Texas

The Lone Star State has become one of the hottest points on the U.S. map in terms of crypto regulation.

In late April, over a hundred people gathered near the Texas Capitol building to protest. 

Peaceful protests in the United States are not uncommon, but what made this one unique was that its participants were gathered to advocate for the right to own and use cryptocurrencies.

The location is also puzzling, as the Lone Star State has been presenting itself as a potential hub for the crypto industry in the United States, with varying state and federal laws creating an uneven regulatory landscape.

‘Digital Freedom rally’ to oppose Senate Bill 1751 in Texas State Capitol #Bitcoin $BTC pic.twitter.com/lwAzAbSnY0

— Cointelegraph (@Cointelegraph) April 25, 2023

And so, the crypto enthusiasts gathered together in Austin to protest Senate Bill 1751, which will strip cryptocurrency mining operators of some existing tax incentives. The bill has already passed in the State Senate and has proceeded to the Texas House of Representatives.

Texas doesn’t fit the binary narrative of crawling into a “crypto-hostile” mode. While its legislators want to strip crypto miners of tax incentives, they almost simultaneously vote for the right of individuals to possess crypto be included in the state’s Bill of Rights.

How did such peculiar legislative moves come about, and what does it mean for the industry?

The pioneer’s path to regulation

Almost 10 years ago, Texas became the first state to address Bitcoin (BTC) regulation when the Texas Banking Commissioner issued a memo proclaiming that the original cryptocurrency “is best viewed like a speculative investment,” not as money.

It was good news for the early adopters, as they were spared from the interest of regulators. From then on, Texas began to attract local and global crypto businesses.

In 2021, the Texas Department of Banking declared that local banks are allowed to store cryptocurrencies for their clients. A month later, the state legislature amended the local Uniform Commercial Code to recognize cryptocurrencies under commercial law. Another bill established a blockchain working group in the state.

However, when Texas made it into Cointelegraph’s list of the top five states for crypto, it was more due to its unique crypto mining conditions than its regulatory efforts.

Energy prices for industrial clients were among the lowest in the country — or in the opinion of mining company Layer1 Technologies then CEO Alex Liegl — in the world.

Following China’s crackdown on crypto mining in 2021, the U.S. state was enjoying the interest of large miners worldwide. Governor Greg Abbot expressed his excitement about Texas becoming the next “crypto leader,” with local communities welcoming new businesses, reopening industrial spaces and hiring people in small towns. 

The trend continued into 2022, with mining behemoths like Riot Blockchain relocating rigs to Texas. Even the record-breaking heat waves in the summer and deadly winter storms didn’t turn off mining operators, which accepted some periods of unplanned stoppages.

The Texas Comptroller’s office even tried to clarify that cryptocurrency mining facilities “do not place big electrical demands on the grid.” The same words have been repeated by Senator Ted Cruz, who expressed his hope to make Texas an “oasis for Bitcoin.”

Hot season for lawmaking initiatives

However, despite friendly overtures to the crypto industry, Texan authorities have never shied away from enforcement action.

The state’s principal financial regulator, the Texas State Securities Board (TSSB), has a long history of interacting with the market.

It accused Bitconnect of illegal securities trading, along with 31 other companies to follow, and pushed Arise Bank — a self-described “first ever decentralized banking platform” — out of the state for using the word “bank.”

In 2022, the TSSB actively participated in enforcement action against collapsed crypto exchange FTX, pushing charges against co-founder Sam Bankman-Fried, scrutinizing “finfluencers” who advertised the platform, and objecting to the potential sale of Voyager Digital to FTX even before the latter’s bankruptcy.

Texas also had its fair share of controversy in attempts to regulate crypto. In 2019, local lawmakers introduced a bill requiring users to identify themselves when using digital currencies. However, the bill never made it past the first reading.

But only in 2023 did the real, even anomalous, appetite for regulation arise among Texan lawmakers.

House Bill 1666, which was introduced in January by a group of lawmakers led by Representative Giovanni Capriglione, proposed to amend Section 160 of the Texas Finance Code, restricting large digital asset providers — with 500+ customers and at least $10 million of funds — from comingling the customer funds with any other type of operational capital. The bill reached Senate approval in three and a half months and was sent to the Governor’s office in May.

In early March, Representative Cody Harris introduced a resolution urging fellow lawmakers to “express support for protecting individuals who code or develop on the Bitcoin network.”

While the resolution doesn’t have any concrete effects or legal power, it provides a picture of the sentiment among certain lawmakers.

Texas lawmakers also introduced a bill to create a state-based digital currency backed by gold, the idea being that once a person purchases a certain amount of the digital currency, the comptroller would use the money received to buy an equivalent amount of gold. 

The mining bill

Senate Bill 1751 started its legislative journey in early March. In a top-down fashion, it passed through the Senate and will now be considered by the House of Representatives State Affairs Committee before heading to the first vote in the lower chamber.

Dramatically presented by some in the crypto community as an “anti-Bitcoin bill” or a “hammer” in the hands of lawmakers, the initiative, in fact, only revokes some artificial incentives, which the mining companies have been enjoying alongside some of the lowest energy prices in the country.

According to the bill, from September 2023, crypto mining facilities’ share of total energy demand should be capped at 10%. However, it only applies within the framework of a state program that compensates load reductions amid extreme events like heat waves or winter storms.

What that effectively means is that miners, which currently sell energy back to the grid at a premium when it needs it, will be unable to do so amid the growing energy demand from the industry.

Also, some mining companies would stop receiving a reduction in state taxes for participation in this program. One of the bill’s sponsors, Senator Lois Kolkhorst, was quite clear about the reasons behind the initiative: 

“We’re trying to produce all this new power. We’re going to have a lot of this new power taken up by virtual currency mining. And then we’re going to pay them to go off the grid at different times, which I believe is a part of their business model.”

What’s next?

The co-founder of the Web3-project Ecosapiens, Nihar Neelakanti, is not so sure that the “seemingly anti-Bitcoin” mining bill would be “all that detrimental” to most miners in the state “given that they would likely fall below the energy threshold laid out in the bill,” he told Cointelegraph.

However, Neelakanti’s observation might become outdated relatively soon. To believe the unnamed source from the Electric Reliability Council of Texas cited in an article by The Verge, crypto mining is set to add 27 gigawatts of demand to the grid by 2026.

Currently, the Texan power grid can provide 92 gigawatts at the maximum. Should it not raise its capacities in the next three years, crypto mining could be taking the lion’s share of Texan electricity generation, in which case the 10% cap would cut the miners from the incentives program.

Speaking to Cointelegraph, Fred Thiel, the CEO of the crypto mining company Marathon Digital Holdings, said that owners of peaker gas plants heavily backed Senate Bill 1751. They need electricity during peak demand and regard Bitcoin miners selling the energy back to the grid as competition. However, he is quite optimistic about the bill not becoming law:

“It would have been detrimental to our industry, but it seems clear this bill is likely not going to pass in the state house.”

Thiel also highlighted the pressure at the federal level makes it harder for states to adopt pro-Bitcoin policies.

Zachary Townsend, CEO of Bitcoin-friendly insurance provider Meanwhile, seemed to agree, telling Cointelegraph that federal authorities are taking a hardline approach to the industry at the regional level. However, he highlighted that there is still progress at the state level:

“There’s Wyoming and Tennessee, as well as blue-leaning states like Colorado. That might be something similar to how the marijuana debate has played out at the state level — you basically have had states crafting their own rules and regulations that, at times, were contradictory to federal rules and regulations.”

In the middle distance, the reciprocal process of federal pressure and local autonomy could converge both poles into some kind of middle ground. Until then, the wrangling will likely intensify at the state level. And Texas, in Townsend’s opinion, seems to be ground zero for this debate.