The Legislature has just passed a bill imposing a partial moratorium on the dominant form of “mining” used by cryptocurrencies, including Bitcoin, which is now headed to the governor’s desk. The reason? Carbon emissions. The challenge? State leaders, like most people, have more to learn about this nascent industry.
Mining refers to how computers discover new crypto currencies from networks by hacking complex crypto puzzles. Crypto assets like Bitcoin become rare and valuable due to the difficulty of mining. Intensive “proof-of-work” mining, the goal of the legislation, prevents night flight activity that would undermine network trust.
This is where carbon comes into the picture. Intensive computing is energy intensive, which often means carbon intensive.
In recent years, the state of New York has become a mining hub. The cool upstate climate and cheap energy defray the cooling and electricity costs needed to keep the processors running. This has attracted vast and numerous “crypto farms”.
While the exact carbon toll of mining remains unclear, it is a valid concern. Many see the reduction in crypto mining as a marginal price for carbon reduction, especially as the state strives to cut 40% of emissions by 2030. But a proof-of-work moratorium is a blunt, half-baked solution. It will limit the ability of regulators to engage with the crypto community and create incentives that may even increase net issuance.
In recent years, New York has already tried unsuccessfully to use a moratorium to clean up its climate law. In 2014, Governor Cuomo signed a ban on hydrofracking. However, an NPR investigation found that this did not curtail the practice, it merely moved it to neighboring Pennsylvania.
So while the ban may have sounded good to voters, it failed to move the climate needle. The New York market continued to demand natural gas, and Pennsylvania was pleased to supply it.
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The relocation costs of crypto mining are much lower than those of fracking, which means that this same scenario is likely to repeat itself. Also, if New York mining goes offline, mining becomes more profitable for everyone else in the short term. Anyone with a decent computer can help bridge this gap.
Eventually, new crypto farms will replace those in New York, likely in more environmentally permissive jurisdictions. An alternative, Kazakhstan, has been attracting considerable crypto mining; like New York, it has cheap energy and a cool climate. However, Kazakhstan’s energy mix relies on coal, while New York has no remaining coal plants.
So if a moratorium is not the solution, what is?
Regulators must first face the facts: Despite the current meltdown, cryptocurrencies are likely here to stay and run on international decentralized networks that are not bound by the rules of one state. Regulation, therefore, means negotiation. Bitcoin and other networks they can upgraded, and low-carbon mining alternatives already exist. Ethereum, the number two cryptocurrency, is updating its software to use a different method that supposedly increases its energy efficiency by 99%.
The very miners New York is targeting may help convince other networks to make a similar change. Miners are key players in the industry who have a great deal of influence over potential upgrades. Therefore, New York should choose to collaborate with its powerful mining community. Only by keeping the miners in the state can the state keep its seat at the table. Not only does this allow regulation of local mining operations, but it could also help drive broader change in the crypto network.
Without a doubt, climate change requires difficult decisions. But while driving miners out of New York may help hit local benchmarks, it won’t solve a global problem. It corresponds to work with, not against, the miners. Who knows what a little collaboration can bring?
Mittelsteadt is a Research Fellow at the Mercatus Center at George Mason University and a former Research Fellow and Visiting Professor at Syracuse University.