Don’t make crypto the electricity scapegoat

A radical new tax proposed by the Biden administration would make cryptocurrency mining the scapegoat for electricity use. The so-called Digital Asset Mining Energy (DAME) tax, first proposed in the Biden budget for fiscal year 2024, would impose a 30 percent levy on the cost of electricity used in crypto mining , supposedly to limit 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 fact on par with many other industries and technologies.

As we argue in our new article, “Don’t Depower Crypto: Biden’s Electricity Tax Will Hurt Conservation, Innovation,” this tax will stifle new technologies and have unintended consequences, including on the industry’s own fast-moving conservation efforts. For example, the mining industry is already improving its energy efficiency and switching to renewable energy sources. Policymakers should allow crypto to continue to mature rather than hinder its development.

Cryptocurrencies have evolved into a vibrant ecosystem that offers significant benefits, from financial privacy to efficient cross-border transactions. Yet crypto-mining, which secures blockchain networks, requires significant electricity to verify financial transactions and feed new coins into the existing supply. Some critics cast a wary eye on crypto mining for this reason, pointing out that Bitcoin uses roughly as much electricity as a medium-sized European nation annually.

However, the estimated energy consumption of Bitcoin mining is less than the power consumption of data centers and networks, as well as of the traditional banking system. And this is equivalent to or less than electricity required in industries such as paper, iron, chemicals and copper and gold mining. To single 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 moving to renewable and low-emission energy sources, including nuclear and hydropower, without the need for government intervention. Some mining companies specifically locate facilities near sources of low-emission power, such as Niagara Falls. Others profit from energy that would otherwise be wasted, such as byproducts of natural gas flared at oil fields.

Worryingly, the DAME tax does not take into account the source of electricity, meaning it will tax companies that rely on renewable and nuclear energy as much as fossil fuels. This could discourage crypto-mining operations from prioritizing carbon-free power sources. Conversely, the result could 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 in facilitating fast and affordable cross-border payments. And innovations like the Lightning Network promise to strengthen Bitcoin’s transaction capacity while improving energy efficiency.

Crypto also remains popular among investors. Major financial institutions are lining up to offer clients crypto-linked investment vehicles. Securities and Exchange Commission approval 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 penalize electricity use in this one emerging industry. This establishes a precedent that says the latest technology fields can be singled out as “whipping boy” even when their energy appetite is unexceptional. There is a danger that the crypto tax could be just the first step in a broader federal plan to introduce an economy-wide electricity tax.

Restricting certain industries puts us on a risky path. Oddly enough, even as the Biden administration tries to crack down on crypto’s electricity use, it is simultaneously seeking to expand electrification in other areas, such as with cars. Rather than penalizing one industry’s electricity consumption while subsidizing another’s, officials should enable the infrastructure investments needed to meet the growing energy demand of all, for example by reforming the permit process.

The solution is to remove barriers to energy supply and not vilify those who use power as an input. Americans expect reliable electricity access, whether for everyday needs or to power innovative new technologies like blockchain.

The crypto industry continues to mature and discover which business models best balance benefits and costs. Heavy-handed taxation today risks derailing innovations that would improve efficiency and further provide social value. Early railroads, automobiles, airplanes, and computers were all “inefficient” in their progeny, meaning their potential had yet to be unlocked. To stifle these technologies prematurely would deprive society of their countless benefits.

Similarly, the use of crypto-electricity will likely continue to become more efficient as the technology advances, just as these other industries have improved over time. But let it happen organically, not punishably imposed by discriminatory taxation or regulation. Don’t make crypto power use the scapegoat for energy use that all of us depend on to power our lives. Allow the operating space to grow while building the future of finance.