Blockchain mining needs a makeover — but so does mining policy

Like so much of the civic discourse in America these days, the debate over the environmental implications of digital assets, particularly cryptocurrencies, is unnecessarily polarized. The policy that governs the energy-intensive computer “mining” of assets like bitcoin from hidden corners of cyberspace often descends into a pit of binary parley — a zero-sum game where one political team can win as long as the other team loses.

Where can America find common ground on bitcoin mining? What solutions might lead to mutually beneficial outcomes for both advocates and opponents of the process? Entrepreneurs and regulators might each achieve their respective goals by welcoming a little more creative destruction and incentivizing the public’s ability to make their own choices.

On one side of the debate are bitcoin enthusiasts and investors who downplay bitcoin’s electricity-guzzling image and suggest that bitcoin mining will save the world. On the other side, environmental groups and scholars state that cryptocurrencies exacerbate environmental justice concerns by mining in communities that are poor or rural and complain that bitcoin is destroying the planet. Both sides seem to have an ornery determination to prove the other wrong.

But this blunt style of verbal combat leaves little room for creativity in terms of how we replenish the Earth without harming our core democratic values of liberty and economic freedom. This is one case where these goals do not have to be in conflict.  

With calls for moratoriums and bans on bitcoin mining, state lawmakers and federal regulators have exhibited unusually autocratic behavior in their targeting of an entire industry subsector. In order to meet climate change goals, New York recently passed a bill to ban certain bitcoin mining operations that run on conventional, carbon-based energy sources. The bill explicitly bans the “proof of work” approach to mining, which powers the Bitcoin blockchain and uses high energy-intensity mining. In its Crypto Assets Climate report, President Biden’s Office of Science and Technology Policy (OSTP) also recommended that the administration consider limiting or eliminating proof-of-work consensus mechanisms. 

If such bans were implemented, state and federal governments would effectively be picking winners and losers by favoring ethereum – a blockchain alternative with a more energy-efficient method of online extraction – over industry leader bitcoin. Denying the public a fair choice underscores just how unbalanced a role the government, instead of the market, is playing in addressing these questions and shaping the future of the digital asset economy. 

While proponents of government investment suggest that funding renewable energy innovation might spur a transformation of multiple industries, including bitcoin mining, and lead to some job growth, if it crowds out private sector investment, we may lose out on much of the contributions of private innovation. Over-relying on government action and specific mandates might disincentivize experimentation and market discovery, especially where conventional and novel industries intersect. Government moratoriums may also cripple the ability of bitcoin mining operations to improvise and find stopgaps to mitigate environmental risks, thereby decreasing short-term innovation, economic activity and wealth creation. If conflict resolution theory tells us anything, then forced compliance is an act of last resort and rarely bridges gaps between disagreeing parties.

Instead, the market should be incentivized to experiment and develop a diverse slate of solutions for the short, medium and long-term–systematic and sustainable improvements in energy efficiency and reliability that minimize environmental risks to local communities.

North Carolina’s market-driven approach to bitcoin mining is one factor that enabled the state to place first in CNBC’s 2022 America’s Top States for Business survey. Because of its permissive bitcoin mining policy, entrepreneurs in North Carolina are free to experiment with novel ways to power mining operations in an environmentally sustainable way. One company has invented a process called “thermal demanufacturing” to redirect wasted tires from landfills and convert them into byproducts of steel and energy to power data centers and bitcoin mining. Although many bitcoin miners still need to address their external designs, noise pollution and the water waste that rural communities are particularly susceptible to, entrepreneurial efforts like this one will help the transition to a cleaner, more sustainable ecosystem, while also providing the industry with a much-needed reputational makeover.        

Before enacting moratoriums or bans on bitcoin mining and other energy-intensive industries, policymakers should try to avoid placing impractical expectations on innovative industries where new challenges are inevitable. A culture of innovation and understanding often simply needs time to find solutions to complex technological and environmental challenges.

This softer, less ultimatum-driven policy approach is more reasonable and addresses the realities of market forces, which are unlikely to quickly meet politicized policy objectives — especially those that overly rely on threats of regulatory prohibition.

Agnes Gambill West is a visiting senior research fellow with the Mercatus Center at George Mason University.

*Disclaimer: The author is the co-chair of the North Carolina Blockchain Initiative and a member of the North Carolina Innovation Council. The author has no financial stake in the blockchain mining industry.