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As the use of digital currencies such as Bitcoin or Non-Fungible Tokens increases, calls for regulating the digital asset sector are mounting, not to ensure financial security but also because of the energy intensity of technologies employed to guarantee digital asset security, a process referred to as blockchain verification. Countries such as China, which once welcomed digital asset miners or crypto miners (those carrying out blockchain verification procedures) immediately reversed course either banning or severely restricting digital asset operations as energy grids collapsed on peak consumption days largely due to the rapid growth of high energy use blockchain crypto mining operations.
In March of this year, President Biden signed an Executive Order on Ensuring Responsible Development of Digital Asset, underscoring concerns over energy use and impacts on greenhouse gas emissions reductions targets that could be undermined by digital asset technologies, calling on key US agencies to collect evidence and public input and recommend policies to ensure that digital currencies, NFTs, and other emerging digital assets do not thwart greenhouse gas emissions reductions goals.
The main controversy, from a climate perspective, is the intense energy use by the technology employed to carry out blockchain verification, which is essentially a process by which multiple computer calculations verify the authenticity of a single digital asset (such as a Bitcoin, or an NFT). Bitcoin, which was one of the first digital assets to gain notoriety, built this assurance technology on the presumption that more computer calculations guarantee greater integrity and confidence in the security of the asset. Crypto miners compete to carry out these blockchain verification operations and race amongst themselves be the first to verify the integrity of the asset, receiving a prize for their effort in the form of a commission for the work. This technological approach is referred to in the digital asset sector as the “proof of work” model. The problem is that it results in hundreds, even thousands of computer operations needed to deliver each asset integrity and assurance. The more “proof of work” behind an asset, the more a user of the asset is assured that it is secure. The “proof of work” also results in warehouses full of computers competing to verify digital asset operations, and hence, the energy intensity of the model.
An emerging alternative to this high energy approach to blockchain verification is the “proof of stake” approach, utilized by Bitcoin competitors such as Ethereum, in the emerging and rapidly expanding NFT market. In the “proof of stake” model, specific crypto miners are assigned to conduct verification procedures without competition. This greatly reduces the computational requirements for a given verification procedure, and as such, the energy needs of the blockchain verification process. The users of digital assets, particularly of Bitcoin, however, are not fully on board with this “proof of stake” technology, claiming they are more weary of the assurances and integrity provided.
As countries such as China have banned or greatly restricted the use of digital assets and specific blockchain verification procedures, crypto miners are racing to find crypto mining-friendly countries and local governments. Crypto miners are mostly attracted to cheap energy and regulation-free environments to mine as much as they can, since the more they mine, the more money they make. The problem is that in some cases, crypto miners have raced to the bottom on climate, utilizing fossil fuel energy such as fracked gas, or worse, reviving otherwise defunct coal mining energy operations to cover their energy needs.
Alongside the negative environmental impacts of digital asset mining, there are also collateral social impacts. According to one study (Truby et al), Bitcoin’s 2021 CO2 emissions alone can be attributed to 18,818 future deaths due to poor air quality. E-waste is also a key issue in crypto mining due to heavy computer use (about 20% of computer waste is recycled properly, the rest is a problem for ultimate waste disposal).
Miners have moved operations from China to countries like the U.S., Canada, Iran and Kazakhstan, where the sector has found a more welcome reception and eager local governments seeking to collect taxes or create jobs in crypto mining. Some, like China, have learned the hard way and have had to back peddle decisions, or set limits to just how much mining and with what energy, they are willing to allow crypto mining to flourish.
From a climate perspective, says CHRE, without incentives or regulatory limits on energy use for blockchain verification procedures, the sector will not move to adopt more climate-friendly technologies. The last thing we want is for the evolution and expansion of digital assets to take us off track from our climate change targets and critical decarbonization strategies. We are trying to reduce our dependency on fossil fuels, not expand it.
CHRE submitted comments this month to one of the US federal agencies reviewing digital asset impacts following Biden’s Executive Order. Federal regulations should at the very least consider mandating digital asset block chain verification technology utilize clean renewable, with zero emissions. The government could also create disincentives, such as high taxes on high energy intensity technologies such as “proof of work” options or incentivize the pooling of technology and of operators to minimize miner activity for single transactions. Clear and effective strategies should also be employed to ensure that digital asset mining does not place undue strain on energy grid peak demand. Ultimately, and most importantly, says CHRE, the federal government and local governments should ensure that digital asset verification technologies do not hinder our global efforts to stop and reverse climate change and that whatever strategies are put in place, that we ensure we keep on the Paris Agreement set pathway to limiting global warming to 1.5°C.