Blockchain is great; Bitcoin is risky
New York City’s Mayor-elect Eric Adams wants to get his first three paychecks in Bitcoin, one-upping Miami Mayor Francis Suarez’s request for a single paycheck in the cryptocurrency. That’s just one piece of Adams’ big plans to encourage the use of Bitcoin in New York, apparently part of a strategy to boost the city’s status as a financial center. Meanwhile, Bitcoin miners, who deploy massive amounts of computing power to create new units of the cryptocurrency, are eager to set up operations in New York State.
The Bitcoin mining industry contends that it will bring jobs to New York and help the state become the hub of innovative financial activity. Other states such as Georgia, Kentucky and Texas are encouraging Bitcoin mining for the same reasons.
In reality, if they encourage Bitcoin mining, New York and its competitors are engaged in a misguided and environmentally destructive race to the bottom. The economic benefits are minuscule and the costs are huge. Moreover, there are better ways to promote financial innovation and benefit residents of their states.
For all its wondrous technology, Bitcoin is an environmental calamity. Bitcoin transactions are validated using a mechanism called proof of work that obviates the need for third-party institutions such as banks or credit card companies to intermediate transactions. This process, referred to as mining, requires enormous amounts of brute-force computing power in a race to solve complex numerical puzzles. Computers that are the first to solve specific puzzles are rewarded with Bitcoin. Solving these puzzles has no benefit to humanity but, with Bitcoin’s price above $50,000, there is a strong economic incentive to devote computing power to this task.
A lot of electricity is needed to run the vast arrays of computers devoted to cryptocurrency mining and keep them cool. By some estimates, nearly 1% of the world’s electricity consumption is devoted to Bitcoin mining. Specialized computers used in these operations are run at full blast nonstop, wearing them out quickly and creating vast amounts of computer detritus.
China dominated global cryptocurrency mining until recently but is cracking down on this activity to limit environmental damage. (China has in fact banned cryptocurrencies altogether, seeing them as vehicles for financial speculation.) Bitcoin miners are therefore increasingly setting up shop in the United States. They argue that such mining activity will bring economic benefits, including jobs, and give states that host this activity an edge in becoming hubs of financial innovation.
Why New York? Upstate has cool temperatures, easy availability of cheap energy and old power plants that can be repurposed to maintain large arrays of computers. The Bitcoin mining industry maintains that using renewable sources of energy such as hydroelectric power limits its environmental impact. This is a fallacy. Such energy could be put to much better use in replacing fossil fuels and other nonrenewable energy sources.
The broader economic benefits to regions that host cryptocurrency mining operations are minimal at best. Once the mining rigs (banks of computers strung together) are set up, operating and monitoring them requires little human intervention. Computers don’t go out to eat at restaurants or stay at hotels. Besides, the operations could be run by firms headquartered elsewhere that have limited direct tax obligations to the states where mining activity is located. By contrast, the environmental consequences of cryptocurrency mining, including the diversion of energy from other uses, will stay local (although there will be spillover effects at the national and global levels) and could take a long time to reverse.
Proponents of Bitcoin mining mistakenly argue that limiting it discourages financial innovations built on blockchains. But Bitcoin and blockchains are not the same thing. Blockchains are, in effect, electronic ledgers that are maintained on a large number of computers around the world and synchronized in real-time, making them tamper-proof and secure.
It is certainly true that Bitcoin bequeathed blockchain to the world, and that the broader technology, as opposed to the currency, is a marvel that can underpin beneficial financial innovations.
But new cryptocurrencies have emerged using similar technology to Bitcoin but with far smaller environmental footprints. These are far more efficient in their ability to process large volumes of transactions with modest electricity consumption.
Similarly, newer blockchains provide far more functionality than Bitcoin’s in serving as platforms for innovative financial products and services. Digital payments, low-cost banking services and a range of credit and investment options could soon be easily and widely accessible without having to rely on traditional banks. Purchasing a car or house will become far easier and cheaper while government records can be simultaneously made more transparent and secure by putting them on blockchains.
Blockchain is cool and transformative. Bitcoin, on the other hand, has become a speculative financial asset and is harmful to the environment. Adams and other public officials need to grasp this difference.
Prasad’s new book is ”The Future of Money: How the Digital Revolution is Transforming Currencies and Finance.” He is a professor at Cornell University and a senior fellow at the Brookings Institution.