Professor, entrepreneur, CPA, and enthusiast for everything blockchain
When the Council of Economic Advisers initially proposed an excise tax of 30% on bitcoin mining organizations in March 2023, the price reaction of bitcoin was swift as the cryptoasset fell below $20,000. After this initial shock, however, and with other geo-political and economic issues taking center stage - especially as the U.S. banking sector continues to grapple with instability and bank failures, this idea fell out of focus. In what some considered to be a surprise move, the CEA revived the debate and controversy around this proposed excise tax via a Twitter thread seeking to explain and justify this proposal.
Reasonably enough this proposed tax, both when initially discussed and when it was revived in the public discourse, drew critiques from the crypto sector. Arguments against this excise tax include that bitcoin mining actually uses a significant percentage of renewable energy to power mining operations, and that cracking down on the U.S. crypto mining industry would simply lead to it relocating overseas. The CEA proposal argues that crypto miners do not pay the "true" cost of the electricity consumed in operations, and that using renewable energy sources just denies these renewable sources to other electricity users.
Such arguments have been presented before, but they miss the more important points. The crypto sector has evolved dramatically in even just the last 18-24 months, but the policy conversations around mining and crypto at large have not - the attitude at the Securities and Exchange Commission is clear evidence of this.
Let's take a look at why an excise crypto mining tax misses the mark from an economic and crypto perspective.
Bitcoin specificity. In most policy conversations the reference to crypto mining is a thinly veiled reference to bitcoin mining, and this reflects the fact that policy debates have not kept pace with market innovation. Even though bitcoin continues to dominate the financial market coverage of cryptoassets, and tends to be the crypto of choice for institutions seeking to diversify into crypto, the fact is that bitcoin is only one cryptoasset. In addition to only representing one aspect of the crypto space, this policy seemingly ignores the facts created by the progress on the Ethereum 2.0 upgrade.
Following the completion of the Merge and Shapella upgrades the Ethereum blockchain and ETH have transitioned away from a proof of work consensus model and to proof of stake. In addition to the technical changes regarding validators and staked ETH, this is also going to result in the energy consumed by the Ethereum blockchain to drop by 99%, according to most estimates. With many of the emerging use cases of blockchain running on Ethereum, this dramatically lower power requirement should be part of the conversation, but that does not seem to be the case when it comes to this excise tax plan.
Energy mix updates. A common refrain among policymakers who advocate for punitive taxes and other disincentives to be applied against crypto mining operations is that these firms consume (and waste) large amounts of electricity. Trying to determine the worthiness of any business enterprise to consumer electricity, in any quantity, is a slippery slope that should be avoided at all costs. Governments do not have a stellar track record for allocating scarce resources, and electricity is no exception.
In addition to this market reality, there is also the fact that the crypto mining world has increasingly moved toward sustainable investing options. According to a 2022 report issued by the Bitcoin Mining Council, the percentage of energy consumed by the bitcoin mining community derivived from sustainable sources increased to 64.8%. For some context, according to the U.S. Department of Energy, approximately 20% of all U.S. energy is dervied from sustainble sources.
Instead of blaming crypto, and by extension blockchain, for yet another problem, policymakers would be well advised to objectively look at the energy landscape.
Global importance. With the wide array of headlines and market moving events, it is easy to lose track of a simple, yet powerful, fact. While the future of transactions remains uncertain, the fact is that blockchain-based transactions and the tokenization of assets of all kinds have rapidly moved from a forecast to a market reality. If institutions as large and systemically important as J.P. Morgan and Blackrock are embracing these trends, it takes very little imagination to see how these trends will come to dominate financial markets.
In order to innovate and think of these new forms of payments, and how to better store and share information more broadly, investors and entrepreneurs require an environment that is at least neutral. Payments and the efficient transmission of digital information are, and will continue to, be the driving factors that determine which corporations, trading blocs, and nation-states occupy leadership positions moving forward. Enacting short-sighted and/or punitive taxes on an entire industry, which many believe to be the future of transactions, payments, and data transmission is bad political policy, and poor economic decision making.
The crypto industry is not perfect, but enacting an excise tax on crypto mining ignores the changing nature of crypto, taxes firms that have embraced renewable energy, and hamstrings future investment and development.
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