U.S. inflation breaks 40-year record: Can Bitcoin serve as a hedge asset?

February 18, 2022 Coin Telegraph

Many have likened BTC’s anti-inflation properties to those of gold, but there are important differences between the two assets.

On Feb. 9, the United States Bureau of Labor Statistics reported that the Consumer Price Index, a key measure capturing the change in how much Americans pay for goods and services, has increased by 7.5% compared to the same time last year, marking the greatest year-on-year rise since 1982. In 2019, before the global COVID-19 pandemic broke out, the indicator stood at 1.8%. Such a sharp rise in inflation makes more and more people consider the old question: Could Bitcoin, the world’s largest cryptocurrency, become a hedge asset for high-inflation times?

What’s up with the inflation spike?

Ironically, the fundamental reason behind the unprecedented inflation spike is the U.S. economy’s strong health. Immediately after the COVID-19 crisis, when 22 million jobs were slashed and national economic output saw a massive decrease, the American economy kickstarted a massive recovery on the heels of the relative success of the vaccination campaign. However, supply chains appeared to be unprepared for such a rapid return of business activity and consumer demand.

The rebound was fueled by the Biden administration’s grandiose $1.9 trillion COVID-19 relief package, with the majority of American households receiving thousands of dollars in direct support by the federal government. Tom Siomades, chief investment officer at AE Wealth Management, believes that the stimulus was excessive, given the overall financial conditions of U.S. households. Speaking to Cointelegraph, he remarked:

“The $1.9 trillion CARES act in March, when Americans were already saving at a 20% rate, put more money into the economy than it could bear. That money allowed people who would otherwise have returned to work to rethink their options. This created a worker shortage, which in turn led to demand for higher wages, which meant higher costs and prices.”

Some economists point out a more subtle factor: an alarming exercise of corporate pricing power by U.S. businesses. “Now producers know people can pay more, and will be unwilling to accept lower prices for their products,” Siomades explains.

Now that inflation has become a major political problem for the Democratic Party, all eyes are on the Federal Reserve’s efforts to solve it. The inflation wave is likely to gradually fade, if not to pre-pandemic levels, then to at least more moderate levels by the end of the year. Nevertheless, as rising prices are becoming a matter of increasing public concern, private citizens and investment professionals alike begin to look around searching for a safe haven for their funds — and here’s where Bitcoin comes in.

Bitcoin as the “new gold”

With every year that Bitcoin and the cryptocurrency sector become more mainstream, the frequency of comparisons with gold in terms of reserve-asset potential multiplies. Many observers suggest that Bitcoin could even be more attractive than the precious metal in this regard. In November 2021, the preeminent cryptocurrency was up by 133% year-on-year against gold’s mere 4%.

As Todd Ault of investment company Ault Global Holdings observed, in the last 13 years, Bitcoin has massively outdone U.S. inflation thanks in no small part to the asset’s deflationary properties. He commented to Cointelegraph:

“What makes it a great store of value and inflation hedge is: there’s a cost associated with mining it; there will only be $21 million Bitcoin. Meaning, there is a finite amount of Bitcoin to be mined [...] Really, it’s still a standard hedge people traditionally think about; there’s limited supply, and even in the current financial climate, it will continue to be in demand.”

Unlike gold, Bitcoin lacks the key features of a predictable, low-volatility asset. Maybe this doesn’t pose as much of a problem for a faithful, diamond-hands hodler who believes in Bitcoin’s ultimate monetary dominance, but for someone who has invested a significant share of their personal savings as a shield from inflation, the unpredictability could be unnerving. In some sense, Bitcoin’s price swings strongly contrast the relative stability of gold, which serves not as a wealth multiplier, but as a preserver of purchasing power.

“In theory, Bitcoin should make for a good inflation hedge because there’s a limited supply of tokens that can be mined. That creates a form of scarcity, which could help it hold its value over time compared to fiat currencies,” as Katie Brockman, analyst at investment advising firm The Motley Fool, explained to Cointelegraph. However, Bitcoin can only be a store of value if a significant number of people find it valuable. Brockman added:

“It doesn’t appear that Bitcoin has reached that stage. While inflation has soared, the price of Bitcoin has plummeted in recent months. It has also fallen at roughly the same rate as meme tokens like Dogecoin, suggesting that many investors perceive Bitcoin as simply another cryptocurrency rather than a store of value.”

However, just because Bitcoin is an imperfect hedge against inflation right now doesn’t necessarily mean it will never be a dominant store of value. But if the currency is to become inflation-proof, it will need to gain both widespread acceptance and a robust mainstream reputation.

Hedge over time

Bitcoin’s status will also depend on how investors choose to use it. If people are holding their BTC bags as a hedge against inflation, it may not be subject to the same volatility cycles as equity markets. But if most investors are trading Bitcoin like they would stocks, the asset’s price could be more correlated with the market’s fluctuations.

The future looks bright for the top cryptocurrency, although the timeline is less clear. Ault believes the volatility may stop at the price of about $2 million per BTC. He added:

“In the process, Bitcoin is expected to become a multi-trillion-dollar asset class. That doesn’t make it a direct hedge, but rather a hedge over time.”

One problem that could become more pronounced in the future is uneven distribution of crypto wealth. As the interest in BTC grows in waves and the entry cost for investment grows rapidly, it is inevitable that large chunks of its monetary stock will concentrate among a limited number of wallets.

That brings us to Bitcoin’s paradox. It seems that to become the “new gold” in terms of conservative inflation hedging, the original cryptocurrency needs to outgrow its speculative attractiveness and become a broadly (and, perhaps, more evenly) dispersed mass of money. A sound regulatory framework for crypto is one thing that could definitely help the asset class achieve these goals.

Oil giant ConocoPhilips reduces gas flaring emissions via Bitcoin mining

February 17, 2022 Coin Telegraph

Bitcoin mining

Oil and gas giant ConocoPhilips has entered the Bitcoin mining business in a bid to profitably reduce carbon emissions.

International oil and gas giant ConocoPhilips is dipping its toes into Bitcoin (BTC) mining as a way to eliminate the wasteful practice of flaring.

According to a report from CNBC, the company is currently operating a pilot scheme in the oil-rich region of Bakken, North Dakota. Instead of burning excess gas, a byproduct of oil-drilling known as flaring, the company is selling it to a third party Bitcoin miner to be used as fuel.

Speaking on the environmental impacts of “routine flaring”, a representative from the company stated that the decision to move into Bitcoin mining reflected the company’s overarching objective of reducing and “ultimately eliminating routine flaring as soon as possible, no later than 2030.”

In a slide from a 2021 ConocoPhillips presentation, the company stated that it has an “ongoing focus” on ensuring that gas capture projects achieve zero routine flaring by 2025.

ConocoPhillips testing out bitcoin mining in the Bakken

Good find from @EnergyInfraBro $COP pic.twitter.com/Gk5tRJCbrh
— Collin McLelland ‍☠️ (@FracSlap) September 23, 2021

Bitcoin mining offers a unique and profitable solution to the problem of routine flaring, which occurs when mining companies accidentally hit natural gas formations while drilling for oil.

While oil can be siphoned up and collected at any location, natural gas harvesting requires pipeline infrastructure. If miners strike gas at any significant distance from a pipeline, companies are forced to burn or “flare” the gas, which is ultimately an unprofitable and environmentally harmful procedure.

Instead of allowing the gas to be wasted, Bitcoin miners place shipping containers or trailers filled with crypto mining equipment near an oil well and divert the gas into generators which power the equipment.

ConocoPhillips did not disclose which Bitcoin miner it has been selling to, nor how long the preliminary experiment has been underway.

Another US-based oil and gas explorer, Crusoe Energy has also taken advantage of Bitcoin mining as a way of profitably reducing emissions, with approximately 60 data centers and Bitcoin mining units being powered by diverted natural gas on their oil fields. According to a report from Argus media, Crusoe Energy’s technology lowers CO2-equivalent emissions by as much as 63% when compared with regular routine flaring.

In response to the widely-circulated criticisms of Bitcoin mining that usually emerge from environmental concerns, miners have become increasingly concerned with finding new ways to harness more sustainable methods of energy.

The Bitcoin Mining Council estimated a sustainable energy mix of 58.5% for the global industry in the fourth quarter of 2021. Miners in Norway are even using waste heat to dry out lumber.

SEC v. Ripple: Here’s how two 2012 memos can turn the tide in the milestone crypto case

February 16, 2022 Coin Telegraph

bitcoin regulation

We will soon know if Ripple’s executives were warned of the possibility of an SEC lawsuit ahead of XRP’s launch.

Ripple’s court battle with the United States Securities and Exchange Commission has recently seen new developments that, according to some observers, could foreshadow an impending resolution of this massively consequential case. Feb. 17 marks the deadline for Ripple to unseal a series of 2012 documents whose contents will likely sway the opinions of both the court and the public toward either one side or another. In another plot twist, the court’s decision to treat some of the SEC’s documents as open to discovery could set a groundbreaking precedent for similar cases involving U.S. executive agencies. Here is where things stand ahead of the next round of the showdown.

What’s at stake

The SEC’s lawsuit against Ripple Labs Inc., filed on Dec. 23, 2020, alleges that the company raised upward of $1.3 billion by selling the XRP token without registering it as a security, which is what the agency considers it to be. Ripple’s argument is that XRP is a tool that facilitates international payments rather than an unregistered investment product and that the agency’s jurisdiction does not extend to the token and its sales.

This is not the first lawsuit against a digital asset issuer that the securities regulator has brought. However, the vast majority of such cases end in a settlement instead of going to trial. In this scenario, individual crypto firms yield to the SEC’s demands and pay penalties to be let go. The regulator’s case never reaches the stage where it can be scrutinized by a judge or a jury panel. No precedent for similar cases in the future is set.

Unlike many others, Ripple chose to go all the way and get into a legal fistfight. If the SEC scores a W, court precedent will reinforce the agency’s claim for regulating much of the crypto market using “tried and tested” securities laws. If Ripple prevails, the need for a more nuanced regulatory regime tailored to various types of digital assets will become more evident than ever. It goes without saying that the SEC’s regulatory ambitions would suffer a major blow if the latter scenario plays out.

While both Ripple as a company and the vociferous online community of its token’s supporters, known as the XRP Army, have been a divisive presence in the crypto space, the lawsuit’s resolution will affect the entire U.S. digital asset industry.

2012 legal memos

One of the pillars of Ripple’s defense is that it simply did not know that its XRP token could be categorized as a security. The SEC, the argument goes, should have notified the company of its intentions before taking the matter to court. By not doing so, the agency denied Ripple what is known as fair notice.

This powerful argument could go bust, though, if it turns out that Ripple knew it was possible the SEC would take issue with the status of the token. Peter Vogel, of counsel and a member of the Blockchain Task Force of law firm Foley & Lardner, explained to Cointelegraph:

“U.S. District Judge Analisa Torres ruled that by Feb. 17, Ripple would have to make public sealed legal memos from 2012 from Ripple’s lawyers advising Ripple before launching XRP. The SEC claims that Ripple was advised in 2012 that XRP would be deemed a security under federal law, so Ripple was well aware of the risk that the SEC would bring a lawsuit. Ripple claims that the 2012 legal memos related only to proprietary internal strategies.”

If the memos clearly point to the absence of a federal law violation, Ripple’s argument will receive a massive boost. However, evidence suggesting that the firm’s executives chose to ignore their lawyers’ relevant concerns ahead of launching XRP could considerably deflate Ripple’s fair-notice argument.

*District Judge Analisa Torres. Source: Columbia Law School*

The company did, though, see the speech from William Hinman, the then-director of the SEC’s Division of Corporation Finance, at the Yahoo Finance All Markets Summit in June 2018 as a notice to market participants about what the commission does and does not consider a security. The regulator contends that these remarks reflected Hinman’s personal position rather than the agency’s.

In a thriller plot twist, Judge Torres ordered the SEC to unseal email communications and staff notes related to Hinman’s speech — an order that the commission disputes. If the order stands, it could change the way executive agencies exercise a principle known as deliberative privilege.

Checking the SEC’s privilege

In common law systems, deliberative process privilege is a principle that protects information from public disclosure that shows the process by which an executive body reached a certain decision or policy. In the case at hand, the principle protects, say, internal documents that describe the SEC’s thinking on how to categorize digital assets from normal discovery in civil litigations and Freedom of Information Act requests.

But because the SEC argued that Hinman’s remarks in question reflected his private opinion, deliberative privilege does not extend to the SEC’s internal documents related to this speech, so these records are fair game.

Amina Hassan, litigation partner with law firm Hughes Hubbard & Reed, thinks that the fight over the scope of the commission’s deliberative privilege is even more interesting than what’s inside the 2012 memos. Hassan commented:

“If the court’s decision stands, it could have a far-reaching impact, opening similar types of SEC and other agency documents to discovery. While any discovery disputes around agency notes will necessarily be fact-specific and resolved on a case-by-case basis, the decision does provide litigants a helpful hook to seek similar documents from the government.”

In other words, the precedent could open the door for crypto firms that will be fighting the SEC and other executive agencies in court in the future to demand the kind of information that was previously out of reach. Hassan added that Judge Torres’ decision is also likely to cause agencies to reconsider “how they treat their officials’ public speeches, which usually contain standard disclaimers that they express the views of the official only, not the agency.”

How does this end?

The fact that Ripple chose to engage in court rather than going for a settlement right away does not rule out the possibility of a settlement at some point in the process. The legal experts who spoke to Cointelegraph on this matter believe that a settlement is still very much on the table. Vogel commented:

“Since about 95% of all lawsuits settle before trial, it seems likely that we will never have a jury trial, but the interpretation of these 2012 legal memos may be a factor in some settlement of the current SEC lawsuit.”

Hassan said that “It is difficult to say whether the case is close to resolution since the discovery and pleading disputes are continuing. But the stakes are very high for both parties, so we cannot rule out a settlement.”

Even if Ripple’s side chooses to settle without trial at some point in the process, the litigation has already demonstrated that a well-resourced crypto company can cause the SEC serious trouble in an open fight.

MIT, Boston Fed give digital dollar CBDC a modest test run

February 11, 2022 Coin Telegraph

CBDC

Blockchain-based architecture was deemed “not a good match” as researchers weighed several technological designs.

The world recently got a sneak peek at what a digital dollar, or at least one component of a hypothetical United States central bank digital currency (CBDC), might look like, courtesy of Project Hamilton, a collaborative effort of the Federal Reserve Bank of Boston and the MIT Digital Currency Initiative. The results of the project’s first phase were originally expected last summer but were released on Feb. 3. The project, announced in 2020, is named in honor of Alexander Hamilton, the first U.S. Treasury secretary, and Margaret Hamilton, an MIT staffer who contributed to NASA’s Apollo program.

Researchers developed two open-source models of transaction processing software, called OpenCBDC, for the “technology-agnostic” project. The researchers note in the project’s white paper that “technical and policy choices are highly interdependent and that these choices are more granular and with more permutations than commonly discussed.” Only one of the models used distributed ledger technology, and it turned out to be the less satisfactory solution, with the technology described as “not needed.”

The distributed ledger model was “not a good match” for the project due to its performance. The project assumed administration by a central actor, and the model was modified accordingly. However, it created performance bottlenecks, and the requirement that the central transaction processor maintain transaction history slowed throughput significantly. The alternative model’s two-phase commit architecture supported “a range of potential privacy options” without central storage of transaction history, although the researchers acknowledged that it presented greater challenges for auditing.

The distributed ledger model had a peak throughput of approximately 170,000 transactions per second, while the competing model, which processed transactions in parallel on multiple computers, had a throughput of 1.7 million transactions per second and showed linear scalability with the addition of more servers.

The second, and apparently last, phase of Project Hamilton will “determine technical and performance tradeoffs associated with various designs.” Researchers have promised to look at “privacy, auditability, programmability, interoperability, and more.” Boston Fed Executive Vice President Jim Cunha said in a press call that “We’ll be defining a number of use cases that focus on different design and possibly policy questions,” adding: “For example, if one policy goal was to maximize privacy, and the other is to stop criminal activity, those create conflicts from a technology perspective in how you design the system.”

The release of the Hamilton Project Phase 1 results comes simultaneously with China’s attempt to scale up its rollout of the digital yuan at the Winter Olympics. The contrast between the United States’ and China’s level of CBDC development could not be starker, and those behind Project Hamilton took pains not to overstate the project’s place in American CBDC development. MIT Digital Currency Initiative director Neha Narula said in a statement, “It is important to note that this project is not a comment on whether or not the U.S. should issue a CBDC — but work like this is vital to help determine the answer to that question.” She added, “The policy conversation around central bank digital currency is still in its infancy.”

The scattershot nature of that conversation is apparent at a glance. The Fed steadfastly refuses to take a stance on a CBDC, reiterating its neutral position in a paper released last month. The same week, Representative Tom Emmer, a Republican from Minnesota, introduced a bill to prohibit the Fed from issuing a retail CBDC, claiming such a law would keep the Fed off an “insidious path” toward authoritarianism. Not long afterward, Bank of America issued a note calling a CBDC “inevitable.” The Fed is welcoming comments on Project Hamilton via an online form with 22 questions. The project is also hiring a new product management director.

US Federal Reserve bank at the helm of CBDC research effort appoints new president

February 10, 2022 Coin Telegraph

bitcoin regulation

Susan M. Collins is set to become the first Black woman to head a Federal Reserve Bank.

The Federal Reserve Bank of Boston, or Boston Fed, has selected economist Susan M. Collins, University of Michigan provost, to serve as its new president and chief executive officer.

The seat has become vacant in September 2021, when the then-president Eric Rosengren expedited his retirement amid a controversy around his securities trading while in office. Collins, who is Jamaican-American, will become the first Black woman in the Fed’s history to lead a Federal Reserve Bank. She will assume office on July 1.

The Boston Fed is one of 12 regional branches of the Federal Reserve. Along with the Fed’s Board of Governors and the Federal Open Market Committee, or FOMC, the Federal Reserve Banks participate in the development of U.S. monetary policy. The Boston Fed president is also one of the five regional Reserve bank leaders who serve as voting members on the FOMC, the body responsible for setting interest rates.

As Cointelegraph reported, the Boston Fed, in partnership with the Digital Currency Initiative at the Massachusetts Institute of Technology, has recently completed the first stage of Project Hamilton – a research initiative aimed at developing and testing a hypothetical central bank digital currency (CBDC) design.

As an academic, Collins studied development economics, exchange rate regimes, and macroeconomic imbalances. During her career, she has not made public statements related to CBDCs or digital assets in general. Also, little is known about her monetary policy views: According to a Reuters report, in a 2019 interview Collins spoke in favor of raising the Fed’s 2% inflation target.

Law Decoded: Tangible wins, new menaces and the global crypto taxation drive, Feb. 1–7

February 7, 2022 Coin Telegraph

bitcoin regulation

Crypto advocates celebrate wins, the Treasury and SEC seek to introduce crypto-unfriendly rules, and governments rush to levy digital asset taxes.

Every global event or major political crisis these days can trigger a digital asset-related conversation. As China welcomes the world’s top athletes to the Beijing 2022 Winter Olympics, showing off ultra-high-tech facilities and sports infrastructure, some United States politicians have raised concerns over the Games’ potential to act as a booster to the digital yuan’s adoption. In neighboring Myanmar, the military government that had overthrown the nation’s elected leadership a year ago is now looking into launching its own digital currency, not to project economic influence but to improve the domestic payments system and the struggling economy more broadly.

Below is the concise version of the latest “Law Decoded” newsletter. For the full breakdown of policy developments over the last week, register for the full newsletter below.

The many good things

Last week brought several favorable developments on the U.S. regulatory front. In a major win for the crypto industry, the House of Representatives passed the version of the America COMPETES Act without a provision that could have allowed the Treasury to suppress and surveil certain financial transactions without due process. The provision and its potential to endow the government with unchecked power to censor transactions have come to light thanks to crypto advocacy group Coin Center and other allies.

Another setback for the IRS came from the courtroom. The agency offered a Tezos block validator who had sued the IRS over staking rewards taxation a settlement that included a refund of the taxes paid. The plaintiff, however, took a principled stand and turned down the offer, realizing that the entire proof-of-stake industry could benefit from a court ruling in this case.

Threats old and new

It wasn’t all rosy, though. As the Treasury’s semi-annual regulatory agenda revealed, the notorious “unhosted wallet” rule could be back on the table. First proposed in late 2020, the rule would require crypto exchanges to collect and report transaction data and personal information of anyone who transacts with self-custodied crypto wallets — i.e., those not maintained by an intermediary. The rule would be triggered if, for example, a user of a regulated exchange withdrew upward of $3,000 to their private wallet.

Another source of potential regulatory pressure is a recent proposal by the Securities and Exchange Commission that seeks to extend the definition of an exchange to include “communicational protocol systems.” This would likely encompass DeFi protocols that facilitate the trading of digital assets that the SEC deems to be securities — i.e., most crypto assets.

If you can’t beat them, tax them

Judging from last week’s news, a good number of nations that have been flirting with the idea of a blanket ban on digital assets might be having second thoughts upon appreciating how much tax revenue is there waiting to be extracted. The Russian government has come up with an eye-popping estimate of its citizens’ (potentially taxable) aggregate crypto holdings, which can reportedly weigh on the scales of the ongoing debate between the nation’s central bank and finance ministry on whether to ban or regulate crypto. Over in India, the finance ministry has announced that a CBDC is to launch later this year or the next, along with a 30% crypto tax. Rising adoption has also inspired Colombia’s tax authority to announce a crackdown on crypto tax evasion, while in Venezuela, the government is looking to impose a new 20% tax on certain crypto transactions.

US Federal deposit insurer lists “crypto-asset risks” among its top priorities for the year

February 7, 2022 Coin Telegraph

Banking

FDIC's acting chairman stated that the work on crypto-related guidance for U.S. banks is underway.

Martin J. Gruenberg, the acting chairman of the Federal Deposit Insurance Corporation, or FDIC, named “crypto-assets” among the agency’s key priorities in 2022, alongside addressing financial risks associated with climate change and promoting amendments to major federal statutes relevant to FDIC’s jurisdiction.

A Monday statement outlines five key areas that the agency deems most important for its mission of maintaining public confidence in the U.S. financial system. Number four on the list is evaluating “crypto-asset risks.”

Acknowledging the rapid pace with which digital asset-based products are becoming part of the financial landscape, the statement emphasizes the systemic risks that this process could pose. Gruenberg further maintains that all federal banking agencies should join forces in assessing these risks and determining the scope of crypto-related activities that banks can safely undertake. As per the statement, the next step would be drafting a comprehensive guide for banking organizations:

"To the extent such activities can be conducted in a safe and sound manner, the agencies will need to provide robust guidance to the banking industry on the management of prudential and consumer protection risks raised by crypto-asset activities."

The FDIC is an independent agency tasked with providing deposit insurance to U.S. banks’ clients, as well as supervising financial institutions for risk management and consumer protection standards. The regulator has recently undergone a change of leadership, with former chairperson Jelena McWilliams stepping down on Friday.

Gruenberg’s statement echoes those previously made by McWilliams as she discussed the U.S. banking agencies’ ongoing effort to provide banks with guidance on activities involving digital assets.

PoS validator turns down IRS tax refund offer, pushes for clear policy on staking taxation

February 3, 2022 Coin Telegraph

Coin Telegraph

The Tezos validator who took the IRS to court argues that staking rewards should be treated as created property rather than income.

A United States couple suing the federal tax agency over Tezos (XTZ) staking rewards taxation chose to forego a tactical victory and engage in a court battle that could eventually result in policy change.

Joshua and Jessica Jarrett, who run a node on the Tezos network (thus “baking” new blocks, in the ecosystem’s lingo), have sued the Internal Revenue Service (IRS) over the taxes paid on the XTZ tokens created in 2019. The Jarretts filed a refund claim on upwards of $3,000 paid on the tokens, which the IRS ignored.

The fundamental point of contention underlying the lawsuit is the classification of staking rewards as either taxable income or created property, which is not taxed until it is sold. The Tezos bakers argue that earning coins by staking is akin to baking a cake or writing a book, and thus these coins should not be treated as taxable income.

On Feb. 3, Joshua Jarrett released a statement that the U.S. Government has offered a refund of the taxes in question as part of the settlement. Jarett said that “At first glance, this seemed like great news,” but he later realized that without a court ruling, there would be nothing to prevent the tax service from taxing his staking rewards again. Jarrett said:

A year and a half into this process, the government didn’t want to defend the position that the tokens I created through staking were taxable income. […] I need a better answer. So I refused the government’s offer to pay me a refund.

Jarrett’s statement further indicates that his ultimate goal is to get the IRS to clarify its position on taxing staking and block rewards “for both Proof of Stake and Proof of Work” systems. He maintained that, while no guidance exists on this matter, the tax authority’s concession in his case could be interpreted as support for the position that staking rewards are not taxable income.

Reid Yager, former staffer at industry advocacy group Proof of Stake Alliance (POSA), stated:

The decision by the IRS and DOJ to offer a refund without taking steps to correct poor policy places American businesses and American innovation at risk.

A subsequent court ruling on whether staking rewards are taxable income or not will likely become a critical juncture for the PoS industry.

Averted a year ago, controversial transaction monitoring rule is back on Treasury’s radar

January 31, 2022 Coin Telegraph

bitcoin regulation

The Treasury will consider imposing KYC regulations on transactions involving self-custodied wallets.

As the Department of the Treasury has announced its regulatory agenda for the fiscal year on Jan. 31, many in the Web3 space have likely experienced flashbacks to December 2020, when the agency had first proposed to impose Know Your Customer, or KYC, rules on transactions that involved self-custodied crypto wallets.

The Treasury’s semiannual agenda and regulatory plan, a document that is meant to inform the public of the department’s ongoing rulemaking activities and encourages public feedback, features a clause entitled “Requirements for certain transactions involving convertible virtual currency or digital assets.”

Ascribed to the Treasury’s Financial Crimes Enforcement Network, or FinCEN, it proposes to require banks and money service businesses to “submit reports, keep records and verify the identity of customers” in relation to transactions with funds held in unhosted wallets.

In FinCEN parlance, unhosted (also known as self-hosted) wallets are those that are not controlled by an intermediary financial institution or service. Users of such wallets “interact with a virtual currency system directly and have independent control over the transmission of the value.”

The rule proposed in December 2020 would have required registered cryptocurrency exchanges to collect personal details of their customers transacting with an unhosted wallet if the value of the transaction exceeded $3,000. A person sending funds from an exchange account to their private wallet would fall within the scope of the rule.

Introduced in the waning days of Secretary of the Treasury Steven Mnuchin’s tenure, the rule was scrapped amid massive pushback from the industry.

At the time, Mnuchin said that the rule addressed “substantial national security concerns” associated with the cryptocurrency market. The resurgence of the agency’s focus on the self-hosted wallets measure could have to do with the “crypto as a national security threat” focus of the executive order that the Biden administration is reportedly preparing.

Still, mentioning a rule on the Treasury’s semiannual agenda does not mean that it will necessarily be adopted.

Fossils vs. Renewables, PoW vs. PoS: Key policy issues around crypto mining in the U.S.

January 30, 2022 Coin Telegraph

Bitcoin mining

A recent meetup on the Capitol Hill highlighted several key debates that will define the mining industry’s development in the years to come.

On Jan. 27, a group of eight U.S. lawmakers, led by Senator Elizabeth Warren, sent letters to the world’s six largest Bitcoin mining companies, demanding to reveal the detailed data on their electricity consumption. This isn’t the first time Senator Warren requested this information from a mining operation — last month a similar letter was sent to Greenidge Generation, which uses a natural gas plant to power its facility.

These moves highlight the increasing regulatory pressure on crypto mining businesses in the United States. But, as last week’s Congress hearing showed, the growing scrutiny might turn out to be an opportunity to align the mining sector’s development with the broader political push for clean energy. Here are some of the key themes around crypto mining that have captured the lawmakers’ attention and that will likely inform the intensifying policy conversation.

Total energy consumption

A cornerstone of any environmental critique of Bitcoin and crypto in general, the question of how much energy cryptocurrency mining consumes was expectedly prominent at the hearing. In a 2018 paper published in the prestigious journal Nature, a group of researchers predicted that Bitcoin’s growth could singlehandedly push global emissions above 2 degrees Celsius within less than three decades — not a good look given the international community’s stated mission to prevent the planet’s temperature rise of the exactly same magnitude.

Cambridge University Bitcoin Electricity Consumption Index set the tone of comparing the yearly Bitcoin-driven consumption to various nation’s levels — and as for now, with its 131.1 TWh per year the most popular cryptocurrency consumes more energy than Ukraine (124.5 TWh) or Norway (124.3), according to this source. The current estimate of Ethereum’s annualized energy footprint by Digiconimist stands at around 73.19 TWh.

None of the most widely cited estimates is beyond dispute, as the recent fact-check report by Bitcoin Policy Institute (BPI) suggests. It cited three separate articles from the peer-reviewed Nature Climate Change journal, one of them debunking the 2 degrees argument as “fundamentally flawed” and criticizing its methodology.

Crypto proponents prefer to compare Bitcoin energy consumption not to nations, but to other industries — in that case, according to the BPI report, BTC’s 0.27% of global energy consumption is less than that of gold mining, although the Cambridge Index sets the two equal.

Fossils vs renewables

In the context of the ever-growing political pressure on energy consumption, the search for a sustainable energy framework becomes crucial for any industry that wants to flourish in the digital age.

The critics of the crypto mining industry have recently highlighted several instances of mining operations relaunching the existing fossil power plants. The authors of the letter that some 70 NGOs sent to Congress ahead of the crypto mining hearing called the legislators’ attention to several such instances, like the relaunch of coal waste plants in Pennsylvania by Stronghold Digital Mining and the partnership between Marathon Digital and coal-fired plants in Montana.

There is also evidence that these are not the only American companies buying up the old ‘“dirty energy” plants to feed their mining operations — the pattern is observed from Texas to Missouri. At the Congress hearing, it was Steve Wright, a former general manager of Chelan County’s in Washington public utility district, who talked at length about the problem. He explained that miners’ interst in dormant fossil facilities is driven by a simple market mechanism: As renewable energy prices (on the West Coast specifically) grow in line with increasing demand, coal prices drop due to investors’ flight ahead of the upcoming 2025 ban on any coal usage in Washington state.

As Represenatives kept returning to this issue over the course of the hearing, it became clear that the tension between the use of fossil fuels for crypto mining and the industry’s potential shift to renewable energy sources is at the center of policymakers’ thinking on the issue. Witness John Belizaire, CEO of green data centers developer Soluna Computing, argued that there exist scenarios under which crypto mining can shift from a being “dirty” energy concern to a vehicle complementing and empowering the renewable energy sector.

Belizaire’s core argument is that computation-intensive tasks like Bitcoin (BTC) mining can be powered by the recaptured excessive (or, in the industry terms, “curtailed”) energy otherwise wasted by clean power plants. According to him, solar and wind farms waste up to 30% of generated energy due to incompatibilities with the old energy grids. Belizaire also addressed the problem of energy shortages allegedly driven by crypto miners, highlighting the fact that the kind of computations that miners execute can be stopped at any moment on-demand.

For now, the problem of “dirty mining” is here to stay simply due to the U.S. level of electricity production from renewable sources being below 7.5%. A recent study by DEKIS Research group at the University of Avila ranks the United States as the 25th country in the world in terms of its sustainable mining potential, with Denmark (65% of energy generated from renewables) and Germany (26%) leading the chart.

Nevertheless, America remains a safe zone for mining, while many other nations' electrical grids are less suited to handle additional load. With a reasonable regulatory framework in place, this could be a massive competitive advantage, laying the groundwork for the U.S. to become a global mining haven. Speaking to Cointelegraph, Belizaire explained that there are certain policy steps that can nudge crypto miners to “go green.” He listed a number of specific measures: “Extended tax credits and special investment tax credits for miners that use green energy and serve as flexible load, along with DOE loan guarantee that is extended to encourage the development of green crypto mining.”

PoW vs. PoS

Any discussion of a possible alliance between crypto mining and green energy tends to bump into a Proof of Work (PoW) versus Proof of Stake (PoS) debate, and the recent hearing was not an exception. It was Cornell professor Ari Juels who repeatedly stated that “Bitcoin does not equal blockchain,” in the sense that the energy-intensive PoW consensus mechanism is not the only way to enjoy the decentralization advantages of crypto.

And, of course, the number one alternative on the table is PoS consensus mechanism that will possibly be adopted by the Ethereum ecosystem and is currently used in a large number of new blockchain projects. It is also central to the development of smart contract-based technologies such as decentralized finance (DeFi) and non-fungible tokens (NFTs).

Juels’ statements reflect the general pressure that is building up on PoW. Earlier this month, Erik Thedéen, vice chair of the European Securities and Markets Authority (ESMA), proposed an outright ban on PoW mining in the EU and called for transitioning to PoS due to its lower energy profile.

In the U.S., dominating the global Bitcoin mining market with the 35% share, the issue is way more pressing than in Thedeen's native Sweden, where only about 1.16% of BTC is mined. However, the real problem lies in the Asia-Pacific region, where, according to the The Global Cryptoasset Benchmarking Study, almost 50% of electricity to Proof-of-Work miners comes from coal.

None of the three experts who spoke with Cointelegraph on the matter see the the juxtaposition of the two consensus protocols as productive. John Warren, CEO of crypto mining firm GEM Mining, noted that there are “slim to none” chances of Bitcoin transitioning to PoS. With that fact in mind, and given Bitcoin's status as the biggest cryptocurrency, ‘the industry should focus its attention on increased adoption of carbon-neutral energy sources versus trying to alter the Bitcoin verification process.”

John Belizaire rejected the idea that the government should support any of the bulletins over another:

Congress does not have enough knowledge to make a call on the technical architecture of a global platform that powers billions of dollars in assets [...] The technology community should be the final arbiter of innovation [...] The POW camp will innovate to solve its problems itself.

Mason Jappa, co-founder and CEO of mining company Blockware Solutions, remarked that both Proofs have their comparative advantages, but, in echoing Belzaire’s testimony, underscored the compatibility potential PoW networks possess towards renewable energy. In that sense, Jappa sees PoW mining as a "net positive for society":

Mining is a perfect complement to the energy grid and is repurposing infrastructure that was otherwise not being utilized, along with providing a use case for building out our energy grid.

What’s next?

As Jappa noted, "It is bullish for the ecosystem that this hearing took place", as once again the lawmakers expressed their understanding that cryptocurrencies are here to stay.

Warren specifically appreciated the part of the discussion that “underscored the ability for the mining industry to innovate more eco-friendly solutions.” We still witnessed plenty of 101 explanations of blockchain technology that reminded of the long way lawmakers should go in terms of their understanding of crypto economy, but, as Warren poined out:

It's important to acknowledge that there were a number of positive remarks that stemmed from the discussion, showcasing to the nation that mining has created many new jobs and that Bitcoin introduced valuable blockchain technology to the world. That perspective has been largely missing from some of the recent public discourse around crypto mining.

Besides the obvious need for both the general public and legislators to get better educated on the issue, there are some clear focal points around which the digital mining industry could rally, Belizaire believes.

For example, laws or governmental programs that encourage the use of renewable energy over legacy fossil fuels to power the industry, like “Incentives for job-creating in rural parts of the country where mining operations are set up – at both the state and federal level.”

Thus, it appears that the green mining card is the one that can present a straightforward economic and environmental argument in favor of the crypto industry, while the PoW/PoS debate is something that should be reserved for the crypto community rather than regulators.

USA