erosion, erratic … weather patterns, shifting climactic zones, loss of wildlife, increased harmful algae blooms and invasive species, and increased risk of disease." (What, no famine?) For these reasons, New York wants to start doing away with bitcoin mining.
The law would direct the New York Department of Energy to issue a moratorium on all new applications or permits for carbon-based electricity facilities that provide energy for "cryptocurrency mining operations that use proof-of-work authentication methods to validate blockchain transactions" for a period of two years.
No, New York has not quite "banned bitcoin mining." Existing mining operations should be able to proceed normally, and mining that is not fueled by carbon-based sources—like the state's abundant hydroelectric miners in the north—will presumably be spared. Supporters of the bill say it intends to kill off any opportunity for the state's "oldest, dirtiest fossil fuel plants" to find a second life as a cryptocurrency mining operation.
Still, the bill demonstrates a worrying antagonism and ignorance about consensus mechanisms and carbon emissions. Many in the industry worry that this is merely the first step to a more hostile anti-cryptocurrency-mining regime in the state.
The bill also directs the Department of Energy to do studies on cryptocurrency and energy usage. This would not be a problem if the analyses were done well. However, much of the "science" on cryptocurrency mining and emissions is grounded in misunderstandings and bias that produces subpar research. If the New York Department of Energy has an axe to grind against bitcoin, they can trivially cook their studies to justify all kinds of non-evidence-based policies.
Many are surprised that the bill even got out of committee. An earlier version of the bill was killed last year because even the Democrats on the New York Senate Environmental Conservation Committee were worried that the bill would have bad economic consequences for the state at a time that it cannot exactly be picky about growth and savings technologies.
We should not be surprised to see New York's surprisingly healthy mining sector start to pick up and move to a more hospitable locale like Texas or Kentucky, even though this particular law might not apply to them. They are getting the message loud and clear.
As last year's rocky events in the former bitcoin mining capitals of Kazakhstan, China, and Russia have shown, this industry is nothing but resilient. Miners can and do say "sayonara" to states that make it harder for them to compete. It's a pain to move, but there is nothing keeping them forever tethered to New York.
We will have to see whether the governor will bite the bullet and sign this bad bill into law. Anti-fossil fuel (and anti-bitcoin) interests are eager to see this happen, but many in New York are more reticent than you might expect to kill a burgeoning industry in a looming recessionary period.
Unfortunately, the New York bill is far from the only environmental threat point for cryptocurrency.
The Biden administration has directed the Department of Energy to consider similar regulations on the federal level pursuant to his much-buzzed executive order on a whole-of-government cryptocurrency approach earlier this year.
An assistant director at the White House Office of Science and Technology policy recently commented on the need for the conversation around digital assets to focus on "climate and energy." This and other federal offices are busy investigating the relationship between cryptocurrency consensus mechanisms and carbon emissions, and should issue their reports in the coming months. Still, it is at least encouraging that this particular functionary understands that proof-of-work mining is "energy-intensive by design, but it also increases security."
The benefits of proof-of-work mining are critical to consider when contemplating policy. It is not enough to point to the costs of any economic activity—like carbon emissions—and declare that sufficient to justify controls. The benefits must be evaluated. In the case of bitcoin, mining secures a decentralized network to allow direct transfer of value. That's huge!
This is before getting to some of the major problems with the way that many academics and journalists understand the relationship between mining and energy usage.
You have probably heard a statistic like: "A single bitcoin transaction uses up as much energy as the average American household uses in a month." This is unscientific nonsense. As the Cambridge University Centre for Alternative Finance explains, transaction throughput is independent of total network electricity consumption. Furthermore, "a single bitcoin transaction" can often mean thousands of batched transactions or billions of timestamped datapoints.
Unfortunately, the time it takes to debunk such misinformed nonsense is far longer than the clickbait media cycle. So your average person probably thinks bitcoin transactions are incredibly energy-intensive and wasteful. The truth is that cryptocurrency mining is a great opportunity to build up grid resiliency and encourage energy parsimony.
When you discuss these nuances with earnest climate change advocates, they often come around to a less hostile position towards cryptocurrency. Not so with political ideologues, who will never miss an opportunity to expand controls on carbon and cryptocurrency.
Regardless of what happens with the proposed New York mining clampdown, it will certainly be far from the last such volley against proof-of-work currencies. And these Baptists have their own bootleggers, too: some competing cryptocurrencies that use an alternative consensus mechanism called proof-of-stake have joined in on the anti-bitcoin chorus. Let's hope freer American states continue to welcome cryptocurrency miners so that the US will still lead the world in this growing industry.