Canary Outside the Mine
By: Michael Bartels
Tags: Crypto, New York, Cryptocurrency, Blockchain, Bitcoin

Canary Outside the Mine

New York’s approach to cryptocurrency mining could set an example for other global hotspots…if they move quickly

New York hasn’t always been known in the past for calling the right shots when it comes to blockchain technology and the assets that utilize it. In 2015, New York pioneered a new frontier in cryptoasset trading, that frontier being attempted government regulation of the growing market in the state, and they blazed a trail 44 pages deep.

In a recent turn favoring cryptoasset miners, however, the state has opened the door to negotiate a pressing issue for the miners: the electric bill.

The Regulatory Battle for Electricity

Other governments haven’t always shown friendliness towards miners on this issue. Just this past April, police in the Gyeong-Ki province of South Korea arrested cryptoasset miners for exploiting cheap electricity costs to minimize the costs of their endeavor. The government, in that part of the country, provided cheaper electricity rates to struggling businesses to support them. Under the guise of other purposes, such as chicken farming, miners set up ASICS to operate on the subsidized electricity. The mining itself was not banned by law, but the fraud of misusing areas that were claimed for other purposes incurred fines for the miners.

Artificially deflated prices aren’t the only lures for hungry miners. Geographic features, such as hydropower, can also drive down energy prices for communities, and therefore miners that live in them. Quebec’s real estate along the St. Lawrence River generates enough hydropower to make energy relatively cheap for local Canadians, which made it a prime spot for mining until Quebec tripled the prices for miners in an attempt to drive them away and keep locals’ energy costs down. Parts of New York that take their power from the St. Lawrence also serve the same potential benefit.

In March, Plattsburg, NY locals filed a complaint with local authorities taking issue with cryptoasset miners’ use of their cheap electricity. Mining caused power costs to spike so much, residents claimed, that the locals’ bills suddenly spiked by hundreds of dollars. In response to the outrage, they city issued a year-and-a-half moratorium on mining, complete with daily fines of up to a thousand dollars for a failure to comply. The state has also taken a notice of the issue, and the New York Public Service Commission allowed municipal power authorities to hike costs on miners, similar to Quebec. The measure aimed to force miners to confront the external costs of their business. In the words of John Rhodes, Chairman of the commission clearing the hike, “If we hadn’t acted, existing residential and commercial customers in upstate communities served by a municipal power authority would see sharp increases in their utility bills.”

Motherboard investigates Plattsburgh, New York during the controversy over bitcoin. Source: Motherboard

Why all the Hate?

The issue, in all cases, is clear. When miners are mining cryptocurrency, the massive computing power required by ASICS also means that miners are harvesting their regions’ available electricity. This required power almost always comes from the local power grid. By extension of increased demand with no change in supply, cryptocurrency mining drives up demand for power, and therefore electric bills, in communities where miners take hold, and impose a financial externality on those living around them.

The argument isn’t without merit. Imagine if your neighbor started a business in their home. For the sake of the metaphor, let’s say they’re literally fracking in their backyard, like a character in a Netflix animated series. This business would impose costs on you by driving down your property values, via pollution, noise, etc. While cryptocurrency mining doesn’t have nearly the impact that fracking might, it does drive up electric bills, sometimes by a few hundred dollars. This provides an inconvenience to the local residents, much in the same way that a fracking rig might.

The counter-argument, of course, is if your neighbor’s business provides a clear benefit to the community. Maybe they’ve created jobs. In the case of the fracking rig, they’ll be making money off the resources, and probably giving back to the community in some way. Maybe other businesses come to your community to address the new business next door. Despite some bad externalities, having a business next door to your house isn’t necessarily a horrible thing.

(Note: if that business is fracking, the benefits to you most likely do not outweigh the inconvenience. Get out of there!)

Building the Negotiating Table

Cryptocurrency miners might drive up power costs, but they also generate wealth in the form of cryptoassets. If the mining pools employ people, they’ll create jobs. Maybe these newly wealthy miners will patronize local businesses. Maybe they’ll even start their own businesses beyond mining. John Rhodes, the same regulator who cleared local municipalities to hike rates on miners in their regions, more recently explained that while New York wants to preserve its cheap electric bills, energy is abundant enough that it can also clear a path for miners to do their business:

John Rhodes (center) alongside New York Power Authority’s Gil Quiniones (left) and Chairman of Energy & Finance Richard Kauffman (right). Source: ny.gov.

“We must ensure that business customers pay a fair price for the electricity that they consume…However, given the abundance of low-cost electricity in Upstate New York, there is an opportunity to serve the needs of existing customers and to encourage economic development in the region.”

The path will be cleared in the form of negotiated contracts. The precedent was set initially in Massena, where contracts would be negotiated to best balance the interests of miners and the community. This precedent will be important to watch; if successful, it could make New York a hotbed for mining endeavors and draw the business into the state. If those miners provided a public benefit, the example could inspire lawmakers in other areas rich in hydropower, such as Quebec and parts of China, to open their doors to the miners.

Even so, New York will have had a head start on the practice. Mining of major cryptocurrencies will be naturally more profitable and easier to establish than it could be in the future. This is especially true for currencies such as Bitcoin and Litecoin, where mining will become gradually harder, and the yields smaller, as time progresses. As the cost of mining increases, the positive externalities of the business, such as wealth creation, will decrease. More cryptoassets, of course, will pop up and provide new opportunities for miners, keeping the business flowing and generating new opportunities for new miners, but if New York’s communities generate an existing infrastructure that can pounce on such opportunities more quickly and efficiently than competitors, that will only make it harder to break into the market.

New York, it seems, has already realized the importance of opening this door to a rapidly growing and ever-more important economic practice. Even if the potential benefits are limited in the short term, once gained, they will not be easily lost. As mining of one asset becomes too expensive to generate a profit, miners could well turn to other assets to keep their networks running. If New York successfully lures miners to its cheap sources of power, the resulting cryptocurrencies floating around the state will also spur on local businesses to accept digital currencies, expanding New York’s business markets even further. What looks like a miniscule step in New York’s legal history has a massive potential impact on its future.