This piece is part of our Student Blog Series, featuring posts on climate, clean energy, and environmental issues from the State Impact Center’s legal interns and other students working with the Center.
Both chambers of New York’s legislature have passed a landmark moratorium on fossil-fuel based cryptocurrency mining. Governor Hochul has not indicated when she will act on the measure, calling it “a lot to consider.” The NY Senate’s website tracker offers a way to keep up to date on recently signed legislation.
While NYC Mayor Adams has been cited promoting making the city a hub for crypto, advocates have been concerned with the industry’s environmental impacts. Recently, the NYC Bar Association published a letter citing crypto’s climate impact and urging Governor Hochul to sign the moratorium into law.
NY’s closer inspection of the industry comes as droves of crypto miners flock to the United States from China after their crypto ban last year. The United States now houses the largest share of mining operations globally at nearly 37%. Unfettered by the constraints of other physical industries, crypto miners are able to migrate whenever conditions become inhospitable, often fleeing to friendlier territories with cheap, abundant energy. Even as the crypto market fluctuates dramatically, losing about 65% of its total value since last fall, it seems the industry is here to stay. This begs the question: now what?
To start, it’s worth understanding how the crypto system works and why it exists.
In a traditional currency system, transactions are verified through third party intermediaries like banks which provide collective trust that transactions and value are legitimate. The founder of Bitcoin sought to eliminate these third parties and promoted Bitcoin as a “trustless” system where transactions are verified through a decentralized network of anonymous moderators. Each transaction is cryptographically encoded into a ledger separated into packets, or “blocks,” which make up the blockchain. Once a block in the ledger is created, it is distributed to a network of computers that must work to solve complex mathematical problems to decode the block and, once all nodes verify the block is identical, the transaction is approved and processed.
Crypto’s decentralized verification system processes digital transactions without the need for a bank or government’s authentication. Supporters of the platform, like financial journalist Martin Rivers writing for Forbes, laud crypto’s ability to promote privacy and self-determination, while downplaying its environmental impact as negligible. But decoding blocks requires massive amounts of computing power. Those decoding blocks, or “miners,” receive payment in the currency if their computer is the first in the network to decode the block. The theory is that this system, called “Proof of Work,” incentivizes miners to maintain the integrity of the currency and mints new units of currency into circulation.
Cryptocurrencies are decentralized and largely unregulated making it difficult to calculate their true impacts on the environment and economy. But study after study demonstrates the industry’s undeniable environmental impact and security concerns.
Currently, the University of Cambridge is tracking the energy needs of Bitcoin through an Electricity Consumption Index. Before China’s crypto ban, a majority of the world’s miners utilized the country’s cheap and available hydro power. Now, the estimated energy mix of crypto-mining has been reported as shifting more towards oil and gas, and away from renewables as miners relocate. Based on US emissions and its share of the crypto market, US miners produced nearly 40 billion pounds of carbon dioxide in 2020. The uptick of US miners has also affected grid stability and increased rates for residential energy consumers.
The current competitive model of cryptocurrency is on track to become more wasteful and energy intensive over time. Platforms like Bitcoin are designed with scarcity built in: documents show only 21 million bitcoins will ever exist, and about 19 million have already been mined. To keep the verification system running, the number of coins awarded for decoding one block is halved every four years: in 2020 the reward was cut from 12.5 coins to 6.25 for decoding one block. This means the energy required and emissions created to mint one bitcoin will continue to double as time goes on.
Questions about fraud and security threats also present issues for consumers. The FTC recently reported over $1 billion lost in crypto scams. Some states have tried to crack down on these threats like NY Attorney General Letitia James who announced the investigation and shut down of two crypto platforms last fall over fraud claims.
The Path Forward:
There are opportunities to regulate the crypto industry in the US.
The first method for regulating crypto mining would be addressing the way that platforms verify their currency. Most platforms utilize Proof of Work (PoW). Transitioning to a method like Proof of Stake (PoS) — where miners set aside an amount of their own currency and are chosen randomly to validate transactions — would drastically reduce the computational effort needed to verify transactions and, thus, lower emissions caused by redundant verification. While companies like Ethereum have made pledges to transition to proof of stake in an effort to reduce emissions, regulating platforms in this way would likely require voluntary compliance and not completely eliminate proof of work.
The second method is to regulate the industry state by state. If states begin to pass stricter regulations on how and where crypto mining can occur, like bans on fossil-based mining or zoning restrictions, it is possible other states may follow suit. The crypto industry is highly mobile and individual state bans may prompt a “race to the bottom” where some states have already deregulated crypto in response to direct lobbying from the industry.
The third path is to target crypto miners directly through federal level taxes and regulations. By giving agencies like EPA or DOE jurisdiction over crypto mining, facilities would have to comply with the same air and energy permitting requirements as the oil and gas industry. Since announcing his executive order in March, President Biden has taken steps to assess regulatory options, directing the administration to conduct a review of the crypto industry’s financial security and climate impact. Advocates from environmental organizations like the Carbon Tax Center, have also pushed for the industry to be subject to carbon taxes to incentivize the industry to move away from fossil fuels and toward renewables.
Finally, any effort to regulate crypto will be affected by public opinion, making PR campaigns critical to informing public knowledge of crypto’s environmental impact. This spring, Greenpeace and crypto billionaire Chris Larsen launched an advocacy campaign, “Change the Code, Not the Climate,” for Bitcoin to shift its code from proof of work to proof of stake in an effort to make the currency greener. The campaign, along with other groups like the Environmental Working Group and Earthjustice, recently urged the Biden Administration through a letter to subject the industry to air permitting, environmental reviews, energy reporting, and energy efficiency standards. Publicizing this issue and educating the public may be critical to spurring legislative action like the recent push from democrat lawmakers, led by Sen. Elizabeth Warren, demanding energy use disclosures and climate impact oversight from crypto companies.
Crypto began as an effort to move away from the structure and rigidity of financial institutions and innovate a currency for the future. Now, with our climate in crisis and that future at risk, crypto-billionaires and climate activists alike need to find common ground in sustainable, renewable-fueled crypto.