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What is the Legal Treatment of Virtual Currency Mining Globally?

Aug



 

What is the Legal Treatment of Virtual Currency Mining Globally?
  • Introduction

bill moving through the state capitol of New York State in Albany calls for a two-year embargo on some virtual currency mining operations that employ proof-of-work authentication methods to confirm blockchain transactions in New York States’ effort to prohibit new crypto mining operations. The bill's advocates say they want to reduce the state's carbon footprint by cracking down on mines that use electricity from power plants that burn fossil fuels.

  • So, what is virtual currency mining?

Crypto mining can be considered a software development activity that generates value in the form of a newly generated virtual currency (sometimes known as the block reward). It entails massive, decentralised networks of computers all over the world that verify and safeguard blockchains, which are virtual ledgers that record crypto transactions. Computers on the network are rewarded with fresh coins in exchange for contributing their processing power. It's a virtuous circle: miners keep the blockchain secure, the blockchain rewards coins, and the coins incentivise miners to keep the network secure.

  • What Is Proof of Work (PoW)?

Proof of work (PoW) describes a system that requires a not-insignificant but feasible amount of effort in order to deter frivolous or malicious uses of computing power, such as sending spam emails or launching denial of service attacks.  Hashes, long strings of numbers serve as proof of work. Put a given set of data through a hash function (bitcoin uses SHA-256), and it will only ever generate one hash. Due to the "avalanche effect," however, even a tiny change to any portion of the original data will result in a totally unrecognizable hash. Whatever the size of the original data set, the hash generated by a given function will be the same length. The hash is a one-way function: it cannot be used to obtain the original data, only to check the data that generated the original data[1].

  • What is a blockchain?

A blockchain is a chain of signatures or hashes as highlighted which are basically organised blocks of time which use a cryptographic mathematical trust to keep track of transactions in a digital system. The network does not require a complex structure, as it uses peer to peer system to verify and publish these chains of blocks. Basically, it needs a distributed data structure for storage and a messaging system protocol that makes up a Public network on the internet.[2]

  • What is the legal treatment of Crypto Mining?

The legislation framework from Argentina, Canada, Germany, India, Ireland, Nigeria, Singapore, Sweden, Switzerland, The United Arab Emirates, The United Kingdom, and The United States generally does not provide for a legal and regulatory framework with regards to crypto mining.

For example, there is no regulatory regime in Singapore specific to the mining of digital tokens. However, to the extent that the digital token being mined is a security token or an asset-backed token (namely a commodity token) and depending on the precise ambit of the specific mining arrangement, relevant regulatory or licensing considerations under the securities and commodities laws may apply. For example, the running of a collective mining pool that aggregates and distributes returns as a result of running mining operations may be seen as operating a collective investment scheme or a commodities pool[3].

While virtual currency mining is not specifically regulated in Canada at this time, the use of virtual currency mining hardware may be subject to provincial or municipal requirements, or both, relating to the use of energy. Canada's cold temperatures and low electricity costs have made it particularly attractive for virtual currency miners[4]. The surge in demand for electricity in this sector has caused some provincial and municipal governments to re-evaluate how to process requests from virtual currency miners going forward.

On 25 April 2019, Quebec's Régie de l'énergie issued a decision approving the creation of a new 'blockchain' consumer category and approved the creation of a reserved block of 300 megawatts (MW) for this category, of which 50MW must be allocated to blockchain projects of 5MW or less. On 5 June 2019, Hydro-Quebec launched a request for proposals with respect to the allocation of the 300MW block reserved for the blockchain consumer category.

Projects will be evaluated based on economic and environmental criteria, including the number of direct jobs in Quebec, the total payroll of direct jobs in Quebec, capital investment in Quebec, and total electricity use.

In November 2020, the Bank of Canada acknowledged that the climate crisis is a source of systemic risk for Canada's economy. In 2021, major corporations such as Tesla publicly expressed concerns over the potentially deleterious impact of the virtual currency industry on the environment. Increased scrutiny surrounding rising carbon emissions, a potential by-product of the virtual currency mining process, has ignited a movement for greater awareness of environmental, social, and corporate governance (ESG) considerations and regulations in this industry.

In Switzerland Mining of tokens (self-issuance of tokens) does not trigger a licence requirement under Swiss law provided that the miner does not perform any activity falling within the scope of the regulated activities.

 In the United States it seems that apart from New York State’s move to actually ban crypto mining, some activity around regulating this industry exists at a local level.

On February 11, 2021, the Missoula Board of County Commissioners adopted permanent zoning regulations for cryptocurrency mining operations in the unincorporated areas of Missoula County in Montana. The zoning regulations permit cryptocurrency mining operations as conditional or special uses in areas zoned C-I1 (Light Industry) and C-I2 (Heavy Industry) and require them to meet criteria to mitigate adverse impacts, including climate change impacts resulting from high energy consumption, noise pollution, and electronic waste disposal[5].

In the body of the mining regulations, the County outlines reasons for such zoning overlay which it describes as having the intention to mitigate the negative effects of proof-of-work blockchain processing used in cryptocurrency mining operations. This includes, but is not necessarily limited to, very high energy usage, noise pollution, and the disposal of electronic waste. The high energy consumption of cryptocurrency mining operations runs counter to Missoula County’s objective to reduce its contribution to climate change. Equipment at these facilities has the potential to create noise pollution that negatively impacts nearby residents, businesses, and wildlife. In addition, electronic waste from cryptocurrency mining operations contains heavy metals and carcinogens that have the potential to damage human health, and air and water quality if not handled correctly[6].

  • Conclusion

Having looked at the legal treatment of crypto mining in the 12 jurisdictions outlined which span the Americas, North America, Europe, Africa, and Asia, it’s clear that Countries are yet to effectively regulate Crypto mining. This remains an area of concern considering the environmental impact of the same. Canada has provincially set a good example of how to encourage businesses to mine crypto in a responsible way that takes into consideration critical factors around ESG.

[1] https://www.investopedia.com/terms/p/proof-work.asp read on 8/8/2022  at 3.24 pm (CAT)

[2] Daniel Cawrey, Lorne Lantz (2020) Mastering Blockchain: Unlocking the Power of Cryptocurrencies, Smart Contracts, and Decentralized Applications. Oreilly Media (Kindle Version)

[3] https://www.lexology.com/indepth/the-virtual-currency-regulation-review/singapore read on 8/9/2022 at 6. 12 pm CAT

[4] https://www.lexology.com/indepth/the-virtual-currency-regulation-review/canada#footnote-043  read on 8/8/2022 at 6.00 pm CAT

[5] https://www.missoulacounty.us/government/community-development/community-planning-services/planning-projects/cryptocurrency read on 8/8/2022 at 12.45 pm (CAT)

[6] Missoula County Cryptocurrency Mining Zoning Regulations March 2021 downloaded on 8/8/2022 at 12.30pm (CAT)

By Seodi White

Keywords: Blockchain, Digital Transformation, Legal and IP

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