The question of how Bitcoin should be regulated depends on a broader and more important question, namely that of whether or not Bitcoin is fundamentally good – for society, for the economy, and for the environment. In recent weeks attention has been focused squarely on the latter question, following Elon Musk’s decision to discontinue Bitcoin payments at Tesla on the premise that the mining process is becoming increasingly dependent on fossil fuels.
There has been much speculation as to the reasons surrounding Musk’s apparent U-Turn. Some have suggested that it was really for tax reasons – given that all crypto transactions are taxable events – while others suggested it was a cynical if ingenious step towards a longer-term plot by Tesla to pioneer its own green Bitcoin mining operations.
Either way, the environmental concerns surrounding Bitcoin are fundamentally missing the forest for the trees. Of course it is true that the network consumes vast amounts of energy. One of its principal appeals is security, and given it is secured by millions of powerful supercomputers competing to solve difficult mathematical problems, it requires huge amounts of electricity. According to the IEA, bitcoin mining consumed 50 to 70 terawatt hours in 2019 — approximately the same amount as a small wealthy country like Switzerland, which consumes about 63 terawatt hours annually.
Advocates for Bitcoin would counter that the world’s largest digital asset creates value with the energy it uses — and that the non-renewable sources of its energy are enormously overstated by its critics. According to CoinShares, a digital-asset investing company that says it spent hundreds of thousands of dollars researching the issue, they estimate 74 percent of the energy used in bitcoin mining comes from renewable sources. That share is only likely to increase. Renewable sources like solar and wind power are also cheap and their prices are continuing to go down — which is a pull factor for cryptominers, whose biggest expense is electricity.
Furthermore, energy consumption is not equivalent to releasing carbon emissions into the atmosphere, which bitcoin mining does surprisingly little of. In the not too distant future bitcoin could become a strong force that will make the electrical grid greener, specifically by providing a reliable financial incentive that will help make renewable power sources like solar and wind more economical. This is the case that Jack Dorsey, the CEO of Twitter and Square, laid out in white paper produced by Square titled ‘Bitcoin is Key to an Abundant, Clean Energy Future’.
The environmental argument is then something of a red herring. The real issues at stake in the bitcoin sphere are its social and economic implications and potential. In theory, decentralised finance is about democratizing the industry, enabling transactions to occur seamlessly without a middleman, and enabling custodians to store value without the threat of it being deflated by a central bank.
Needless to say, the technology still has a long way to go. Transaction costs remain extremely high, making it difficult if not impossible to act as a useful currency, while its volatility prevents it from acting as a useful store of value.
More concerningly, there is a real threat that rogue regimes have been using the technology for the simple purpose of bypassing international sanctions, especially those imposed by the US. If bitcoin is to reach its full potential as a technology – which would mean to live up to its billing as the most significant technological innovation since the internet – it will require intelligent, targeted regulation, which serves to prevent and penalize its misuse without muzzling its potential before it has reached escape velocity.
This is much easier said than done of course. So what would the first steps towards appropriate international regulation of cryptocurrencies look like? Any such regulatory tools cannot be blunt instruments, and must carve out a role for the use of artificial intelligence and big data in addressing the problems of money laundering, amongst other nefarious uses of cryptocurrencies.
Regulators can use AI to learn from the data about possible financial frauds and potential threats, just as miners can make use of AI techniques to increase their profit and save electricity for environmental considerations. Security specialists can also use these techniques to analyze and assess the security and privacy level of cryptocurrencies and identify possible pitfalls and threats.
Whatever regulation is applied to bitcoin and cryptocurrencies more broadly, the overriding principle must be to avoid throwing the baby out with the bathwater. If blunt and overbearing regulation stifles the adoption of cryptocurrencies in Europe and North America, autocratic regimes will jump at the opportunity to become the leading crypto-powers. That is how this technology works. As an open decentralised protocol, it no more possible or desirable to stop bitcoin in its tracks than it was to stop the spread of the internet. The genie cannot be forced back into the bottle. The West must lead the world or be led by others – and that starts with smart regulation.