The Breakdown - The Utter Folly of Biden's Proposed Bitcoin Mining Tax

Episode Date: May 14, 2023

Today on Long Reads Sunday, NLW reads Nic Carter's "The White House’s Bitcoin Mining Tax Undermines Itself"   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

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 Sunday, May 14th, and that means it's time for Long Reads Sunday. Before we get into that, a quick note, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link of the show notes or get a bit.ly slash breakdown pod. All right, friends, happy Sunday. You know, the breakdown doesn't have too many rules.

One is treat everyone with respect. Two is have a nuanced point of view and come at things with an open mind. But three is when Nick Carter writes something, we read it on Long Read Sunday. One of the big themes recently on the breakdown and in the world that we inhabit has been the growing partisanship around Bitcoin and Crypto. Now, for a while, it seemed like it was more concentrated on crypto than it was on Bitcoin, right? It was securities regulations. It was unregistered securities exchanges.

Those seem to be the big offenders. And Bitcoin is the one crypto that everyone, even Gary Gensler, agrees is a commodity. Recently, however, Bitcoin has not been safe either. And the attack factor is, of course, mining and its environmental impact. About a week and a half ago, I did a show called The Dame Tax is an attack on Bitcoin, and it is, in fact, that tax that is the subject of Nick Carter's most recent essay for CoinDisc. The piece is called The White House's Bitcoin Month. mining tax undermines itself. Imposing a levy on mining in the U.S. will send the industry

overseas, increasing emissions while depriving the grid of a useful form of demand response. In its bid to marginalize the domestic crypto industry, Nick writes, the White House has unleashed financial regulators, deputized the bank sector, and generally harassed crypto firms here. On top of that, it is now trying to push through a de facto ban of mining in the U.S. with the digital asset mining energy or dame excise tax. The proposed levy would add 30% to electrical. costs for miners, which would be enough to turn their economics upside down and force them to leave these shores. The tax sets an extremely dangerous precedent, as it singles out an industry that lawfully purchases electricity, holding the electricity buyers responsible for the carbon emissions of the

underlying generation. This makes no sense. It's not Bitcoin miners' responsibility to decarbonize the electricity they purchase that falls to the architects of the grid. If the Biden admin can't get the grid to be sufficiently green, it should focus on that, rather than punishing an industry that buys less than a single percentage point of the electricity produced in the U.S. in a given year. Additionally, the proposed tax may not even be legal. Appellate attorney W. Aaron Daniel has argued convincingly that Bitcoin mining is protected speech under the First Amendment and that a mining ban singles minors out unfairly as New York State has done already. Other industries don't get held responsible for grid emissions this way,

just politically disfavored ones like Bitcoin miners. And if this precedent is set, any politically disfavored energy consumer will potentially be in the crosshairs. I could easily imagine the next Dame tax targeting data centers running AI models that aren't sufficiently woke, or data centers running servers for uncensored social media. And in a future possible Trump administration, who's to say he wouldn't use a similar approach to cut off the electricity supply of abortion clinics, leftist universities, Disney World, the New York Times, or any other industries or corporations he dislikes.

In this country, resources like electricity should be available to all, not used as a political cudgel to attack specific industries. Regarding the tax itself, it doesn't even achieve its stated objective. In fact, it directly achieves the opposite of what its architects envision. The objects of the tax are as follows. It would, in theory, raise $3.5 billion in revenue over 10 years. It would get miners to pay their fair share of costs imposed on local communities and the environment.

But the tax would actually do the following. It would directly increase the emissions associated with Bitcoin mining by pushing miners out of the relatively low-carbon intensity U.S. into dirtier jurisdictions. It wouldn't raise money as mining in the U.S. would be uneconomical, and miners would simply choose to leave. It would directly empower America's adversaries like Russia, China, Venezuela, and Iran by making state-sanction mining operations more profitable there. It would eliminate the ability of Bitcoin miners to help monetize the renewable build-out in the U.S. and rule them out from assisting with grid stabilization programs that they actively participate in.

Firstly, and most important, taxing mining in the U.S. does not mean less Bitcoin mining overall. Bitcoin mining is a highly competitive industry, and miners are incentivized to bring capacity online as long as the economics are favorable. China's Bitcoin mining ban in 2021 did not result in any less Bitcoin mining. The miners simply left China, for the most part, and set up shop elsewhere, including the U.S. hash rate dipped temporarily after the ban,

then came roaring back to a level double the pre-ban amount. The mighty U.S. government is impotent in this case. It cannot persuade the miners to trash their A-6, it will just mine somewhere else. In fact, many miners who were using abundant hydropower in the Yunnan or Sichuan provinces moved to Kazakhstan, which has a highly fossil-fueled power grid. Today, the U.S. composes roughly 30% to 40% of global Bitcoin mining.

The best data we have comes from Cambridge University, but it's somewhat dated and imprecise. The most popular other countries are in rough order, China. Yes, despite the ban, there's about 17% of hash rate in China, Russia, Canada, Kazakhstan, Indonesia, Paraguay, Norway, and Venezuela. We also know that Bitcoin mining directly finances the governments of Russia, Iran, Venezuela, and North Korea. These regimes use Bitcoin mining for sanctions evasion to turn their mineral wealth into cash. Attacking domestic miners in the U.S. hash rate simply means that other miners

are more profitable on net because their share of the pie is bigger. Supporting the state coffers of these direct adversaries should hardly be a goal of the Biden administration, but that's what the Dame tax would do. The authors of this tax, I'm told the ringleader is Heather Bouchy of the White House Council of Economic Advisors, acknowledged that miners can freely move abroad, undermining their policy. But they seem to be laboring under the naive delusion that governments globally will impose similar levies on Bitcoin miners. This is wishful thinking in the extreme. The Biden admin claims that China banned such activity completely in 2021, but we know there is still meaningful Bitcoin mining in China. And the Biden admin, which has fewer friends abroad by the day, can hardly expect other jurisdictions

to move in lockstep with them. The U.S.'s loss is Russia's, Iran's, China's, and Venezuela's gain. Additionally, the Biden admin has repeatedly called for more transparency in terms of minor emissions and energy impact. They have clear access to this data if miners are based here in the U.S., but virtually no insight if these miners are domiciled in China or Russia. And if you look at the emissions profile of these alternative domiciles for miners, they are almost all, with the exceptions of Paraguay, Norway, and possibly Canada, characterized by a higher carbon intensity of generation than the U.S. In practice, mining in the U.S. is generally cleaner than the generic grid at the country level.

There is considerable mining, for instance, in West Texas, which has copious amounts of wind and solar, for which there is insufficient transmission. Other hotspots of mining in the U.S. include hydropowered mining in upstate New York, New York, hydro in the Appalachians, natural gas and nuclear in Ohio and Pennsylvania, and stranded flare gas in Wyoming, Montana, and the Dakotas. Mining with otherwise flared gas is actually carbon negative overall. As for the purported costs imposed by Bitcoin miners on local communities, that argument is highly dubious.

Bitcoin miners are just data centers. They don't produce pollutants or toxic waste. Generally, miners locate themselves out of the way in rural areas where electricity is cheap. Due to the laws of physics, electricity doesn't travel well. So miners consuming energy in rural West Texas are not depriving someone in Dallas of power. The net effect of the presence of Bitcoin miners on a modern grid is to cut off the tails of the price distribution. They scoop up cheap or even negatively priced power when no one is buying it, helping utilities better monetize, and they turn

off when power is expensive, giving power back to households during grid scarcity events. Miners actively participate in demand response or controllable load programs in grids that have them, helping stabilize grids as they have the unique ability to react quickly to changing grid conditions and dial up and down their consumption as needed. During the grid's drain last winter and in summer in Texas, miners dialed down their consumption so energy could flow back to ordinary households. It's no wonder that Texas Governor Greg Abbott has praised miners for their benevolent presence on the Irkot grid. Such is the flexibility of mining from a location perspective that a number of miners like Iris Energy or Terowulf are able to make the exclusive use of renewables part of their

corporate mandate, something that virtually no other industry can match. And there are some miners, like Aspen Creek, that explicitly support the buildout of new additional renewables as part of their mission. Any solar or wind installation it helps finance will provide decarbonized power to ordinary households, too. This is hardly something the Biden and Min can complain about. More generally, the administration's attitude, as revealed by the Dame Tax, exposes its technologically regressive degrowth agenda. Biden officials aren't satisfied with Bitcoin miners using clean power, preferring to try and ban the industry entirely.

Bitcoin miners have the prospect to help stabilize increasingly renewable grids and even economically support new wind and solar installations. They can create a new model of location agnostic data centers that are co-located with renewable generation rather than relying on the old hub-and-spoke model that requires costly transmission. Bitcoin miners are pioneering the model of bringing demand to the source of generation, but other industries will follow, like green hydrogen, fertilizer production, and eventually other forms of compute. Additionally, if the Biden admin wants to carry out their electrify everything plan,

which is a necessary component of decarbonization, it will need multiples more generation than we have today. Someone will have to pay for this. How, then, is a novel source of demand for electricity, especially renewables, considered a bad thing. The Biden administration's rejection of a buyer of energy that is location agnostic, interruptible, and uniquely suited to purchasing new renewable sources of power is totally at odds, with its stated objectives for the transformation of the grid. As for the tax, it doesn't achieve any of its stated aims and empowers America's enemies.

Clear-eyed policymakers should reject it outright. Now, Nick said almost everything that needs to be said here. This is an argument that doesn't respect the economics of energy. It's an argument that doesn't really try to take into consideration the overall environmental impact. It's just about the U.S. and what the U.S. wants its policies to be, and how it does or doesn't want Bitcoin to be around. The Dame tax is quite simply Operation Choke Point, but for energy. It is yet another front in this administration's war on crypto, and I believe falls in line with everything else that we've seen where there is a calculus that this is politically popular, or at least that they can make it politically popular.

As we got into on my show a few days ago about the talking points for the last House hearing, these policies and positions seem not to be about recruiting new voters. How could they be? Instead, they seem to be about rallying the base for people who are distrustful of money, distrustful of wealth, who see all business and capitalism as producing negative externalities for the environment and killing the earth. Hatred of crypto is absolutely red meat. Or maybe I guess a Beyond Burger is a better analogy. But call me crazy, I just still don't think it makes good politics. I think there are too many young people

whose position on crypto isn't as clear cut and who in general aren't as interested in these old, tired arguments. People who have the complexity of political thought to understand that solutions to problems like climate change require not just government policy but also industry and reimagined economics of industry that look a hell of a lot like Bitcoin miners at the source of generation.

There is, I guess, it feels like, an inherent laziness here. These are obvious political positions, not right ones, just obvious and lazy, too easy to be effective. But I guess we have about a year to see how true that is. In the meantime, all we can do is keep reading these pieces, keep writing these pieces, and find the people that agree on both sides of the aisle, as well as the people that they listen to. I hope you guys are having a great weekend. Until next time, be safe and take care of each other. Peace.