Cryptocurrency

Decode 16 tons (of bitcoin), what do you get? Nevada considers redefining the phrase “corporate governance”

Jesse Smith, MJLST Staffer

On January 16, 2020, Nevada Governor Steve Sisolak, as part of his state of the state address, announced a new legislative proposal allowing certain types of private companies to essentially purchase the ability to govern as public entities. The proposal applies specifically to tech firms operating within the fields of blockchain, autonomous technology, the internet of things, robotics, artificial intelligence, wireless technology, biometrics, and renewable resources technology. Those that purchase or own at least 50,000 contiguous acres of undeveloped and uninhabited land within a single county can apply to create  “innovation zones” within the property, or self-governed cities structured around the technology the company develops or operates. The company must apply to Nevada’s Office of Economic Development and provide a preliminary capital investment of at least $250 million, along with an additional $1 billion invested over ten years. Upon approval by the state, the area would become an “innovation zone,” initially governed by a three-member board appointed by the governor, two members of which would be picked from a list provided by the company creating the zone. This board would be able to levy taxes and create courts, school districts, police departments, and other offices empowered to carry out various municipal government functions.

One of the main companies lobbying for the passage of the bill, and the likely its first candidate or adopter, is Blockchains LLC, a Nevada based startup that designs blockchain based software in the areas of “digital identity, digital assets, connected devices and a stable means of digital payment.” The company purchased 67,000 acres of largely undeveloped land near Reno in 2018 for $170 million, in pursuit of building what it calls a “sandbox city,.” There, the company would further develop and use its blockchain technology to store records and administer various public and private functions, including “banking and finance, supply chains, ID management, loyalty programs, digital security, medical records, real estate records, and data sharing.”

Natural and rightful criticism of the legislation has mounted since the announcement. Many pointed out that Jeffrey Berns, the founder of Blockchains LLC, is a large donor to both Sisolak and Democratic PACs in Nevada. Furthermore, months before the proposal was unveiled, Blockchains purchased water rights hundreds of miles away to divert to its Nevada land, prompting various outcries from water rights and indigenous activists. From a broader perspective, skeptics conjured up dystopian images of zone residents waking up to “focus group tested alarm[s]” in constantly monitored “corporate apartments.” Others reflected on the history of company-controlled towns in the U.S. and the various problems associated with them.

Proponents of the plan seem fixated on two particular arguments. First, they note that the bill in its current incarnation requires an innovation zone to hold elections for the offices it sets up once its population hits 100. This allegedly demonstrates that while any company behind the zone “retains significant control over the jurisdiction early on, that entity’s control quickly recedes and democratic mechanisms are introduced.” Yet this argument ignores the fact that there is no requirement that a zone ever reach 100 residents. Additionally, even where this threshold is met, the board still retains significant control over election administration, and may divide or consolidate various types of municipal offices as it sees fit, and dismiss officials for undefined “malfeasance or nonfeasance” (§ 20 para. 2). Such powers provide ripe opportunity for gaming how an innovation zone’s government operates and avoiding true democratic control through consolidation of various powers into strategic elected offices.

Second is the more traditional argument that these zones will attract new businesses to the state and bestow an influx of money and jobs upon the citizens of Nevada. Setting aside various studies and arguments that question this assumption, this argument is yet another tired talking point that ignores the damage large businesses already wreak on the local communities they take over. Many overuse the limited resources of various departments. Others use the “value” that big businesses supposedly bring to communities to pit local governments against each other in bidding wars to see who can offer more tax breaks and subsidies to bring the business to their town, money and revenue that could and likely should be used to fund other local programs. Thus, the ability to actually govern appears to be the logical end in a progression of demands big businesses expect from the cities they set up shop in. Perhaps the best argument in favor of innovation zones is also the saddest, in that they allow big businesses to, as is said in corporate speak, “cut out the middleman” by directly collecting the tax dollars they already consume by the billions and directly controlling the municipal resources they already monopolize.

Sisolak, Berns, and other proponents of the proposal fight back against the idea that innovation zones will become the equivalent of “company towns” and argue that it will make Nevada a tech capital of the world by attracting the businesses specified in the bill. They would be well suited to remember two maxims that summarize the criticism of their idea: that history repeats itself and the road to hell is paved with good intentions. There is a reason these phrases are overused cliches. Last week’s MJLST blog post left us with the sweet sounds of Billy Joel to close out its article. As suggested by Tony Tran of “The Byte,” I’ll end mine with the classic, yet unknowingly cyberpunk ballad “16 tons” (the Tennessee Ernie Ford version), and leave the reader thinking about the future plight of the Nevada Bitcoin miner, owing her or his uploaded cloud soul to the company store, aka Blockchains LLC, in their innovation zone job.


The Next Chapter for Mining and Energy Law: The Cryptocurrency Miners

Zach Sibley, MJLST Staffer

 

Traditionally, miners enjoyed a position on the supply side of energy production, providing energy inputs like coal that power the grid. The cryptocurrency boom during the last decade, however, has given rise to a new type of “miner” that turns this relationship on its head. Mining for cryptocurrencies like Bitcoin and Ethereum is not providing energy inputs but rather adding a new, massive load to the power grid. Bitcoin globally consumes an estimated 54.88 terawatt hours (TWh) of electricity annual, while Ethereum comes in at 15.74 TWh per year. For comparison, mid-sized countries like Denmark—home to over 5.7 million people—consume approximately 31.5 TWh per year.

 

And like the miners of old, these new miners are flocking to rural American cities and towns. Rather than gold or coal deposits, though, these cryptominers are searching for something more valuable: low energy bills. And rural areas in Washington state and New York running primarily on hydroelectric power are the new goldmines. The influx of new technology—and its high energy demand—now inevitably clashes with the simpler, energy-cheap lifestyle these rural Americans once enjoyed. Now locals are pushing back, leaning on local governments, energy utilities, and public utility commissions to respond.

 

The energy consumers who resided in these areas prior to the cryptocurrency boom fear that all these new loads will require new grid infrastructure investments, incurring capital costs that would be spread across all ratepayers. These concerns have been mitigated to a degree by large hook-up fees charged to new cryptomining operations, but such efforts likely do not fully insulate the prior residents and businesses from upgrade expenses. The concerns stem from constant fluctuation in cryptocurrency pricing, which can lead to two detrimental effects on non-mining residents’ energy bills.

 

First, when the value of cryptocurrencies are high, in increase in transactions creates a high demand for mining. Miners may push the limits of current infrastructure capacity or spike demand peaks faster than the local energy utilities plan for or more rapid than they can get generation assets online to handle. Unanticipated spikes require distribution utilities to purchase power from “spot markets,” which is often a double or triple digit multiplier compared to their normal generation expenses. These measures also fail to protect residents from footing the bill if the cryptocurrency boom becomes a bust. If prices dip low enough for long enough, bankruptcies and sudden departures of cryptomining operations leave remaining residents and business to pay the costs of stranded assets.

 

Concerned over the local effects of a volatile commercial cryptomining industry, the mayor of Plattsburgh, New York introduced an 18-month local moratorium on commercial cryptomining operations in the city’s common council. If passed, the moratorium will test constitutional challenges based on the Fifth Amendment’s substantive due process jurisprudence or its regulatory takings jurisprudence. It is likely that substantive due process claims will fail because the moratorium is substantively justified, i.e. reasonably related to the mayor’s police power to protect the health, safety, and wellbeing of the residents from economic shock and high utility costs. This reasoning would follow a 2006 Western District of New York decision upholding a town’s development moratorium on a wind energy project. The temporary duration of the moratorium and that substantive police powers underpinning would likely also defeat categorical and non-categorical regulatory takings claims, respectively.

 

The legitimacy of cryptomining moratoria will allow local governments to engage in meaningful debate with commercial cryptocurrency miners, energy utilities, and the local ratepayers. Establishing sufficient connection prices, demand charges, and contingency pricing to compensate for the risk of stranded assets takes time. These tariffs must be carefully crafted to comply with state retail electricity rate standards, such as just and reasonable and non-discriminatory. Allowing any cryptomining boom to continue uncoordinated only increases the exposure of innocent, permanent residents.

The tension between the commercial cryptomining market and the rural residents of low-cost electricity towns begins a new chapter for energy justice advocates and miners. The new miners, however, find themselves on the opposite side of the scales, potentially harming residents and businesses in rural America. Local governments require regulatory tools like land use moratoria to better coordinate energy loads and protect its citizens from financial uncertainty unique to cryptocurrency rapid boom-and-bust cycles. Residents do not enjoy the same locational flexibility as these cryptomining operations nor are these cryptominers bringing significant business or jobs to the area—a large cryptomining facility can be monitored by a single employee. The division between cryptomining’s small local benefits and its high local cost will likely lead to interesting litigation as rural localities and sophisticated cryptominers attempt to navigate the crossroads of energy law, land use regulation, and emerging technologies.