Blockchain Council: Oversight ‘welcome’

Arkansas became the second-strictest state in the country in regulating crypto mining after Gov. Sarah Huckabee Sanders signed two pieces of legislation May 3, according to at least one state-based association that promotes the industry.

Only New York’s laws are stricter, said Ben Smith, president of the Arkansas Blockchain Council.

“No industry operates with impunity,” Smith said. “We definitely welcome some kind of regulation if it at least means we don’t get unjustly pushed out.”

Such oversight is necessary for any “legitimate industry,” according to Smith, who said he believes lawmakers in other states have been waiting to see whether the new laws would pass and what effect they would have on the industry in Arkansas.

Senate bills 78 and 79 became Act 173 and Act 174, respectively, upon receiving Sanders’ signature. The laws are state lawmakers’ attempt to address Arkansans’ concerns over the permitting, noise and foreign ownership related to crypto mines.

The laws amend the Arkansas Data Center Act of 2023, which prohibited localities from passing ordinances aimed at regulating crypto mines. Many Arkansas lawmakers have since called for greater regulation of such facilities after noisy crypto mining operations sprouted up around the state.

The two laws went into effect immediately upon receiving Sanders’ signature, leaving crypto mining operations that are already in operation with 90 days to comply.

This means crypto mining businesses have roughly 80 days to apply for permits from the Oil and Gas Commission, which is now required under Act 174. However, the operations can’t do so just yet because the commission is still designing that application process.

Smith said designing that process is estimated to take about 60 days. He did not express concerns about being able to apply for a permit by the deadline, but said he hopes members of the council will “have a seat at the table” regarding the promulgation of rules.

The Arkansas Department of Energy and Environment, of which the Oil and Gas

Commission is a part, did not respond by deadline Friday to an email from the Arkansas Democrat-Gazette requesting information on the development of the permit application and rules for investigating and enforcing compliance with the new requirements.

According to Smith, the Arkansas Blockchain Council doesn’t expect its members will be significantly affected by the noise-reduction requirements in Act 173. As many counties in the state hurried to implement emergency ordinances last summer allowing them to regulate noise before the Arkansas Data Centers Act took effect, council members already have taken the steps necessary to follow the new law, its president said. Smith joked that the reason lawmakers are asking where all of the crypto mining operations in the state are located is because the domestically owned operations have been relatively quiet.

While estimates vary regarding how many crypto mines operate in Arkansas, with some lawmakers saying they have seen lists of at least 30, Smith said he believes there are only about 18. Of those, he said eight are domestically owned by five companies, while 10 crypto mines are owned by foreign parties. The mines range in location from northeastern Arkansas to the southern reaches of the state.

Both new laws prohibit certain foreign parties, such as China and other entities subject to the International Traffic in Arms Regulations, from maintaining ownership of crypto mines in Arkansas. Many state lawmakers have expressed concerns that some crypto operations have ties to China or other adversaries of the United States.

“Obviously, Bono is a huge problem,” Smith said, referring to a mine in an unincorporated community near Greenbrier. A New York Times article published in early February reports that the mine is connected to a business partially owned by the Chinese government.

A federal lawsuit filed by two dozen Faulkner County residents against crypto mining company NewRays One LLC is scheduled to have an omnibus hearing May 28 in the Eastern District of Arkansas.

The judge in that case, U.S. District Court Judge Lee P. Rudofsky, is also presiding over a separate lawsuit filed in federal court in November by Jones Digital LLC. That lawsuit lists NewRays Inc. as one of several “members” of Jones Digital, which is one of two companies that Arkansas Agriculture Secretary Wes Ward last month said might be in violation of a new law that prohibits certain foreign businesses from acquiring land in the state.

Rudofsky approved an amended consent decree May 1 to end the lawsuit between Jones Digital LLC and Arkansas County officials. Burt Newell, an attorney representing Arkansas County, said in court on Friday that the cost to end the dispute was “unbelievable.”

While Smith said he believes Act 174 will likely force out the owners of several foreign-owned crypto mines, he added those mines would likely have to follow noise mitigation practices to comply with requirements in Act 173.

“That’s pretty much going to entail them rebuilding the site, so it’s probably not going to be worth it for them to even continue,” Smith said.

He guessed that those owners will move to a state with looser regulations.

In total, Smith said he believes Arkansas currently has the electrical capacity to host as many as 10 more crypto mining sites than are currently operating. That number is far fewer than the 50 additional sites a CBS Sunday Morning piece estimated in late April; CBS has since retracted the figure.

The 18 current crypto mining sites in Arkansas account for about $12.5 million in state taxes “on the power sale alone,” Smith said. That figure doesn’t account for what it pays to the cities or counties in which they operate.

“Yeah, we might not employ 50 people, but we also make up on how much taxes we have to pay,” he said.

ACTS 173, 174

Senate Bills 78 and 79 were sponsored by Sens. Joshua Bryant, R-Rogers, and Missy Irvin, R-Mountain View, respectively, and were introduced as non-appropriation bills in Arkansas’ recent fiscal session.

Such bills require first that resolutions authorizing them be approved by a two-thirds vote of the Senate and House. Lawmakers have said the bills, which easily passed through the House and Senate, likely mark only the start of lawmakers’ considerations of crypto mining regulations in Arkansas. They expect additional bills regarding the industry will be introduced during the 2025 regular session.

Bryant has said Senate Bill 78 attempts to “clarify local control and make sure that local control does have the authority to regulate within their jurisdictions.” It also clarifies that people “acting in their individual capacities” have the right to crypto mining within their home, which the senator labeled a hobby.

The bill would require that crypto mining operations “apply noise-reduction techniques,” such as using liquid cooling and “fully enclosing the envelope.” The latter technique involves enfolding the space where noise from a crypto mining business is directly produced around all sides, including above and below the equipment that produces the sound.

According to the bill, a crypto mining facility may use a passively cooled, pre-manufactured container without enclosing the space in a complete envelope if the business locates or relocates to a site that is at least 2,000 feet from the nearest residential or commercial use structure, or an area zoned for industrial use or “an otherwise approved use.”

A person who owns land within 2,000 feet of the nearest property line of a crypto mining business may file a lawsuit in circuit court to enforce the noise-reduction techniques listed in the proposed legislation.

Senate Bill 79 would require crypto mining businesses to get a permit from the Oil and Gas Commission to operate. Irvin has said the bill “provides a state presence of regulatory oversight” to crypto mining operations.

Both bills prevent certain “prohibited foreign parties,” such as China and other entities subject to the International Traffic in Arms Regulations, from owning crypto mines in Arkansas. Under both bills, a prohibited foreign party-controlled business includes one in which the party possesses an “ownership interest of greater than zero percent.”

The bills define a prohibited foreign party as a person, party or government subject to the International Traffic in Arms Regulations, which are federal rules meant to restrict the sale of arms to and from certain foreign governments. Many lawmakers have expressed concerns some crypto operations have ties to China or other adversaries of the United States.

Civil penalties and damages received by the attorney general’s office under the section on foreign party-controlled businesses would be split between the state Oil and Gas Commission fund and the attorney general’s office, according to the proposed legislation.

Any prohibited foreign party-controlled business operating a crypto mine in Arkansas before the bills become law would have one year to divest all interest in that enterprise. If the attorney general concludes a violation of this rule has taken place, the attorney general may then order that party to divest within the next year.

The two bills came after lawmakers passed Act 851 of 2023, known as the Arkansas Data Centers Act. While the law easily passed last year — with a similar measure signed into law in Montana last May — many Arkansas lawmakers have since called for greater regulation of such facilities after noisy crypto mining operations sprouted up around the state. Among those lawmakers is Bryant, who sponsored Act 851.

LOCAL LEADERS, RESIDENTS

Local leaders and residents who aren’t currently located near the crypto mining operations connected to litigation have expressed support of the new laws, though some officials admit they still don’t know much about crypto mining.

Union County Judge Mike Loftin said he has heard concerns from some county residents about noise and other issues caused by the industry. He recalled that the Association of Arkansas counties sent out model ordinances in June meant to impose limitations on the noise a crypto mine could generate. At the time, his county decided against adopting such a measure.

With the new laws, though, Loftin said officials will design an ordinance “that fits the situation.” He said he’s waiting to hear from his attorneys for recommendations.

According to the county judge, a crypto mine recently sprang up in his area. Loftin said he wasn’t sure if the operation was still under construction or whether it was owned by an Arkansas-based company.

“I’ve never met them,” he said.

Vance Williamson, an alderman and finance chairman for the city of El Dorado, said he remains somewhat uninformed about the crypto mining industry.

“It has not been a big concern for us,” said Williamson, who added he had only recently been made aware of a crypto mining operation along the city’s Industrial Road. “It must have been done pretty quietly because I don’t think anyone knew.”

Williamson said he was in favor of the capitalism it supports and hasn’t heard much talk from residents about the facility, so he doesn’t think it’s going to cause any harm in its location.

Lawrence County Judge Gary Barnhill said he was aware of two that are in Walnut Ridge, which means he doesn’t have any say over regulating them.

“We passed an ordinance on the noise level already,” he said. Any operations that decide to start in the county will have to “stay in the law.”

Smith, who operates in Walnut Ridge, said he has every intention of complying with state and local rules.

“We’ve invested millions of dollars into this stuff here,” he said. “We don’t want to have to pick it up and pack it out.”