Concerns over the environmental impact of proof-of-work mining have recently led to increased focus by legislative bodies in Europe and the United States. The use of proof-of-work consensus mechanisms, by which “miners” solve complex cryptographic puzzles in order to validate transactions and mine new blockchain tokens, is central to the operation of certain blockchain networks such as Bitcoin. However, the energy required by miners for operating the computers that make the necessary calculations has led to concerns about negative impacts on the environment, including high carbon emissions.
These concerns have led to legislative efforts in certain jurisdictions to ban or limit the use of proof-of-work mining. For example, a proposed ban on the trading of cryptocurrencies that employ proof-of-work was narrowly defeated by the European Parliament in March, though the subject remains on the radar of certain European Union (EU) jurisdictions.
On April 26, 2022, the New York State Assembly passed a bill that would curtail proof-of-work mining within the State of New York. The bill is now pending before the New York State Senate. If passed and signed into law, it would place a two-year moratorium on certain new or expanded mining operations that use proof-of-work methods.
European Union and MiCA. In late 2021 and early 2022, certain member states of the EU, including Germany and Sweden, promoted the incorporation of proof-of-work mining limitations in the EU’s Market in Crypto Assets (MiCA) regulations. In general, MiCA seeks to establish broad oversight of the crypto industry, such as by putting in place a licensing scheme for crypto industry service providers.
The proposed provision was added to draft MiCA regulations in early March 2022 and would have implemented a phase-out plan pursuant to which all cryptocurrencies supported for trading in the EU would need to be subjected to the EU’s “minimum environmental sustainability” standards with respect to their consensus mechanism. Following the phase-out period, trading in proof-of-work cryptocurrencies would have, in effect, been banned in EU member states.
The European Parliament’s economic and monetary affairs committee voted (by a 30-23 margin) to keep the provision out of the MiCA regulations at this time. As somewhat of a compromise, a slim majority of the committee voted in favor of language calling on the European Commission to offer alternative regulation by January 1, 2025, “with a view to including in the EU sustainable finance taxonomy any crypto asset mining activities that contribute substantially to climate change mitigation and adaptation.” The sustainable finance taxonomy is a classification system that establishes a list of environmentally sustainable economic activities, and is meant to assist in meeting the EU’s climate and energy targets for 2030 and beyond (including those established under the EU’s “Effort Sharing Decision,” or “ESD,” which currently sets national emission targets for member states for each year through 2030).
New York Legislation. If the New York legislation adopted by the Assembly is passed by the Senate in its current form and approved by the governor of New York, the new law would amend New York’s environmental conservation law in order to establish a moratorium on cryptocurrency mining operations that use proof-of-work authentication methods to validate blockchain transactions.
Technically, the legislation seeks to accomplish this objective by placing a moratorium on the issuance of new air permits to electric generating facilities that utilize a carbon-based fuel and that provide, in whole or in part, electric energy utilized by cryptocurrency mining operations that use proof-of-work authentication methods. It also places a moratorium on the renewal of an existing permit in similar circumstances if the renewal application seeks to increase, or will allow or result in an increase in, the amount of electric energy utilized by such cryptocurrency mining operations.
The New York Department of Environmental Conservation would be tasked with preparing an environmental impact statement assessing the energy consumption and greenhouse gas emissions attributable to proof-of-work miners and the associated impact on public health. Such statement would be due within one year following the effective date of the law.
Industry participants have pointed out that if the bill passes, it will make New York the first state to ban blockchain technology infrastructure, and some industry participants have expressed concerns that it may have a domino effect in other U.S. states.
Impact. If the New York legislation passes, the immediate impact may be to push proof-of-work mining activities to other states. While some states may follow in New York’s footsteps, there are a number of states (such as Georgia, North Carolina, North Dakota, Texas and Wyoming) that industry participants view as being friendlier to crypto mining and less likely to adopt similar restrictions.
Although few in the industry would contend that proof-of-work mining does not consume significant amounts of energy, there is less consensus as to the true scope of the issue. For example, industry participants point to statistics indicating that many miners already make use of alternative energy sources to at least some degree. From an environmental impact perspective, a unit of hydro-powered energy will have much less environmental impact than an equivalent unit of coal-powered energy.
Industry proponents also argue that proof-of-work miners can consume energy that might otherwise go unused. For example, if wind or solar plants produce more energy than the power grid can absorb, miners may be able to make productive use of such surplus. (This assumes that there are not viable alternatives for diverting such excess energy to other markets or for storing such energy for later use.)
If nothing else, these legislative efforts point to the fact that there is likely to be increasing scrutiny as to the environmental impact of blockchain activities generally, and proof-of-work mining specifically, over time. For Ethereum, which is set to transition to a proof-of-stake consensus mechanism in the near future, this may not be a concern. For Bitcoin and similar cryptocurrencies built on a proof-of-work consensus mechanism, the concept of simply legislating a forced transition to a less energy-intensive consensus mechanism is less viable in practice given the degree of decentralization, the fact that current miners are heavily invested in the proof-of-work architecture and industry reaction to prior suggestions aimed at converting Bitcoin from proof-of-work to proof-of-stake.
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