Yet More Reasons Bitcoin/Cryptocurrency Bites

If virtual currency exchanges and financial technology firms wish to realize the tremendous benefits of

being part of the U.S. financial system and serving U.S. customers, they must play by the rules. Treasury Secretary Janet Yellen

Rules? What rules? The cryptocurrency world has been filled with scammers and thieves. It has provided criminals and rogue nations facing international sanctions with a backdoor currency that avoids the scrutiny of those attempting to enforce justice. It has accelerated global tax evasion. It has crashed and burned, losing as much of 80% of its aggregate value, leaving believers crying in the dust. If crypto were allowed to resume its prior growth, it could also threaten national monetary and fiscal policy controls. And given the massive, decentralized blockchain security system involving multiple computers and a highly energy-inefficient interface to deal with users. The process is called “mining,” and the aggregate heat generated by all the relevant file servers and computer terminals requires massive cooling systems, most of which use water.

But let’s start with a gridlocked Congress, several criminal cases (and convictions) and federal administrative agencies struggling to regulate cryptocurrency in the absence of tailored and more appropriate statutes. Los Angeles Times OpEd contributor (November 28th), describes the regulatory mess: “Things got started with a blast Nov. 2, when scam artist Sam Bankman-Fried was convicted on seven fraud and conspiracy counts related to his management of the once-upward scuttling crypto exchange FTX.

“Matters didn’t get any better after that. On Nov. 20, the Securities and Exchange Commission charged the crypto trading platform Kraken with a raft of legal violations… The SEC alleges that Kraken has been operating simultaneously as a crypto ‘broker, dealer, exchange, and clearing agency,’ which present potential conflicts of interest that work against customers’ interests.

“One day after that, the government dropped a nuclear bomb on the asset class. The Treasury, Commodity Futures Trading Commission and Department of Justice announced a $4-billion settlement of money laundering charges against Binance, the largest crypto platform still standing after the collapse of FTX… (Interestingly, the one agency not participating in the settlement is the SEC, which makes it seem that its enforcers are intent on pursuing their own case against Binance.)

“As part of the deal, Binance agreed to cease doing business in the U.S. and employ an independent compliance monitor for five years. Its founder, Changpeng “CZ” Zhao, agreed to step down as chief executive; he pleaded guilty in Seattle federal court to a felony money-laundering charge and agreed to pay a $50-million fine. Federal prosecutors are asking the court to sentence him to 18 months in prison.” That’s more than enough to make you distrust, perhaps even hate, cryptocurrencies. But if you have any concern for serious environmental concerns, take a good, hard look above at one typical cryptocurrency datacenter … at the file servers cooking up heat at unjustifiable levels. Writing for the November 29th FastCompany.com, Chris Stokel-Walker examines on controversial study, disputed by big crypto-players for obvious reasons:

“It was meant to revolutionize finance, and free us all from the tyranny of centralized control of our banking. But it turns out, Bitcoin just might end up killing our planet… That’s the findings of a new study by Alex de Vries, a researcher [and PhD candidate] at the Vrije Universiteit Amsterdam, who has put forward an estimate for how much water is consumed every time someone buys, sells, or mines Bitcoin on the blockchain.

“Writing in the journal Cell Reports Sustainability, de Vries calculated that in 2021 mining Bitcoin consumed more than 1,600 gigaliters of water worldwide, with every single transaction on the blockchain using 16,000 liters of water—6.2 million times more than is used every time we swipe a credit card to pay for something.

Water is used in these transactions to cool the computer equipment used to mine Bitcoin, as well as to cool the power plants that supply the electricity for those computers. ‘In order to generate electricity, you also need a lot of water to cool the fossil fuel-based power plants,’ he explains.

Only between 10% and 20% of the water usage involved with every Bitcoin transaction is direct—that is, used to cool the equipment that actually mines the Bitcoin, says de Vries. The remainder is the transaction’s indirect footprint, where water is used elsewhere along the supply chain… ‘Water footprint is a very important, but often overlooked, environmental cost of computing systems, including AI and Bitcoin,’ says Shaolei Ren, associate professor of electrical and computer engineering at the University of California, Riverside, who tries to track the water impact of various technologies. Ren was not involved in the Cell Reports Sustainability study.

“Ren welcomes the paper putting forward a concrete estimate of the overall water footprint of Bitcoin. ‘The operational water footprint for server and power-plant cooling is already huge,’ he says. ‘If we further factor in the embodied water footprint for manufacturing Bitcoin servers, the total water footprint could be easily doubled. But, at this point, there’s been very little, if any, data available for the embodied water footprint.’”

In a time where climate change is inflicting severe drought in many countries, embracing crypto centers can be disastrous: “Countries like Kazakhstan, a major hub for cryptocurrency mining, are already facing water shortages. In 2021, Bitcoin transactions in Kazakhstan accounted for 997.9 GL [gigalitres] of water, adding to the country's water crisis.” Eric Ralls for EarthSnap.com. Maybe we like providing tools for drug cartels, Russian attempts to annex sovereign nations or income tax evaders. Cryptocurrencies are hardly the legal facilitators that wire transfers and credit cards have become; their nefarious use and creation of values based on faith of unvetted privateers and technology geeks are downright dangerous.

I’m Peter Dekom, and sometimes what appears to be too good to be true, what has mistakenly caught on as the future of trade, just might be a minefield of painful disasters.