Dear Everybody's Business, 

Today I share with you the most recent version of my testimony to the majority members of Congress' House Committee on Energy and Commerce who are analyzing the cryptocurrency industry as they prepare for hearings on this subject. 

Majority Members of the House Committee on Energy and Commerce, thank you for hearing my experience with Proof-of-Work cryptocurrency mining. My name is Colin Read. I’ve taught and researched environmental and energy economics and money and banking for 35 years, the last half at SUNY Plattsburgh. I served as Plattsburgh’s mayor during a previous Bitcoin expansion. During my presentation, please feel free to interrupt at any time. This is an exceedingly nuanced and complex topic, for which good information is valuable. I welcome all your questions. 

I begin by noting that cryptocurrency is a useful innovation, and we should encourage its development in the Proof-of-Stake or other data protection models described below. However, the most common method, by market share, is a highly and unnecessarily wasteful Proof-of-Work (POW) technique as employed by the cryptocurrency Bitcoin, and I show how the reward structure from POW can never become environmentally benign, despite claims of improved efficiency by industry proponents. This innovative, but, in retrospect, immature and environmentally dangerous, technique frustrates our need to address global warming. In addition, other cryptocurrencies meet every purpose Bitcoin serves, but far better and more efficiently, leaving Bitcoin primarily as a vehicle for hiding transactions to evade detection or taxation, for ransomware, or for speculation. Bitcoin is not an optimal transaction method because it processes only about 5 transactions per second, compared to 1,700 transactions per second in the Visa network, and takes upwards of half an hour for a transaction to be fully recorded and completed. It generates more than a tonne of carbon dioxide emissions for every transaction it processes. This is vastly less efficient than, say, a credit card transaction. It also generates more than a tonne of carbon dioxide emissions for every transaction it permits. And, in addition to the problems addressed below, the Bitcoin mining industry uses four times the energy per year as the entire electricity needs of New York City. There are far better alternatives that can inexpensively allow us to transact globally in seconds rather than hours, and at almost zero transaction costs. Our challenge is to figure out how to create a viable and properly regulated digital currency that is efficient and does not damage the environment. 

Well-implemented blockchain technologies can be a boon for our economy, but poor implementation creates the sort of problems I confronted when I was mayor of the City of Plattsburgh in 2016. Electric usage by one Bitcoin miner required City purchases of more power on spot markets, which caused big constituent electric bill increases. Mining also threatened worker safety, disturbed residents adjacent to mines with constant noise from fans that dissipated huge amounts of heat, and risked firefighter safety. 

We created laws to protect residents from the noise and heat that Proof of Work mining produced. Everybody in our city heats with electricity because of our incredibly inexpensive power. But, all the energy going into Bitcoin mining literally goes up in the air, which is incredibly wasteful, and which led to our provision that Bitcoin miners recycle some of that heat. Ultimately, our heat recycling provision stemmed the inundation of new mining applicants. We were fortunate to be able to address these municipal concerns. Many jurisdictions are unable to navigate good public policy to regulate such a complicated industry. Federal leadership is essential.

Environmental issues must be solved if we are to efficiently transact digital currencies to exchange tokens that represent ball game or airplane tickets, maintain medical records, and perhaps even record real estate transactions in perpetuity. I know we can develop bipartisan regulation to unlock blockchain benefits while we protect the environment and financial markets. 

Environmental issues arise because Proof-of-Work (POW) cryptocurrency mining employs myriad energy-consuming machines in a lottery-like competition to first successfully record a series of transactions in an inalterable way. The alternative and more benign Proof-of-Stake (POS) approach is equally effective in ensuring each link in the blockchain is tamper-proof, but without the environmental concerns.

POW Bitcoin mining employs the equivalent of tens of millions of the ubiquitous purpose-built S9 machines to compete for 6.25 Bitcoin awarded every ten minutes. Each machine performs trillions of calculations every second to accomplish one function - to add a key from the previous block in the chain to a new ledger of transactions over the last ten minutes, insert its own random key, and then run all these numbers through an algorithm, called a hash, that outputs another key. If these latter two keys are, by coincidence, “close enough”, the machine “wins” the lottery. Other machines in the network then verify the match. Like lotteries, as Bitcoin prices rise, the reward grows in value and more machines vie to compete. 

Every account-to-account transaction in each 10 minute block in the Bitcoin chain is visible to all. Despite the name, cryptocurrency miners maintain secrecy not through encryption, but by obscuring the owners of accounts, much like Swiss bank accounts. The underground economy cherishes this anonymity of Proof-of-Work currencies. Anecdotally, my border city no longer receives significant revenue from asset seizures of duffel bags full of cash for drug transactions as much of the underground economy is denominated in Bitcoin now because of its lack of regulation and oversight.  

Bitcoin mining machines are neither “data processors” nor particularly high tech. Data centers are stocked with servers staffed by skilled technicians who manage the cloud. Such data centers also employ 55 times more technicians per megawatt than Proof-of-Work mining. Alternately, Bitcoin mining uses “Application-Specific Integrated Circuit” machines cleverly designed, engineered, and manufactured in China, with no alternative use other than Bitcoin mining. They are easily installed and can be repaired by unskilled labor, but generate more than 26,000 metric tonnes of electronic waste annually as these special purpose machines become obsolete.

Electricity is miners’ predominant input and heat and Bitcoin are its outputs. At current prices, about $2 million of Bitcoin reward flows to miners every hour for the work they do to keep the currency tamper-proof. The reward goes primarily to electricity (either per kilowatt-hour costs or amortized costs of a generation plant), profits, and mining machines, in approximately that order. Labor and facility rentals are an almost infinitesimal share of expenses. The largest share of mining reward goes to electricity purchases. Increased efficiency, better machine cooling, cheaper electricity, batteries, renewable energy, or any other innovation that does not (and cannot) change the industry reward structure will simply result in greater profits in the short term and, as more mining machines come online to share in those profits, the same electricity demand to usurp that hourly reward in the long run. Similarly, a rising Bitcoin price results in short term profits, but a long term increase in electricity demand. Such a vexing aspect of this industry is its driving force. In the end, the nature of Proof-of-Work for a cryptocurrency facing increasing demand will always result in greater overall energy demand, and hence the need for peak power providers such as coal and natural gas, no matter what source of energy actually fuels the cryptocurrency industry, unless miners are off the grid. Over time, despite increased machine efficiency, electricity demand rises in lockstep with the increase in Bitcoin price, regardless of improvements in processing technology, punctuated only by the periodic decline in Bitcoin's reward structure:

Approximately every four years, the number of Bitcoin rewarded to a successful miner is halved. This results in waning growth of outstanding Bitcoin over time. The last reward halving was in May of 2020, and the next will be in 2024. One might conclude that a halving of the reward would also halve the incentive to consume energy to earn the reward. However, if the price of Bitcoin more than doubles every four years, as it has consistently performed, the halving of the quantity of coins offered to the successful miner is out-swamped by the price increases, and hence energy consumption continues to increase over its history, despite reward halving. 

From the municipal perspective, Licensed Limited Corporations flock to cheap power. Lower power costs translate directly into increased mining profitability. POW miners offer elusive promises of great job creation, and will quickly relocate if they find cheaper energy or less regulation elsewhere, potentially leaving municipalities with decommissioning or cleanup costs in their wake. In the process, Bitcoin currently creates 97 million metric tonnes of carbon dioxide annually and increases global energy consumption equivalent to 58 large coal fired power plants, which approaches the electricity consumption of the nation of Australia, and is four times the electricity consumed in New York City annually. 

China recently banned POW mining because its contribution to energy demand required dozens of coal plants to remain online. This resulted in the migration of shipping containers full of Bitcoin mining machines to the United States and elsewhere, and the creation of the U.S. as the largest Bitcoin mining center worldwide. This Proof of Work race-to-the-bottom in energy consumption is unnecessary. Recent cryptocurrencies have abandoned costly Proof-of-Work mining to instead employ Proof-of-Stake that requires but a few well-protected machines. 

We reduce global warming and our carbon footprint through reduced consumption, better designed carbon markets that increase carbon sequestration, and replacement of fossil fuel power plants with carbon neutral plants such as wind, solar, and new generation nuclear power. Greater consumption of electricity of any form, including mining, always results in greater demand for fossil fuel peak power plants, unless an equal amount of new clean energy is simultaneously created to power the mines. Diverting clean energy to mining merely forces other users to more heavily rely on fossil fueled energy sources, and increases the cost to consumers as we must employ more expensive coal power. In other words, there is no such thing as clean mining unless the mines are off the grid completely. Only reduced consumption so that fossil fuel plants are taken offline, or new sources of clean energy pumped into the grid will result in a cleaner energy mix. 

Some claim mining operates as a battery to smooth fluctuations in energy consumption. Anything that reduces load when the grid is stressed can be helpful, but the easiest loads to shed are those unnecessary loads avoided. Utilities increasingly employ true energy storage technologies like battery backups, pumped hydro, and, someday, heat storage from next generation molten salt nuclear reactors. However, the grid could benefit from mining operations with proprietary power sources only if they agreed to curtail operations and sell their proprietary power into the grid when stressed. 

The industry also claims that they can take advantage of stranded natural gas or solar and wind power. It is true that capped gas wells emit methane, and this problem must be remedied. These wells must be properly capped and monitored, but to recover small amounts of methane from thousands of wells is infeasible. If the industry claims that some wind and solar power cannot be used, the solutions include a better grid and battery storage, not Bitcoin mining. 

Effective regulation can also manage financial risks. Miners’ goal to decentralize our monetary system and create a shadow banking system takes from the Federal Reserve essential monetary policy tools. Inexperienced investor speculation, enabled through margin loans by unregulated cryptocurrency near-banks, has created crypto-bubbles that risk the savings of those lured by the accessibility and secrecy of crypto. As the industry adopts a “Stablecoin” tied to a major currency, the Fed and the FDIC must also regulate and insure currency reserves to maintain confidence in cryptocurrency transactions. Risks to financial markets, the banking industry and inexperienced investors are manageable if lawmakers empower regulators to oversee such near-banks as they do for banks. 

I’m confident, though, that we can overcome these challenges and develop policies to effectively manage the environmental and financial risks of the cryptocurrency industry that has so much to offer our economy. 

References:

The original updated testimony with graphs can be found at:  https://docs.google.com/document/d/1XMpN-nlZZc412VrbokE4PwXq17Fd3FXb39_h0PBV4YI/edit?usp=sharing

https://www.buildingcongress.com/advocacy-and-reports/reports-and-analysis/Electricity-Outlook-2017-Powering-New-York-Citys-Future/The-Electricity-Outlook-to-2027.html#:~:text=Annual%20energy%20consumption%20in%20New,year%20over%20the%20forecast%20period.

 

https://digiconomist.net/bitcoin-energy-consumption/