Excise taxes on cryptos are bad policy

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When the Council of Economic Advisers initially proposed a 30% excise tax on bitcoin mining organizations in March 2023, bitcoin price reaction was swift as the cryptoasset fell below $20,000. After this initial shock, however, and with other geopolitical and economic issues taking center stage, especially as the US banking industry continues to struggle with instability and bank failures, this idea has fallen into disrepair. disuse. In what some considered a surprise decision, the CEA reignited the debate and controversy surrounding this excise tax project via a Twitter thread seeking to explain and justify this proposal.

Reasonably enough, this proposed tax, both when initially discussed and when revived in public discourse, has drawn criticism from the crypto industry. Arguments against this excise tax include that bitcoin mining actually uses a significant percentage of renewable energy to power mining operations, and that cracking down on the US crypto mining industry would simply lead to its relocation. abroad. The CEA proposal argues that crypto miners do not pay the true cost of electricity consumed in operations, and that the use of renewable energy sources simply denies those renewable sources to other electricity users.

Such arguments have been made before, but they miss the most important points. The crypto industry has evolved dramatically over the past 18-24 months, but the political conversations about mining and crypto in general have not the attitude of the Securities and Exchange Commission is proof of that. obvious.

Let’s see why a crypto mining excise tax misses the mark from an economic and crypto perspective.

Bitcoin specificity. In most political conversations, the reference to crypto mining is a thinly veiled reference to bitcoin mining, and this reflects the fact that political debates have not kept pace with innovation on the market. Even though bitcoin continues to dominate financial market coverage of crypto-assets and tends to be the crypto of choice for institutions looking to diversify into crypto, the fact is that bitcoin is only one crypto. -asset. Besides representing only one aspect of the crypto space, this policy seemingly ignores the facts created by the progress of the EthereumETH 2.0 upgrade.

After the completion of the Merge and Shapella upgrades, the Ethereum blockchain and ETH transitioned from a proof-of-work consensus model to proof-of-stake. Along with the technical changes to validators and staked ETH, this is also going to result in a 99% drop in energy consumed by the Ethereum blockchain, by most estimates. With many emerging blockchain use cases running on Ethereum, this dramatically lower power requirement should be part of the conversation, but that doesn’t seem to be the case when it comes to this excise tax plan.

Energy mix updates. A common refrain among policymakers advocating punitive taxes and other disincentives against crypto-mining operations is that these companies consume (and waste) vast amounts of electricity. Trying to determine the value of any commercial enterprise for consumer electricity, regardless of quantity, is a slippery slope that should be avoided at all costs. Governments do not have a great track record when it comes to allocating scarce resources, and electricity is no exception.

Adding to this market reality is also the fact that the crypto mining world is increasingly moving towards sustainable investment options. According to a 2022 report published by the Bitcoin Mining Council, the percentage of energy consumed by the Bitcoin mining community that comes from sustainable sources has increased to 64.8%. In some context, according to the US Department of Energy, approximately 20% of all US energy comes from sustainable sources.

Instead of blaming crypto, and by extension blockchain, for some other problem, policymakers would be well advised to objectively examine the energy landscape.

Global significance. With the wide array of moving headlines and events in the market, it’s easy to lose sight of a simple, yet powerful fact. While the future of transactions remains uncertain, the fact is that blockchain-based transactions and the tokenization of assets of all kinds are rapidly moving from prediction to market reality. If institutions as large and systemically important as JP Morgan and Blackrock embrace these trends, it takes very little imagination to see how these trends will eventually dominate financial markets.

To innovate and think about these new forms of payment, and how to better store and share information more widely, investors and entrepreneurs need an environment that is at least neutral. Payments and the efficient transmission of digital information are, and will continue to be, the defining factors that determine which companies, trading blocs and nation states occupy leadership positions in the future. Adopting short-sighted and/or punitive taxes on an entire industry, which many see as the future of transactions, payments and data transmission, is bad policy and bad policy making. economic decision.

The crypto industry is not perfect, but enacting an excise tax on crypto mining ignores the changing nature of crypto, taxes companies that have embraced renewable energy, and hinders investment and future development.

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I am a professor at City University of New York Lehman College. I sit on the advisory board of the Wall Street Blockchain Alliance, where I chair the accounting working group. I’m also the chair of the NJCPA Emerging Technologies Interest Group (#NJCPATech). I serve on the advisory board of Gilded, a TechStars 19 company and a participant in the AICPA-CPA.com startup accelerator. I was a visiting scholar at the American Institute for Economic Research in 2019.

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