It’d be incorrect to say that we don’t know much about cryptocurrency. It’d be a blatant lie to claim that what we do know about cryptocurrency is good. Realistically, our knowledge of the innovation’s impact is disheartening.
The first form of cryptocurrency, Bitcoin, was circulated in 2009. Initially, Bitcoin, and other digital coinage, appeared promising, intended to limit government power, eliminate middlemen and provide equal opportunity for profit.
However, it’s proven to be quite different. Over the past decade, we have watched cryptocurrency’s volatility disrupt the flow of economy, its anonymity enable criminal activity and the extortionate energy requirements of its “mining” process take a toll on the environment. It’s time to regulate cryptocurrency.
Demand for cryptocurrencies has skyrocketed, reaching a market cap of over $3 trillion. This is a striking value — roughly equal to the GDP of Britain or India. What is most striking, however, is that it was reached without having any traditional monetary backing.
Cryptocurrencies are “decentralized autonomous organizations,” or DAOs, meaning that one-on-one transactions are unrestricted and effectively anonymous. The creation and exchange of cryptocurrencies are wholly unregulated and unbacked by financial institutions or governments.
Decentralization triggers damaging economic effects. In September 2019, the Bank of Canada estimated that the overproduction and underuse of Bitcoin in 2015 produced a welfare loss about 500 times as large as a cash economy with two percent inflation. This massive loss signals a clear market inefficiency. Moreover, the nature of the cryptocurrency market is such that double-spending, or stealing cryptocurrencies, is not only possible, but present. Double-spending puts honest individuals in competition with criminals, threatening the average users’ investments and generating market volatility. The lack of centralized regulation over cryptocurrency allows for market inefficiencies and volatility that may soon have dire economic consequences.
Further, the anonymity of cryptocurrencies as DAOs enables untraceable crime. Many of the advantages provided by cryptocurrencies — efficient payment, low transaction costs, simple exchange — are commonly used to conduct illegal business. Cryptocurrency critics recognize that this creates a prime environment to purchase drugs, launder money, avoid capital controls and engage in various criminal activities. In 2019, the FBI seized over $4 million worth of Bitcoin from the first darknet market called the “Silk Road,” which sold everything from stolen credit card information to murders-for-hire. Studies of Bitcoin exchange patterns uncovered that nearly half of all transactions are associated with illegal activity… and that’s just Bitcoin.
The most damaging impact of cryptocurrencies results from its mining process and extortionate energy requirements. Cryptocurrencies were crafted so anyone with a computer could own, trade and “mine” them. “Mining” is the process of winning cryptocurrency by solving mathematical puzzles. During mining, thousands of individuals race to solve these problems. Those who solve them first are granted cryptocurrency. However, the system was designed such that, as competition grows, so does the puzzle’s complexity.
While at first these puzzles could be solved using a traditional personal computer (PC), the evolving complexity of each puzzle now demands that competitive miners use more powerful technologies that require exorbitant energy to operate. These miners rely on specialized computers called Application-Specific Integrated Circuits (“ASICs”) that are more efficient at mining than a traditional PC but also consume much more energy. ASIC use has shattered the intended equality of cryptocurrency and created devastating environmental effects.
Considering the massive market, with thousands of people mining the same coin, the energy costs of ASIC operation have become excessive. Researchers estimate that mining and exchanging just one Bitcoin consumes 2100 kilowatt hours — the average American household consumption in 2.5 months. According to a 2021 study, a year of Bitcoin mining consumes 121.36 terawatt hours — more energy than used in the global consumption of Google, Apple, Facebook and Microsoft combined. Unfortunately, most of the energy used in cryptocurrency mining comes from nonrenewable resources. Thus, cryptocurrencies leave massive carbon footprints. Scientists warn that carbon emissions from Bitcoin mining alone could push global warming beyond 2 degrees Celsius, taking a hefty toll on the environment.
To protect our earth, national security, economy and ultimately the future of humanity, we must regulate cryptocurrency and its mining processes.
This regulation should not criminalize cryptocurrency. Many critics of extreme cryptocurrency regulation argue the importance of technology neutrality and the impossibility of prosecuting over 46 million American cryptocurrency users were the coinage to be made illegal. It would be imprudent to ban cryptocurrency simply because it can be abused. If that logic was applied to other financial instruments, we would have to ban cash, which can just as easily facilitate anonymous or illegal transactions. Nonetheless, it is clear that cryptocurrency requires some regulation. A middle ground — protecting innovation and promoting freedom while addressing the economic, civil and environmental implications of cryptocurrency — should be the goal.
Given modern technological advances and the importance of maintaining freedom of choice, there is no easy answer. Potential solutions lie in ASIC regulation — placing a carbon-tax on users, implementing a pollution cap or even banning the use of mining-specific technology altogether. ASIC regulation could reduce the environmental repercussions of cryptocurrency while maintaining technological neutrality. By disincentivizing the use of ASICs and returning miners to traditional PC usage, governments could more easily track criminal activity and double-spending.
Leaders have taken small steps towards regulation, as seen in the President’s recent Executive Order and bills like the Responsible Financial Innovation Act. These are merely initial steps on the path toward effective regulation. We must continue to educate ourselves on the growth and impacts of cryptocurrency. With that knowledge, we must vote for leaders willing to address the negative impacts of cryptocurrency through measured regulation.
Ainsley Hillman, a sophomore living in Johnson Family Hall, is studying Business Analytics and Political Science. She currently serves as assistant direction of operations within BridgeND. Some of her research interests include U.S. foreign policy and the intersection of environmental and social justice.
BridgeND is a multi-partisan political club committed to bridging the partisan divide through respectful and productive discourse. It meets on Tuesdays at 5 p.m. in Duncan Student Center W246 to learn about and discuss current political issues and can be reached at firstname.lastname@example.org or on Twitter @bridge_ND.
The views expressed in this column are those of the author and not necessarily those of The Observer.