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Legislators' Views on Blockchain Technology and Energy Consumption

Posted by Ryan M. Newburn | Oct 04, 2022 | 0 Comments

Industries and sectors across the board are beginning to use blockchain technology. Specifically, people are using blockchain technology to record information on a digital ledger maintained by a network of computers, making it difficult to alter or hack. This technology provides a secure way for individuals to deal with one another without having an intermediary, such as the government, bank, or other third party.

While companies are using blockchain technologies to track low-carbon energy, the amount of energy the technology currently uses has led to criticism by climate change activists. A major drawback of using blockchain technology is the energy required to execute a transaction or validate a new block on the chain.

Why Blockchain Technology Uses So Much Energy

Blockchain technology uses a considerable amount of energy because blockchains can only operate on the condition that blocks are added to the chain on a consistent time interval. As more blocks are added to the blockchain network, the PoW puzzles become much harder, using more energy to solve them. 

With cryptocurrency, different competitors race to see who can solve a mathematical problem first. The more energy used, the faster a competitor is during a race. As cryptocurrency technology becomes harder to solve, more electricity is necessary. As more energy is becoming necessary, more startups, such as LiquidStack, have targeted cryptocurrency companies to switch to renewable energy.

Despite legislatures and environmentally friendly startup efforts, cryptocurrency, including blockchain technology, has continued to increase its energy use.

Initiatives to Target Carbon Emissions Associated With Data Mining

The process of recording transactions and solving mathematical problems is known as "mining." China has begun to crack down on mining and trading in what is known as "the great mining migration."  China has been the home of over half the world's bitcoin miners, but now migration and China's wanting out of mining could allow new locations, like Texas, to become major potential relocation spots. China's pullback began after Beijing failed to meet the climate targets. The Chinese government gave bitcoin miners only two months to relocate.

Pre-Mining Initiatives

Some cryptocurrencies have introduced "pre-mining" to avoid wasteful computing. Pre-mining occurs when a central authority creates a set amount of an item and releases it into the economy. This depends on the current business or issues in the world. Further, governments have introduced carbon credits or fees. This acts as a government-sanctioned ability that allows a company to emit a predetermined amount of carbon emission into the environment, which then causes companies to produce less emission as it is often securitized. Companies needing more carbon credits may purchase it from another company or switch to more environmentally friendly energy to earn a profit.

Ethereum's Change to Be More Energy Efficient

Blockchain company Ethereum recently completed “The Merge" to cut their electricity use by 99.988%. The Merge is also expected to drastically slash the blockchain's greenhouse gas emissions. They previously used nearly 23 million megawatt-hours per year. Now, they wish to use just over 2.600 megawatt-hours per year.

This change will come with how users earn new tokens. Rather than having a "proof of work," which uses an immense amount of energy, users will use a mechanism called "proof of stake." This essentially eliminates the use of puzzles and mining. Rather, users will need to "stake" their tokens to have an opportunity to validate the new blocks and then be rewarded more tokens in return.

While some miners resist the change, this change can lead to a more sustainable future for the blockchain and cryptocurrency world.

New York Legislation on Cryptocurrency Mining Operations

On June 3, 2022, New York Legislature passed a bill that asserted a moratorium on certain cryptocurrency mining operations. The goal of this legislation is to temporarily halt certain bitcoin and other cryptocurrencies that run on carbon-based power sources. According to the bill, a two-year moratorium is set where New York State would not issue new permits or approve any renewals that fell under its guidance. This bill ties in with other legislation proposed by the U.S. Senate and White house that is meant to regulate digital assets, as discussed below. 

State Legislation on Blockchain Energy

As of today, twenty-eight states have addressed legislation regarding blockchain. On May 26, 2022, California passed AB 2781, where the Office of Digital Innovation within the Government Operations Agency will study the feasibility and appropriateness of utilizing blockchain technology by January 1, 2024. Massachusetts introduced HB 126, which, if passed, would establish a special commission on blockchain and cryptocurrency. Louisiana introduced HB 170, allowing a candidate to receive campaign contributions in the form of cryptocurrency.

While some states approve of the usage of blockchain technology, others oppose the increase of blockchain technology. Indiana state representatives introduced HB1211. This legislation required the Office of Technology to explore how a state agency could use blockchain technology to:

(1) achieve greater cost efficiency and cost-effectiveness; and

(2) improve consumer experience, convenience, data privacy, and data security. 

As more and more states begin looking at cryptocurrency and its effects, it is likely there will become a divide among states accepting blockchain technology while other states will start to engage in legislation prohibiting the impacts of blockchain technology.

Federal Legislation on Blockchain Technology

While many states have written legislation on blockchain technology, U.S. Congress has also addressed the conversations surrounding blockchain technology. In 2021, the 117th Congress introduced 35 bills in 2021 that primarily discussed cryptocurrency and blockchain policy. The Blockchain Innovation Act was introduced on May 28, 2021. It would require the Department of Commerce to consult with the Federal Trade Commission and any other relevant agency to study the application of blockchain technology and its use to address issues of fraud and deceptive practices.

Senate Action

In the Senate, U.S. Senators Cynthia Lummis and Kirsten Gillibrand introduced the Responsible Financial Innovation Act that would create a comprehensive set of regulations across digital assets in the U.S. The legislation would attempt to tackle the main questions dealing with digital assets, set new federal laws for stablecoins, taxes on small-scale payments, and overall provide better regulation on digital assets. Some of the main features described in the landmark will give clarity to both industry and regulators while providing a clear outline of digital assets.

Lummis stated that the "Responsible Financial Innovation Act creates regulatory clarity for agencies charged with supervising digital asset markets, providing a strong, tailored regulatory framework." This legislation remains a starting point and joins previous bills in most states to regulate digital assets properly.

Biden Administration's Executive Order

On March 9, 2022, President Biden took presidential action on Ensuring Responsible Development of Digital Assets through an Executive order. The President's order outlines the first governmental approach to address the risks and benefits of digital assets, such as blockchain technology. The executive order focused on the following six issues: consumer and investor protection, promoting financial stability, countering illicit finance, U.S. leadership in the global financial system, and economic competitiveness

Over the last six months, various agencies in the federal government have developed frameworks and policy recommendations focused on the six priorities. The Biden administration noted that obscured blockchain ledgers without proper control could mitigate illicit finance that would present additional marker and national security risks in the future.

The executive order furthered federal agencies to address the potential uses of blockchain that could support monitoring or mitigating technologies to climate impacts, including liabilities for greenhouse gas emissions and other assets. The Executive order further tasked the White House Office of Science and Technology Policy (OSTP) to submit a report to the President that examined the risk and advances digital assets would have on climate change while providing solutions to tackle climate change.

Climate Risk Unit

The Climate Risk Unit established by the Commodity Futures Trading Commission (CFTC) was established to coordinate and facilitate clean-energy finance and other efforts to address climate risks. The U.S. joins other countries worldwide to reduce carbon emissions and create solutions that will address sustainability concerning the climate.

Chairman Rostin Behnam of the CFTC has stressed that digital assets impact more than the financial markets. The CFTC has further looked to play a larger role in overseeing the digital asset commodity market and ensuring digital assets do not negatively impact anything from energy to precious metals. By June 2, 2022, the CFTC unanimously voted to release a Request for Information (RFI) to seek public comment on climate-related risks, including digital assets. Public responses to the RFI will guide the CFTC while allowing the CFTC to provide recommendations to the Climate Risk Unit.

Questions?

Contact our legal team today for a free consultation if your company is interested in learning more about blockchain technology and its legislation.

About the Author

Ryan M. Newburn

Ryan Newburn is a business and legal expert trusted by Executive Teams and Boards of Directors to apply sound business principals to solve legal and financial problems. Ryan's practice focuses on mergers and acquisitions, financings, corporate formations and corporate governance in a broad range of industries including energy, distribution services, healthcare, medical devices, and technology. Leveraging his formal business training and years of practical experience, including as an executive at public and private companies, Ryan has advised hundreds of companies in dozens of industries of unique legal and financial issues.

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