The Breakdown - Why Bitcoin Mining Might Be the New Business Model for US Power Plants

Episode Date: March 6, 2020

It was another good day for global crypto, as South Korea votes to formally integrate the industry into the existing financial system, opening the market to new players and potentially improving services for crypto companies.  In New York state, meanwhile, a recently renovated power plant is taking advantage of low cost energy with 7000 bitcoin miners. This is part of a larger trend of US-based mining in 2020.  In a very different part of the industry, a new partnership between ConsenSys, EY and Microsoft suggests the intranet era of enterprise blockchain might be coming to a close.  Finally, the new governor of the Bank of England says be prepared to lose money if you buy bitcoin.

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to the Breakdown. It is Thursday, March 5th, and today we are going to be talking about South Korea. Yesterday, it was news from India that a ban had been overturned. Today, it is news out of South Korea that crypto will be fully integrated into the financial system, so we'll look at that. Second, we're going to look at a new partnership in the Ethereum world that signifies some interesting shifts from maybe an era of private enterprise blockchains to a more interconnected

public era, even in the context of the enterprise. Third and finally, we're going to look at a new mining project out of, of all places, New York State, and see what it means in terms of a larger trend of U.S.-based mining. As a new thing, if you want to discuss this topic, you can actually join me in our new Breakers Discord. So Breakers is a experimental discord. I'm going to be running it for at least two weeks to see if people actually want a different type of conversation experience, not just around the breakdown, although I will talk

about what goes into the episodes and what I thought about them in more detail there, but also just about the crypto industry at large. So you can hit me up at NLW on Twitter for an invite to that. And before I dive into the exciting topic of South Korea, I want to kick off with one small bit of news out of the UK. One of the few bright spots among central bankers for the past few years has been Mark Carney, who was the governor of the Bank of England. He wasn't necessarily a wave the flag around champion bull for Bitcoin or anything like that, but he was much more engaged with this space than the average central banker, right? When Libra launched, he was basically the only

prominent central banker, not just to dismiss it out of hand, but to say there could be something valuable here. A few months later, he even took it to a new level and proposed that perhaps the world of central bankers should be looking at a synthetic hegemonic currency to replace the U.S. dollar as the global reserve currency. So he was thoughtful, right? Even if you didn't like his opinions, he was thoughtful. Well, we have a new poised-to-be governor of the Bank of England named Andrew Bailey. In 2017, Andrew Bailey said in an interview with the BBC that buying Bitcoin is similar to gambling, so that doesn't really bode well. Of course, people can over a couple years change their opinions, so have his opinions changed it all? Well, let's just listen to this speech

from Wednesday in front of the UK Parliament. So one part is where this whole debate started with, which is sort of so-called crypto assets of the Bitcoin variety. Now, they are in no sense, There's no guarantee of the value of Bitcoin. I've said publicly, because we were concerned about it, I'd like to actually think it was quite a good example of the FCA Act in promptly. If you want to buy Bitcoin, be prepared to lose all your money. If you want to buy it, fine, but understand what you've got. It has no intrinsic value.

It may have extrinsic value, but it has no intrinsic value. That's one thing. The debate's really, and it, you know, it hasn't caught on as much as when people sort of predict it would in a sort of slight early. On the one hand, he's not wrong, right? There is no guarantee to the value of Bitcoin. On the other hand, I have to say,

in a world in which just a couple weeks ago, global equity markets were reaching new all-time highs, while reportedly hundreds of millions of people were quarantined in the supply chain capital of the world, perhaps we might ought to be a little bit more careful about how we discuss intrinsic value. Anyway, on that note, let's get into something a little bit better, South Korea. Okay, so as I said yesterday in India, we woke up to this great news that after two years of basically crypto being banned effectively, the Reserve Bank of India had banned banks and financial institutions in that country from doing business with crypto exchanges.

that ban was overturned by the Supreme Court there. This hopefully creates new opportunities for a ton of new Indian crypto activity, and already we're seeing companies move into the void and move in to actually do things and offer new services. So really exciting. Today, it was news out of South Korea that we got to wake up to. The Korean National Assembly has passed a law that more or less officially brings crypto under the legal system. So what does that mean? It means that all of those financial action task force rules, FADF, that have been going around,

are now going to be applicable to Korean crypto companies. That means more KYC, more AML. And so why is this good you're asking if all of a sudden we have this whole KYC AML regime? And the reason is a couple things. The first is that it simply allows for better servicing of customers, right? In a world where there's no clarity on where crypto industry, where the crypto industry, or digital assets fit, everyone's kind of making it up. And because of that, lots of times key institutions, particularly banks, just wouldn't get involved, right? Being a crypto

business in Korea could be really difficult if you can't find a bank that's willing to work with you. So one, allowing just the fundamentals of running a business or interacting with a business if you're a consumer, is poised to get much, much better because that the crypto industry is now in this regulatory regime. Second, it creates the opportunity for more institutions to get involved, right? More traditional finance players that have been on the sidelines, not for lack of interest, but for, again, lack of regulatory clarity and a belief that it just wasn't worth the risk until they got that. This institutionalization, this formalization of the entire crypto industry, the entire blockchain sector into the Korean mainstream opens up opportunity for those players to move in.

Now, I think this is part of a much larger trend for 2020. More or less, my read on governments of the world is that they are saying, look, we get it now that you are not going anywhere, that the crypto industry is here to stay. But man, if it is here to stay, you are going to play by our rules. Now, we can disagree with those rules, and I think citizen agitation around things like KYC, is really important. However, those are the rules of the road right now. And you can bet that we're going to see more and more effort and attempts on the part of regulators to wrestle crypto businesses specifically into molds that make sense alongside those roles. So that's something that I'm keeping an eye on,

and I think the South Korea news is just a part of that. Second story. All right, for those of you who are listening to this, you may be a little bit skeptical when I say that this is the news that I'm covering today, and with good reason, I don't usually focus on enterprise blockchain stuff because so much of it is just press or just, you know, bluster or whatever, just the innovation optics, innovation theater of big corporations. But I think that this one is worth noting. So yesterday it was announced that there was a new partnership between EY, who used to be Ernst Nyeong, Microsoft, and Consensus that is effectively a resource planning solution that is designed very differently from some previous types of enterprise tools. I won't get into all of the minutia of the baseline protocol,

which is the name of what's being built, but effectively it is a resource planning tool where part of the data is kept behind private company firewalls, but by building on a public chain, it can also be used as middleware. So what does that mean? Well, let's take this quote from John Wolpert from consensus. He says, I can say my purchase order is the same as the record you have of that same purchase order. The business rules that we employ to transform that record or use it to make new records is going to be executed by both of us in the same way. So basically, this middleware solution focuses on where two businesses meet rather than just things that happen inside a single company. So why am I focusing on this? Why do I think it matters? This to me is potentially a signal of an

era shift, an epic shift, in the development of blockchain as a technology category. When the internet first started, the way that most corporations tried to get involved initially was intranets, right? Corporations are famously private. They are averse to solutions and new technologies that open them up to potential vulnerabilities, right? To their data being exploited, to there being people outside who can know more about them. And the internet is the greatest force for that sort of opening up that we've ever seen in human history. And so companies tried to have their own private intranets, but we know how that went. Ultimately, everything shifted from intranets to the internet itself, and all of this sort of entire energy of around

that technology category moved to the public internet rather than these private intranets. Now, that's not to say that there weren't private dimensions that connected and plugged into the internet. Obviously, we continue to see a constant surge of new tools that are specifically for companies, again, behind their firewall that are theoretically data and privacy preserving and just for them, but that plug into that larger, broader public internet. To me, this suggests that we may be seeing some cracks in the private blockchain era of enterprise blockchain. Now, it's hard to say how much that's the case, and obviously I'm not making any sort of subjective judgments about utility of these tools, because frankly, this is a very different world than the part

of the crypto industry that I spend most time in. But I do think it's notable in that historical parallelism to the early days of the internet when companies really tried to focus on their own intranets before giving up the ghost and really realizing that the innovation here and the power here was connecting to a public shared protocol. Maybe that's what we're seeing here. Last up today, a story about a New York-based power company that has set up its own Bitcoin mining operation and is a huge source of discussion all around crypto Twitter today. Greenage power plant was first established in 1937, but today it is owned by a private equity firm called Atlas Holdings. And as part of a recent huge $65 million renovation of the power

plant, where they transformed it from coal to natural gas, they also installed 7,000 crypto mining machines that are basically mining five and a half Bitcoin per day, so something like $50,000 worth of Bitcoin every day. The company is able to do this profitably because they're working with what is called, quote, behind the meter power. So because they're producing power on site, they can power these mining rigs at extremely low cost. What's more, they think that they're in a favorable position even in the context of the upcoming having because of that consistency of the power price, which is really, instead of a market price for energy, it's more of a cost of production issue for them. So why is this interesting? Well, a couple reasons. First, New York

is probably the most hostile state to crypto in the entire country, at least from a regulatory standpoint. So super interesting to see that this is being built up in the fingerlikes region of that state. The second is that definitely one of the top narrative watches for me in 2020 is a return of U.S.-based mining. And more specifically, U.S.-based mining that can capture energy that would otherwise just be siphoned off or burned off because it couldn't be easily captured or monetized in a different way. I think that we're going to hear a huge amount more about this this year.

We're already seeing international interests setting up shop in places like Texas to capture some of that low-cost power. And I think you're just going to see more and more of the story about U.S. mining coming back this year. Now, of course, energy remains alongside crime, I think, the two biggest areas of fud against Bitcoin, right? The cost of energy, the cost of the world of Bitcoin mining. I've watched as this story has come up on crypto-twitter, folks from a more mainstream business perspective, again, bringing up that narrative of, well, is this the best use of energy,

this is how many houses that could power or whatever. And Bitcoiners, as you would expect the immune system of Bitcoin to do, attack it, and try to counteract it and diminish the person who's asking the questions. But I think that there's a better way potentially to respond to that. I think that there's two quote unquote right ways that I've seen that are maybe more effective. And I could be wrong and whatever. You know, fight however you want to fight. But to me, I think there's two approaches. The first is honestly to welcome this fud. I do think that it's reasonable in an open liberal society to have debates about how markets should allocate resources and where energy should be deployed. It is a reasonable thing to say,

do we want to prioritize this use of energy versus this use of energy? So I think that to some extent, we can just be fine and open to the fact that some people are going to disagree. They're also going to disagree that, you know, we should use energy in some other way that we think is fine. There's disagreements in any open society about how resources are allocated. What's more, we live in a society where still more or less markets are going to dictate this. And if companies are able to make this decision for themselves, which they are, they're going to go capture that value. So it kind of doesn't matter what us Twitter warriors do in the larger scope of things. So that's part one. Part two is I think that we should be discussing and talking about those

instances in which Bitcoin mining is allowing us to capture energy that would otherwise just go unused or be burned off, right? It is making potentially energy systems more efficient. In fact, it is incentivizing energy systems to be more efficient, and it's incentivizing people to go out and capture energy that would otherwise just be dissipated. That is an exciting thing, even if you aren't interested, even if you find yourself not necessarily falling on the side of Bitcoin being, quote, unquote, worth it from an energy cost perspective. I think we're going to get to see a lot more of that, not just in theory, but in practice this year.

And to me, that is the best most unassailable argument is showing how the market. market mechanism behind Bitcoin mining is actually doing something good vis-a-vis energy, not just that we get to because free markets say you can't stop us. Regardless, I think that, like I said, I really believe that the U.S. mining narrative is going to be a much bigger part of 2020, and I think we're going to keep having this fud. So figure out what you think is the most effective way to combat this fud, or if you don't disagree with it, then figure out what's the most effective critique that you have. But either way, let's get ready for this conversation because it's happening.

It's on. And it's even happening in New York, which is just kind of cool. All right, guys, that is it for the breakdown today. We are back tomorrow with a really exciting interview. I'm not going to mention it yet in case for some reason it gets rescheduled, but should be a really, really fun one for your weekend. Until then, have fun, hang out, and I will be back tomorrow to break it down. See you then.