Proof of Work
The first cryptocurrency method to be created was the “proof of work” system. Under the proof of work model, virtual miners race to solve mathematical puzzles by trial and error in order to update the blockchain with verified transactions.
As a reward for their work, miners who win the race are given a predetermined amount of cryptocurrency. The process uses a large amount of energy and power, but provides a greater degree of security due to the expertise, time and expense needed to attack a proof of work system.
Proof of Stake
Alternatively, “proof of stake” has developed as a faster, but less energy-intensive mechanism for adding transactions to the blockchain.
Under this model, “validators” who possess a high level of technical knowledge seek to update the blockchain and validate a transaction by contributing or “staking” all or some of their own cryptocurrency. This method provides security in the sense that miners have an incentive not to cheat or steal coins, as doing so could result in the loss of their own coins.
The purpose of each of these processes is to ensure that people are not spending the same funds twice, but both seek to achieve this goal in different ways.
Bill A7389C: New York's Proposed Moratorium on Cryptocurrency Mining
On June 2, 2022, the New York State Senate passed bill A7389C, which would establish a two-year moratorium on certain cryptocurrency mining operations. In particular, the bill targets cryptocurrency companies that use proof-of-work authentication methods to validate blockchain transactions and that run on carbon-based power sources.
The bill, which had previously been passed in the New York State Assembly, is now in front of Governor Kathy Hochul, who could either sign the bill into law or veto it. If the governor chooses to sign the bill into law, New York would become the first state in the nation to ban blockchain technology infrastructure, and it is believed that other states would follow suit.
New York is not alone in considering legislation regarding cryptocurrency mining. The Biden Administration indicated that it has been formulating its own policy to address cryptocurrency mining in hopes of reducing energy consumption and emissions. Additionally, other countries, including China, have already banned cryptocurrency transactions.
Energy Implications of Cryptocurrency Mining
Lawmakers were motivated to pass this bill in an effort to reduce New York State's carbon footprint. Generating cryptocurrency uses a large amount of energy.
For reference, Bitcoin, the world's largest cryptocurrency, consumes approximately 150 terawatt-hours of electricity each year and results in the emission of 65 megatons of carbon dioxide annually. Further, as cryptocurrency industries continue to grow, the energy demands of cryptocurrency miners are expected to grow as well.
The bill would deny expansions, reject permit renewals, and refuse new entrants to the cryptocurrency scene in New York State for a period of two years. The bill does, however, provide one exception: companies using 100% renewable energy would not be subject to the bill's restrictions.
This bill is ultimately part of a larger effort for New York to achieve climate goals set under the Climate Leadership and Community Protection Act (“CLCPA”). The CLCPA requires New York State to cut 85% of its greenhouse gas emissions by 2050.
As a component of the bill, the Department of Environmental Conservation (“DEC”) would be required to study the environmental impacts of the cryptocurrency industry to determine whether the industry interferes with New York's climate goals under the CLCPA.
Potential Impact on New York Businesses
While the bill would reduce New York State's carbon footprint, it could also weaken New York State's economy. Under the bill, cryptocurrency businesses seeking to establish operations in New York or hoping to expand and renew permits for operations already begun in New York would need to power their facilities through renewable energy; the alternative is moving operations to another state. This legislation could thus have the effect of eliminating job opportunities for New Yorkers in a time when they may be most needed.
While New York is not currently a leading state for cryptocurrency mining, the Empire State is an attractive destination for these operations because of the relatively low cost of readily available power in upstate New York and the region's chillier climate that would help reduce the costs expended to keep the technological infrastructure cool.
Nevertheless, the proposed bill is already causing Bitcoin miners to re-think beginning their operations in New York. Companies have expressed their fears of investing in New York given the current political climate, which is generally hostile to the cryptocurrency mining industry. Consequently, some companies have preemptively decided to “set up shop” in jurisdictions that are friendlier toward cryptocurrency mining so that they will face less regulatory scrutiny.
While the moratorium would only apply to new or renewed permits and thus should only effect companies who have not already filed with the DEC, it is possible that more restrictions could be on the horizon from the New York State Legislature if Governor Hochul decides to sign the bill into law.
In conclusion, New York State's proposed moratorium on cryptocurrency mining has the potential to reduce New York's carbon footprint, but may also result in businesses either leaving New York State or beginning their operations elsewhere.
Since Governor Hochul has not yet indicated whether she will sign the bill or when she will make a decision, both cryptocurrency industries and New York workers alike will need to wait in anticipation for a final determination to be reached.