Cryptocurrency mining has been a hot topic lately. This past summer’s Bitcoin price surge has spurred a lot of interest in mining, which has major implications for the future of Bitcoin, the industry’s most popular token. Cryptocurrency mining has already become a major economic force, and it’s on the verge of becoming regulated.
A new bill in the US congress just got approved by the House of Representatives’ Committee on Energy and Commerce, which will go on to the full House before it goes into effect in January of next year. This bill is a seeming attempt to control cryptocurrency mining and related activities, which have been growing in popularity over the past year. However, many people are concerned that it will be abused by the government to monitor cryptocurrency mining activities and, in turn, monitor cryptocurrency users.
It’s no secret that cryptocurrency mining has become a hot topic in the news recently. But what exactly is cryptocurrency mining? And more importantly, how will the new US policy change affect cryptocurrency mining?. Read more about cryptocurrency laws by state and let us know what you think.
Blockchains and cryptocurrencies are being more scrutinized by regulators. The economic activities that underpin and are facilitated by blockchains have become a major issue for regulators, from China’s cryptocurrency mining ban to Treasury Secretary Janet Yellen’s Working Group on Financial Markets. Most recently, a clause in the planned infrastructure law for 2021 expands the definition of a broker to include “any person who […] is accountable for routinely delivering any service effectuating digital asset transactions on behalf of another person.”
The declared aim of this “miner-as-broker” regulation change is to enhance tax revenue collection on bitcoin capital gains by improving tax collectors’ capacity to monitor cryptocurrency transactions. Cryptocurrency miners seem to meet this description of a broker since they frequently verify transactions that move digital assets, such as bitcoins, on behalf of cryptocurrency holders. Many in the bitcoin sector, understandably, are concerned.
Competitive decentralized record-keeping is a fundamental aspect of blockchain technology. The advantages and disadvantages of this innovative method of record-keeping against conventional centralized financial databases are hotly debated. However, the new rule may bring this argument to a premature conclusion.
Authorities are attempting to bridge the gap on unhosted wallets.
What are the immediate ramifications of classifying miners as brokers?
First, miners — at least those in the United States — would face much more stringent reporting obligations from the Internal Revenue Service. Compliance with such regulations is expected to be costly and essentially fixed for miners. Before mining a single block, miners would have to suffer these fees, regardless of how much mining power they had. This will discourage entrance and likely lead to greater centralized control or mining power concentration.
Second, these broker-miners would be in charge of adhering to Know Your Customer laws. Because most cryptocurrencies are pseudo-anonymous, such a regulation would limit the kinds of transactions that broker-miners may execute to non-anonymous transactions. How would this function in practice? I’d probably sign up with a miner (maybe by connecting my driver’s license to a Bitcoin address), and miners would only verify transactions on behalf of their registered customers. My transactions are less likely to be completed on the Bitcoin (BTC) network if that miner is tiny (has little mining power). It may be better if I (and you) signed up with a bigger miner. Alternatively, we could all utilize Coinbase and have a miner process transactions on Coinbase’s behalf. Again, a larger concentration of mining power is the result.
This policy, taken together, is likely to increase the concentration of cryptocurrency mining in the United States while also raising mining costs and possibly reducing the overall amount of mining that occurs; that is, the policy would shift mining within the United States away from the “shadowy faceless groups of super-coders” recently described by Sen. Elizabeth Warren, but it could also increase users’ reliance on suckers.
What are the ramifications of classifying miners as brokers on a global scale?
The proportional significance of U.S. cryptocurrency mining activities in the context of global mining determines part of the global effect of the proposed measures in the infrastructure bill. Recent history may help put things in perspective. China ramped up enforcement of its anti-Bitcoin mining policy in June. As a consequence, there were significantly fewer miners. This may be seen in the decrease in mining difficulty seen at the start of July. The pace at which transactions are processed is determined by the mining difficulty (about 1 block per 10 minutes on Bitcoin). When there are few miners, it becomes more difficult to maintain a consistent transaction pace.
The lower the mining difficulty, the less energy is required to mine a block. The block reward is always the same. The price of Bitcoin did not decline in July when the difficulty level was reduced. There are three things to keep in mind:
- Mining earnings must have risen for the surviving miners.
- New miners did not quickly replace the now-defunct China miners.
- Mining competition has decreased.
These characteristics are likely to lead to mining power consolidation or concentration. We may certainly anticipate a similar effect if the new legislation is implemented, especially the broker identification of miners.
Turn on your Bitcoin miner if you have one.
Is a greater concentration always a negative thing?
Decentralization is at the heart of blockchain technology’s security concept. No one has a vested interest in excluding transactions or previous blocks. When a single miner has enough mining power — the ability to solve many blocks in a row — they may be able to change the blockchain’s history. This is known as a 51 percent assault, and it raises questions about the blockchain’s immutability.
The suggested policy has two unrelated effects. For starters, greater concentration brings miners closer to the point where they may practically change the blockchain record by definition. Second, and perhaps more subtly, as the cost of mining lowers, the profitability of an attack rises – it is just cheaper to attack.
Such security issues, however, arise completely from Bitcoin’s mining protocol, which suggests miners add new transactions to the blockchain’s longest chain, as my co-authors and I explain in continuing research. We claim that this suggestion for coordinating miners on the longest chain is solely responsible for the possible success of 51 percent assaults. We demonstrate how different coordination devices may improve the security of a blockchain while limiting the security risks associated with increasing mining concentration.
There is no blockchain if there is no competition.
Whether or not the present proposals in the US infrastructure plan for 2021 succeed, officials seem poised to tighten regulation and reporting of bitcoin transactions. While the debate has largely focused on the tradeoffs between increased government monitoring of cryptocurrency trading and potential harm to U.S. blockchain innovation, it is critical for both policymakers and innovators to consider the likely impact of such policies on cryptocurrency mining competition, as this competition is critical for securing blockchains.
The author’s views, ideas, and opinions are his or her own and do not necessarily reflect or represent those of Cointelegraph, Carnegie Mellon University, or any of its affiliates.
Ariel Zetlin-Jones is a Carnegie Mellon University associate professor of economics. He researches the relationship between financial intermediation and macroeconomics. Ariel has been studying the economics of blockchains since 2016, focusing on how economic incentives may be used to influence blockchain consensus and stablecoin protocols, as well as the new and economically significant centralized marketplaces that presently enable cryptocurrency trading. The American Economic Review, the Journal of Political Economy, and the Journal of Monetary Economics have all published his work.
U.S. Federal Trade Commission Chairman Joseph Simonsaid on Thursday that no new cryptocurrencies will be approved after 29th of January, 2018. To allow new coins to be launched, Simons said the commission will prohibit U.S. companies “from selling products and services tied to the issuance or sale of any digital asset” that is not approved by the commission.. Read more about u.s. cryptocurrency regulation and let us know what you think.
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