The Breakdown - Biden's DAME Mining Tax is an Attack on Bitcoin

Episode Date: May 3, 2023

The White House Council of Economic Advisors yesterday announced the Digital Asset Mining Energy (DAME) excise tax. The proposed 30% tax on "cryptomining" would be a soft ban on mining in the USA according to crypto industry experts.  Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced and hosted by Nathaniel Whittemore aka NLW. Research is by Scott Hill. Editing is by Rob Mitchell and Kyle Barbour-Hoffman. Our theme music is “Countdown” by Neon Beach.

TLDR, it's political theater. Targeting Bitcoin mining as a major environmental platform is akin to not actually addressing an issue but instead choosing something that you think is politically popular and viable in order to get your base rallied. This is an election season proposal, pure and simple. Now it's our job, I believe, this cycle, to show them that this isn't a winning issue.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Wednesday, May 3rd, and today we are talking about the White House's proposed new punitive Bitcoin mining tax. Before we get into that, a couple quick notes.

First of all, if you're enjoying the big picture power shifts that you hear about on this show, I would love for you to come talk about them in our breakdown community, the Breakers Discord. I'm loving the conversations we're having there, and they would be better if you were participating too. Check it out at bit.ly slash breakdown pod. Also, if you are yearning for more big picture power shifts, I would urge you to check out

the breakdown network's other shows. There's an AI breakdown now, and Bitcoin Builders is rocking and rolling. I just released an interview with Des Dickerson from Thunder Games, which is all about how Bitcoin can be spread around the world with play. You can find the link to those at breakdown.network. All right. Now, to today's show. One of the thing that Bitcoiners have held a lot of sorts of.

stock in over the last six months is that as much as it has seemed like there has been a coordinated effort targeting the larger crypto industry, Bitcoin has seemed a bit more immune. Even the arch nemesis SEC Chair Gary Gensler repeated recently in front of Congress that Bitcoin was in fact a commodity, a claim he would not make for Ethereum. Now, to be fair, he said that it was a commodity because that was the assessment of a previous SEC, not really a full-throated endorsement, but nevertheless. Still, some Bitcoiners have warned that it felt like there was another shoe to drop, that it wasn't like there were a bunch of Bitcoin maxis running the banking infrastructure or the Biden administration who were just targeting the rest of the crypto industry but ignoring Bitcoin.

Julian from the Breakers community wrote about it in the context of privacy. He said, I feel like the Bitcoin community isn't giving enough thought to how we're building things that won't be targeted by regulators. We've seen some clear lessons in the broader crypto-Etherium community with OFAC and Tornado cash, the Aztec shutdown, and the implementation of the travel rule in Europe. Governments hate privacy and will try to destroy anything that enables 100% privacy. As a consequence, every regulated crypto company will drop privacy tools like a hot potato. End quote. Now, another obvious area that could be targeted when it comes to Bitcoin is the environment. Washington's attentions have,

of course, been on the systemic risks to the banking system that some people argue crypto represents. It's understandable, given the failures of signature bank, Silvergate Bank, Silicon Valley Bank, etc. However, even as that has been happening, state regulators have been much more focused on Bitcoin mining. Last year, for example, New York passed a moratorium on licenses for new Bitcoin miners or for the approval of license extensions for miners that already had licenses unless they were using 100% renewable energy. Other states have started to explore similar types of initiatives. And even in Texas, one of the most mining-friendly states, there has recently been legislation that would single out Bitcoin miners. Perhaps then, what happened yesterday shouldn't be a surprise,

but to many, the aggressiveness of it was. On Tuesday, the White House's Council of Economic Advisors, the CEA, proposed a punitively high 30% tax on the electricity used by crypto miners. Now, as an aside up front, Andrew Bailey, a fellow at the Bitcoin Policy Institute, really nails my feeling about the terminology here. He writes, Why is crypto mining so annoying? When people use this term, they're talking almost exclusively about Bitcoin mining, but it's like they don't want to credit Bitcoin even with the bad stuff. Very strange and off-putting. Just say you hate Bitcoin, my authoritarian dudes. Anyway, this initiative was called the digital asset mining energy or dame excise tax,

and the measure was first mentioned in last month's budget proposal and would be phased in over the next six years in 10% increments. The CEA explained the rationale for the the tax, stating that, quote, currently, crypto mining firms do not have to pay for the full cost they impose on others in the form of local environmental pollution, higher energy prices, and the impacts of increased greenhouse gas emissions on the climate. Their blog post explaining the measure featured all of the current anti-mining talking points, most of which are either outdated or have been thoroughly debunked. These included the notion that crypto miners push up the cost of electricity for the surrounding area, that the environmental externalities of electricity

production are felt most in minority communities, and that the economic benefits to local communities through employment are vastly overstated by the crypto industry. We even got the ever-popular comparison to other domestic energy use, although sadly Christmas lights weren't used this time around, with crypto mining estimated to fall somewhere between nationwide use of televisions and computers. For those keeping track at home, the measurement had a 35% margin of error, and the methodology was based on taking a rough U.S. portion of crude global electricity use estimates. Digging in a little deeper to some of their arguments. One was that by using renewable energy, the crypto mining industry is robbing that supply of

green energy for more deserving uses. Now, this is worth noting because we're seeing this narrative more and more often and is reflective of the fact that Bitcoin mining is just in a can't-win situation. Most of the forward-thinking Bitcoin mining operations are setting up where renewable energy like wind, solar, and hydroelectric are plentiful. But by doing so, they are apparently robbing the local region of that electricity. it is a totally strange and foreign way to look at energy usage that isn't reflected in any other industry and shows how unique the situation with Bitcoin is.

Now, some of the anecdotal evidence that they present used to support claims of harm to local communities dated back to 2018, which is obviously eons when it comes to the crypto mining sector. The proposal also specifically cited last month's Environmental Flood article from the New York Times as evidence of the scale of power consumption. An anonymous economist from the CEO said, quote, where we see the strains emerging are in these places that are drawing off the grid, where this starts getting noticed at the level that communities are pushing back and are experiencing consequences of it.

Localities are dealing with it and they're struggling to come up with solutions on their own. I would only point out here that the community specifically mentioned in that New York Fudd article that we've discussed extensively at this point, subsequently passed a resolution supporting the Bitcoin mining industry after that article came out. Now, of course, the most telling part of the proposal is the single industry-specific focus on Bitcoin mining, which the CEA said was justified because, quote, Crypto mining does not generate the local and national economic benefits typically associated with businesses using similar amounts of electricity.

The proposal also contemplated the risks that crypto mining would simply change jurisdiction, which was the justification for why this needed to be a federal tax imposed on all communities, even the ones who have welcomed crypto mining firms. It claimed that the world is shutting its doors on crypto mining, leaving little chance to move abroad, noting that China banned mining in 2021, three Canadian provinces and several U.S. localities are in the process of placing a moratorium on mining, and that eight countries have banned mining entirely. And of course, the fact is less impressive if you actually look at which countries the CEA is referring to. Egypt, Iraq, Qatar, Oman, Morocco,

Algeria, Tunisia, and Bangladesh. I have to say I'm not sure how many of the big U.S. miners were contemplating relocating to Algeria before they banned it. What about the revenue that would be raised by this excise tax? It's $3.5 billion over the next 10 years, aka less than half a percent, of the annual deficit over a 10-year span. Now, of course, this is just a budget proposal from the White House. It would need to pass through Congress before being enacted, and judging by the difficulty this administration has had in passing its fiscal agenda, that seems highly unlikely. Now, the industry's reaction was about what you would expect. Tom Mapes, the director of energy policy at the Chamber of Digital Commerce, said, this puts a clear line in the sand that they do not like the industry.

They are looking for ways to hamstring it. This is just a way to go after the industry which they do not support. Nick Carter pointed out that if the goal is really fewer emissions, then this is a bad move. He writes, I know politicians focus only on first-order effects, but it bears repeating, for the nth time, discouraging miners in the U.S. would directly increase emissions associated with Bitcoin mining. I don't know why they don't understand this very simple fact. Banning mining, and this is a de facto ban in the U.S., won't cause there to be less Bitcoin mining. It will simply mean that mining occurs elsewhere. Other places with higher carbon intensity Bitcoin mining, Other dominant jurisdictions for Bitcoin mining are China, Russia, Kazakhstan, Iran, Venezuela, Malaysia, and Canada.

Every single one, with the possible exception of Canada, has a higher carbon intensity for their generation than mining-related generation in the U.S. U.S. policymakers have an easy tool to reduce the emissions associated with Bitcoin, encourage miners to domicile in the U.S., especially if they are consuming renewables, protecting increasingly renewable grids, and subsidizing new buildout of renewables. Economist Pratig Gurha says, the point isn't to reduce global emissions. That's far too virtuous. Neither is it to assist the development of the renewable energy mix at home. That is far too forward thinking. It's just a virtue signal, break things, and move right along. PhD climate scientist

Sergio Sejas says, exactly. The drop-in hash price caused by the de facto ban would make mining more profitable, allowing for high-carbon intensity mining to come online, replacing the lower-carbon intensity mining that was occurring in the U.S. Don't be fooled. This is not good for the climate. Austin Campbell writes, in the modern era of social media, the decay we are experiencing in American politics, is because the signaling is more important than the results. Commenting on all this, Troy Cross writes, the argument for this is so simple, and the White House is fully aware of it, fully aware.

Hard to avoid the conclusion that they're lying and even want us to know they're lying. That sounds crazy, but less crazy than the alternative, which is gross incompetence. Now asked if this was part of Operation Chokepoint 2.0, Troy said, maybe so. They're in a religious war, and this is one front. So, of course, there is the environmental argument that this would just increase emissions globally. Then there's also the inconsistency argument, which is presented by Level 39, a contributor at Bitcoin Magazine, and generally good threader. Level 39 writes, 12 years ago, the Environmental Defense Fund and Obama's U.S. Department of Energy were encouraging Urquat to attract large-scale demand response loads. Today, the Biden

administration attacks Bitcoin mining the most responsive of all demand response participants on the entire Ercot grid. 14 years ago, Obama's Federal Energy Regulatory Commission chairman called demand response the killer application of the smart grid. Today, the Biden administration claims it will push up electricity prices and make local electric grids riskier as a result of increased strain on equipment. Okay, so we've got an environmental argument, an inconsistency argument, and what about an economics argument? Josh Hendrickson, an associate professor and chair of the Department of Economics at Ole Miss says, the CEA is clueless about this subject and this proposed tax is silly. One, this isn't serious economics. If there are particular ways of generating electricity

that create environmental externalities, then you address this by taxing these forms of electricity generation. You don't tax particular types of electricity use. Two, demand fluctuates over time in both predictable and unpredictable ways. Some electricity is wasted. Having a buyer of last resort for electricity, as is the case with Bitcoin miners, helps to balance the grid and limit the amount of waste. Three, electricity generated by wind and solar power is intermittent. You could build a ton of windmills, but if the wind doesn't blow, there's no electricity. As a result, it's difficult to build this out at scale. Buyers of last resort can justify these types of investments. Four, stranded natural gas is burned. Bitcoin miners will pay for the right to capture this stranded gas and use it to generate

electricity to run their miners. This prevents the gas from being burned. Economic theory says this behavior should be subsidized. But if you're paying attention, you know this isn't about electricity or externalities anyway. Now, another potential argument against the dame tax is a state's rights issue. Justin Slaughter, the policy director at paradigm rights. I do love, quote, state plans can allow companies to move so we just need a national plan. Now, this is a subtle but really important part of all of this. Bitcoin mining has provided an industrial replacement for a lot of hollowed out region so far and has much promise to do more. Now, of course, these benefits aren't equally applicable across the entire country. But denying states the ability to take advantage of this seems counter

to state's rights. Then, of course, there is the precedent argument, and this one I think is extremely important. Dennis Porter, the CEO of the Satoshi Action Fund, which has been helping with states' right-to-mine bills, writes there is no world where anyone should accept a tax on any end use of electricity. This is a Pandora box which cannot be resealed. Tom Mapes again from the Digital Chamber of Commerce says the White House blog on the Dame tax can be shortened to, and to one sentence. If the government doesn't like how you use energy, you will be penalized. All industries should be keeping a close eye and opposing these tactics, because you could be next. In many ways, this is the same conversation that we're having around Operation Choke Point in the banking

sector. Penalizing specific uses of electricity is similar to penalizing specific legal industries by not allowing them access to the banking system, or more specifically, pressuring the banking system to not give them access. It's an end run around due process. It's an under fairly target specific industries that are politically unfavored, and it certainly doesn't reflect any sort of democratic will. Now, speaking of democratic will, what about the fight? Kyle Schnepps, the director of public policy at Foundry writes, this proposal in the president's budget will be fought hard in Congress during actual

budget negotiations and the appropriations process. Arbitrary climate taxes designed to pick winners and losers is a non-starter. Asked to give key talking points for the fight, Troy Cross again, says, how about four? One, the tax will end mining in America, along with the jobs, community revitalization, and related innovation in industry. In a perfectly competitive market, all Bitcoin is fungible and instantly transmissible over the internet. A 30% disadvantage, even a 10% disadvantage, is death. Number two, the tax will not improve CO2 emissions one iota, and may increase them. Bitcoin is the only commodity with a perfectly inelastic supply. Look at the China mining ban.

Three, the tax is weirdly indiscriminate. It would not only affect coal-powered mining, but even those monetizing venting methane on landmills or using Bitcoin to make new solar generation possible. This shows it is not about emissions at all, but grossly unfair. Four, taxing one industry's energy use makes no sense. Why not tax all users? Now, there is a fight going on in the Bitcoin community about whether this means that Bitcoiners should just disengage with the political process entirely. There are a set of Bitcoiners who feel that it's always been a loss battle and that time spent

trying to convince politicians that Bitcoin was going green were always a waste. Even beyond that, Bitcoiners are pretty clear about the implications for how their government feels about their industry. Nico, the director of content strategy at Swan, writes, In case anyone hasn't been paying attention, the current administration is at war with the Bitcoin industry. The economic report of the president was the first time that the Biden and Min openly admitted that Bitcoin created issues for the financial system and the environment.

They strongly advocated for the necessity of central banking and CBDCs. Today, they unveiled Dame, a 30% punitive tax on Bitcoin miners for, quote, negative spillovers on the environment, quality of life, and electricity grids where these firms locate across the country. These are false narratives. The goal here is killing the industry. The U.S. should not be taking cues from the CCP. Now, I don't think it's unclear where my position on all of this is. TLDR, it's political theater. Targeting Bitcoin mining as a major environmental platform is akin to not actually addressing an issue, but instead choosing something that you think is politically popular and viable in order to get your base rallied. This is an election season proposal, pure and simple.

Now, it's our job, I believe, this cycle, to show them that this isn't a winning issue. Now, of course, if it were to go through, it would be incredibly sad. Bitcoin mining, as so many have pointed out, would be completely fine. But any benefits for us in the U.S. and for the environment writ large would be lost, from recycling waste methane to subsidizing the buildout of wind and solar. These potential environmental positives of Bitcoin are barely at their infancy, but showing so much promise. To strangle that in its crib to score political points would just be a shame. But that's the state of it from here.

It's the day mining tax. We're going to be debating it until it's killed in the next budget. So buckle up. And until tomorrow, be safe and take care of each other. Peace.