• Tue. Feb 27th, 2024

Why Texas is the canary in the crypto mine

Why Texas is the canary in the crypto mine

El Salvador has established itself as a center for cryptocurrency (or “crypto”) mining. In 2021, it became the first country to accept bitcoin as legal tender and the first to issue a bitcoin-backed bond. Now, the United States has announced plans to open a “Bitcoin Embassy” in Texas.

Due to relatively cheap energy and receptive regulators, Texas is one of the largest crypto-mining centers in the world. This has put Texas at the forefront of crypto policy, with the state recently passing several bills that could change the crypto landscape. Policymakers and blockchain businesses alike should pay attention to the Lone Star State’s latest attempts to manage the Wild West of cryptocurrency innovation.

Cryptomining is the process of validating cryptocurrency transactions, using high-powered computers to solve highly complex mathematical problems. As an incentive for “mining” or solving those math problems, miners are rewarded with cryptocurrency.

But crypto mining requires a lot of energy. A 2021 New York Times analysis found that mining one bitcoin uses as much electricity as an entire family uses in nine years. Therefore, crypto miners are aware of their electricity costs and must carefully choose where to mine. Many miners chose Texas.

The Texas Blockchain Council stated that in 2022, Texas is already home to 2 gigawatts (GW) of bitcoin mining (including mining for hundreds of other cryptocurrencies) and is attracting an additional 2 GW of bitcoin-mining capacity per year. By mid-2022, the Electric Reliability Council of Texas (ERCOT) estimates that there will be 33 GW of Bitcoin mining projects in its interconnection queue. For reference, combined households in Houston, the nation’s fourth-largest city, use less than 6 GW annually.

Riot Blockchain is building the world’s largest Bitcoin mining facility in Corsicana, Texas with 265 acres of Bitcoin mining computers. Texas also has the largest Bitcoin mine in the country. London-based Argo Blockchain chose the state because it has lots of land, low electricity prices and lots of wind farms. Other companies also chose Texas because of its cheap electricity prices and abundant renewable energy; In 2022, Texas led the nation in renewable energy, generating 2.5 times as much electricity as second-place California from wind and solar.

Some have criticized crypto mining for the large loads these operations require, especially during the sweltering heat of Texas; However, crypto miners have countered that it helps maintain electricity generation and has the ability to rapidly curtail mining to support the integrity of the grid.

Because Texas is such an attractive place to mine cryptocurrency, many of the issues surrounding crypto take place in Texas in the first place. As a result, the state is often at the forefront of crypto policy.

Crypto ventures in Texas are important to the industry nationwide, as the state is often the canary in the crypto-mine. With no clear directives regarding crypto from the federal government, Texas is making its own laws. For example, in the wake of the collapse of crypto exchange FTX, the state felt it had to act to protect consumers. Five crypto-related bills have recently been enacted or may be reintroduced and enacted in the coming years:

  • House Bill 1666: Governor Greg Abbott signs bipartisan legislation to protect cryptocurrency users. The bill, HB 1666, was introduced shortly after FTX’s bankruptcy and is designed to prevent similar collapses by companies holding consumers’ cryptocurrencies.

By law, Texas agencies are empowered to regulate digital asset service providers that act as banks for cryptocurrency investors. This crypto does not allow banks to fetch customer funds using bank funds, use customer funds to secure a transaction, or hold customer funds in a way that customers cannot later withdraw. Crypto banks will also now be subject to annual reporting requirements and audits.

The law will come into effect from September 1. Any crypto bank that violates the law could lose its Texas money transmission license and face fines and criminal penalties.

  • House Bill 4728: This recently enacted bill requires ERCOT to register individuals operating certain virtual currency mining facilities and provide information regarding the location and need for a facility. It also requires the PUC to establish a method to ensure compliance with this rule.
  • Senate Bill 1751: This bill would limit the extent to which crypto miners can participate in demand-response programs, which allow miners to be paid to curtail their operations during periods of high energy demand. Under a demand-response program, a miner is paid in credits to turn off operations when the power grid sees increased demand. SB 1751 would limit this credit to a 10 percent credit and eliminate tax credits.

The bill is sometimes called the “anti-bitcoin mining bill” because it may discourage miners from entering the market, but it will do nothing if it is not implemented. Now it is confined to the committee. The bill could be reintroduced in the next legislative regular session beginning in January 2025.

  • House Bill 3768: The “Texas DAO Bill” proposes amendments to the state’s Business Organizations Code to allow decentralized autonomous entities to form and use distributed ledger or blockchain technology for certain business purposes. The bill may be reintroduced in the next legislative session.

Everything is big in Texas, including crypto. Because of that fact, Texas focused on developing an environment It will attract crypto companies to the state and try to protect consumers from volatility in the electricity and crypto industries. Other states would be wise to pay attention to what policies are working — and not working — in the Lone Star State.

Monica Hwang, Sid Modi And William K. Pao are partners, and Christian Rice is an associate in the law offices of O’Melveny & Myers LLP.

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