Does crypto mining face an existential moment?

In the aftermath of FTX’s collapse, the crypto industry faces greater scrutiny about the sustainability of crypto mining and the concentration of power

The crypto industry is in overdrive. Despite fluctuating markets, recent negative headlines and the seemingly endless volatility, consumers are still investing and the crypto space is still on the relative up-and-up.

According to Insider Intelligence, the number of US adults who own at least one cryptocurrency was estimated to be almost 34mn by the end of last year – accounting for close to 13% of the adult population, having passed the 10% mark for the first time the year before. The largest ownership group was adults aged 25-34. Men are much more likely to own a cryptocurrency asset than women and, unsurprisingly, the typical demographic is affluent men. Yet, despite increasing uptake, there remains concerns about the way that cryptocurrencies are mined.

Environmental concerns about crypto mining

One of the eminent concerns about the growth of cryptocurrencies is the energy consumption required to mine them, particularly for cryptocurrencies that use the proof-of-work model. Indeed, such is the energy intensity of crypto mining, when Ethereum announced at the end of last year that it had successfully transitioned to a proof-of-stake system (requiring crypto staking, rather than crypto mining), it predicted an enormous 99% reduction in carbon emissions.

Indeed, current crypto mining operations use more energy to complete than some medium-sized countries – 91 terawatt hours of electricity every year to be precise, or more than the whole of Finland, which has 5.5mn residents.

Kaj Burchardi, Platinion Managing Director at BCG, says: “While crypto has certainly disrupted traditional finance, its impact on the environment cannot be ignored. The mining of crypto, which requires enormous amounts of energy, has a significant carbon footprint that contributes to climate change.”

But it's not just mining that contributes to conventional crypto's sizeable carbon footprint, Burchardi adds: “Other sources of emissions in the crypto value chain include transaction processing, data centres and infrastructure. These emissions are not only detrimental to the environment but also pose a risk to the long-term viability of the crypto industry.”

Burchardi says that steps are being taken to rehabilitate crypto and make it a more sustainable option. “More and more blockchain protocols are using a consensus mechanism with a lower carbon footprint, such as proof-of-stake or proof-of-authority. More miners are using renewable energy sources such as solar and wind power to power mining and processing operations.”

Is crypto concentrated in too few hands?

One of the overarching benefits of digital currencies on the blockchain, as opposed to Fiat, is that it no longer requires a single, central source of truth (as authority is shared across the network). In this way, it has the power to democratise financial services. And yet, concerns about the way crypto is mined – specifically for whom crypto mining is a viable and accessible endeavour – risk undermining that core mission of democratisation entirely.

“Many mining operations are carried out by individuals using sophisticated computing software that is geared towards completing mining tasks as quickly as possible,” explains Daniel Seely, a crypto expert and financial regulatory lawyer at law firm Freeths.

“As cryptocurrency grows and blockchains become more sophisticated, the computing power required to be able to successfully mine will become more advanced and, ultimately, expensive. This is the case not just for acquiring the relevant technology, but also the significant energy bills which such computing operations generate. This means that, in time, we may see mining operations carried out by large corporate entities and those with the 'deepest pockets'.

“This does, however, give cause for concern. The ethos behind cryptocurrencies and mining was to ensure the safety and reliability of the network, since mining and transaction verifications could be carried out anywhere on the globe. 

“However, by being placed into the hands of fewer and fewer operators, the room for potential misuse of the technology grows, meaning that regulators may begin to turn their attention to monitoring and, ultimately, regulating mining operations so as to ensure there is sufficient oversight and auditing in place to prevent any market abuse.”

What is the future of crypto mining?

Events of the last 12 months, including the headline-grabbing collapse of crypto exchange FTX and subsequent police investigations, will have done nothing to sanitise crypto's image or prevent regulators from circling. Increased scrutiny, including tighter regulation, should now be considered near-inevitable to crypto operators planning for the future.

As the crypto industry matures, what were once considered 'cottage industries' will rapidly become industrial-scale operations and crypto mining businesses will have to adapt to the changing landscape. This could mean changing the way they're structured.

As Freeths' Daniel Seely explains, crypto businesses will need to consider the tax implications of their operation. For example, a 'payment' in cryptocurrency as a reward for mining “could give rise to tax liabilities, since cryptocurrencies are increasingly seen as acceptable and taxable assets”. In addition, if an individual wants to sell that cryptocurrency at a later date, other taxes such as capital gains tax might become applicable.

“Whilst many crypto businesses may want to expand, this may mean that they wish to register as limited companies so as to provide the directors with legal protection by being able to avoid personal liability, as well as potentially making their businesses more attractive to investors. 

“Firms will, however, need to consider the various legal requirements which will arise from this – if a business grows, will it look to take on employees? If so, it will need to consider the implications and expenses that will follow, such as the costs of preparing employment contracts, obtaining employers’ liability insurance, as well as pension contributions and tax liabilities.”

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