Why Texas is the canary in the crypto mine

El Salvador has established itself as a hub for cryptocurrency (or “crypto”) mining. In 2021, it became the first country to adopt bitcoin as legal tender and the first to issue a bitcoin-backed bond. Now, it has announced that it is seeking to open a “bitcoin embassy” in the United States, in Texas.

Because of its relatively cheap energy and receptive regulators, Texas is one of the largest crypto-mining hubs in the world. This has placed Texas at the forefront of crypto policy, and the state recently enacted several bills that may change the crypto landscape. Policymakers and blockchain businesses alike should keep their eyes on the Lone Star State’s latest attempts to regulate the wild west of cryptocurrency innovation.

Crypto mining is the process of validating cryptocurrency transactions, by using high-powered computers to solve extremely complicated math problems. As incentive for “mining,” or solving those math problems, miners are rewarded with cryptocurrency.

But crypto mining requires a lot of energy. A 2021 New York Times analysis found that mining one bitcoin uses as much electricity as an entire household does over nine years. Crypto miners are, therefore, conscious of their electricity costs and must carefully choose where to mine. Many miners have chosen Texas.

The Texas Blockchain Council stated in 2022 that Texas was already home to 2 gigawatts (GW) of bitcoin mining alone (not including mining for hundreds of other cryptocurrencies) and was attracting 2 GW per year of additional bitcoin-mining capacity. And as of mid-2022, the Electric Reliability Council of Texas (ERCOT) estimated that there were 33 GW of bitcoin mining projects in its interconnection queue. For reference, the combined households of Houston — the fourth biggest city in the country — use less than 6 GW per year.  

Riot Blockchain is building the largest bitcoin-mining facility in the world in Corsicana, Texas, with 265 acres of bitcoin-mining computers. The previous largest bitcoin mine in the country is also in Texas. London-based Argo Blockchain chose the state because it has plenty of land, low electric prices and an abundance of wind farms. Other companies have also chosen Texas due to its cheap electric prices and ample renewable energy; in 2022, Texas led the nation in renewable energy, producing over 2.5 times as much electricity from wind and solar as second-place California.

Some have criticized crypto mining for the large loads required for these operations, especially during periods of extreme heat in Texas; however, crypto miners have countered that they help to keep electric generation operational and have the capability to rapidly curtail mining to support grid integrity.

Because Texas is such an attractive place to conduct cryptocurrency mining, many of the issues surrounding crypto play out in Texas first. As a result, the state is often on the cutting edge of crypto policy.

Crypto initiatives in Texas are important to the industry nationwide because the state is often the canary in the crypto-mine. Without clear instructions regarding crypto from the federal government, Texas is making its own rules. For example, in the wake of the collapse of FTX’s crypto exchange, the state felt it needed to act to protect consumers. Here are five crypto-related bills that have recently been enacted, or could be re-introduced and enacted, in coming years:

• House Bill 1666: Gov. Greg Abbott has signed bipartisan legislation meant to protect cryptocurrency users. The bill, H.B. 1666, was introduced shortly after the bankruptcy of FTX and is designed to prevent companies that hold customers’ cryptocurrencies from similarly collapsing.

Under the law, Texas agencies have the authority to regulate digital asset service providers, which serve as banks for cryptocurrency depositors. These crypto banks will not be allowed to comingle customers’ funds with bank funds, use customers’ funds to secure a transaction or maintain customer funds in a way that customers may be unable to later withdraw them. The crypto banks will also now be subject to annual reporting requirements and audits.

The law is slated to go into effect on Sept. 1. Any crypto bank that violates the law may lose its Texas money transmission license, be fined and face criminal penalties.

• Senate Bill 1929: This bill, now law, requires miners with energy capacity larger than 75 megawatts to register with the Public Utility Commission of Texas (PUC) as large loads operators. Their data are then shared with ERCOT, the grid operator.

• House Bill 4728: This recently enacted bill allows ERCOT to require persons operating certain virtual currency mining facilities to register and provide information about the location and demand of a facility. It also requires the PUC to establish a method to ensure compliance with this law.

• Senate Bill 1751: This bill would cap how much crypto miners can participate in demand-response programs, which allow miners to get paid to curtail their operations during periods of high energy demand. Under a demand-response program, a miner gets paid in credits to turn off operations when the power grid sees a surge in demand. SB 1751 would cap this to a 10 percent credit and abolish tax abatements.

The bill is sometimes called the “anti-bitcoin mining bill” because it might discourage miners from entering the market, but it won’t do anything unless it is enacted. For now, it is moored in committee. The bill can be reintroduced in the next legislative regular session, which starts in January 2025.

• House Bill 3768: The “Texas DAO Bill” proposes amendments to the Business Organizations Code of the state to allow for the formation of decentralized autonomous organizations and the use of distributed ledger or blockchain technology for certain business purposes. The bill can be reintroduced in the next legislative regular session.

Everything is bigger in Texas, including crypto. Because of that fact, Texas has focused on developing an environment that will attract crypto companies to the state and attempt to protect consumers from volatility in the electricity and crypto industries. Other states would be wise to keep an eye on what policies work — and don’t work — in the Lone Star State.

Monica Hwang, Sid Mody and William K. Pao are partners, and Christian Rice is associate, at the legal offices of O’Melveny & Myers LLP.