Don’t make crypto the electricity scapegoat

Photo Credit: Getty

A radical new tax proposed by the Biden administration would make cryptocurrency mining the scapegoat for electricity usage. The so-called Digital Asset Mining Energy (DAME) tax, first proposed in the Fiscal Year 2024 Biden budget, would impose a 30 percent levy on the cost of electricity used in crypto mining, supposedly to curb emissions. But this policy sets a dangerous precedent by singling out one industry and asking it to shoulder the blame for energy consumption that is, in reality, on par with many other industries and technologies.

As we argue in our new paper, “Don’t Depower Crypto: Biden’s electricity tax would harm conservation, innovation,” this tax would stifle new technologies and have unintended consequences, including on the industry’s own rapidly-evolving conservation efforts. For example, the mining industry is already improving its energy efficiency and shifting to renewable power sources. Policymakers should let crypto continue maturing rather than handicap its development.

Cryptocurrencies have evolved into a vibrant ecosystem offering significant advantages, from financial privacy to efficient cross-border transactions. Yet crypto mining, which secures blockchain networks, does require substantial electricity in order to verify financial transactions and introduce new coins into the existing supply. Some critics cast a wary eye on crypto mining for this reason, pointing out that Bitcoin uses about as much electricity annually as a medium-sized European nation.

However, the estimated energy consumption of Bitcoin mining is less than the power usage of data centers and networks, as well as of the traditional banking system. And it is on par or less than electricity demanded in industries like paper, iron, chemicals, and copper and gold mining. Singling out crypto as an energy villain ignores this broader context.

We also consider the claim that the DAME tax will have environmental benefits. But here too the logic quickly falls apart. The crypto sector is shifting to renewable and low-emission energy sources, including nuclear and hydropower, without the need for government intervention. Some mining companies specifically site facilities near sources of low-emission power, like Niagara Falls. Others take advantage of energy that would otherwise be wasted, like natural gas byproducts flared at oil fields.

Troublingly, the DAME tax fails to account for the source of electricity, meaning it would tax companies that rely on renewables and nuclear energy as much as fossil fuels. This could discourage crypto mining operations from prioritizing carbon-free power sources. Perversely, the result may be increased emissions if mining activity moves overseas to countries with more fossil-dependent grids.

The DAME tax also ignores the benefits generated by crypto’s electricity consumption. Mining is not waste but an investment in securing decentralized networks and enabling permissionless, censorship-resistant transactions. Stablecoins built on crypto networks have proven useful for facilitating rapid and affordable cross-border payments. And innovations like the Lightning Network promise to amplify Bitcoin’s transaction capacity while improving energy efficiency.

Crypto also remains popular among investors. Major financial institutions are lining up to offer crypto-linked investment vehicles to clients. Approval by the Securities and Exchange Commission of Bitcoin-based exchange-traded funds is expected as early as this week. There are clearly valuable financial use cases being unlocked, even amid some industry volatility and scandals (typical of many new technologies still finding their footing).

The DAME tax is particularly problematic because it would arbitrarily punish electricity usage in this one nascent industry. It establishes a precedent that says the latest tech fields can be singled out as “whipping boy,” even when their energy appetite is unexceptional. There is a danger the crypto tax could be just the first step in a broader federal plan to enact an economy-wide electricity tax.

Restricting certain industries arbitrarily sets us down a risky path. Strangely, even while the Biden administration tries to crack down on crypto’s electricity use, it simultaneously seeks to expand electrification in other areas, such as with automobiles. Rather than penalize one industry’s electricity consumption while subsidizing another’s, officials should enable the infrastructure investments needed to meet the growing energy demand of everyone, for example, through reforming the permitting process.

The solution is removing impediments to energy supply, not vilifying those who use power as an input. Americans expect reliable electricity access, whether for everyday needs or powering innovative new technologies like blockchain.

The crypto industry is still maturing and discovering which business models best balance benefits and costs. Heavy-handed taxation today risks derailing innovations that will improve efficiency and provide social value down the road. Early railroad, automobiles, aircraft, and computers were all “inefficient” in their nascency, meaning their potential had yet to be unlocked. Stifling these technologies prematurely would have deprived society of their countless benefits.

Likewise, crypto electricity use will likely continue to become more efficient as the technology progresses, much like these other industries have improved with time. But let this happen organically, not be imposed punitively through discriminatory taxes or regulation. Don’t make crypto power usage the scapegoat for energy use that all of us depend on to power our lives. Allow the industry space to grow as it builds the future of finance.