WH Crypto report recommends buoyant mechanism underpinning Bitcoin

The March 2022 Executive Order titled “Ensuring Responsible Development of Digital Assets” mandated the White House Office of Science and Technology to prepare a report on digital assets. The report was recently published and the recommendations related to Bitcoin may undermine its existence.

The White House claims that global electricity consumption from digital assets such as Bitcoin and Ethereum is estimated to be “120 and 240 billion kilowatt-hours per year” or 0.4% to 0.9% of annual global electricity consumption.

To minimize their environmental footprint, the Biden White House is proposing drastic measures for the existing cryptocurrency framework.

One of the main takeaways from the 46-page report was a recommendation for congressional legislation and executive orders that “restrict” or “eliminate” Proof-of-Work (PoW) mining. Instead, the White House wants to adopt a Proof-of-Stake mechanism to reduce Bitcoin’s power usage.

PoW mining is a consensus mechanism used to secure the network and validate blockchain transactions. PoW is only successful because of crypto miners using computers to “solve complex puzzles, consuming massive amounts of energy.”

“An alternative, less energy-intensive consensus mechanism, called Proof of Stake (PoS), was estimated to consume up to 0.28 billion kilowatt-hours per year in 2021, less than 0.001% of global electricity consumption,” the report said. “Current discussions about reducing the electricity use of crypto-assets focus primarily on PoW blockchains, particularly Bitcoin. There have been increasing calls for PoW blockchains to adopt less energy-intensive consensus mechanisms. The most prominent response has been Ethereum’s promised launch of “Ethereum 2.0 “, which uses a PoS consensus mechanism.”

The White House fact sheet suggests that PoS will “dramatically reduce” electricity consumption to less than 1% of current usage levels. But is such a drastic change from PoW to PoS justified, and will it result in significant energy savings? Hardly.

First let’s be clear, there is a role for both types of technologies and it should be left to those engaging in the networks to decide which consensus mechanism – POS or POW – works best for them. Ultimately, the pro and con analysis comes down to the intended use.

For digital money and secure storage of value, PoW tends to be the mechanism of choice given its “hardness” (ie security) and low bar for access. One only needs access to energy that is available worldwide to be part of the PoW network. For smart contracts and the development of other distributed computing products, PoS tends to be the consensus mechanism of choice.

There is now a regulatory consideration that will play a role in the analysis. PoW has been deemed a commodity and will be overseen by the Consumer Financial Trade Commission, while PoS has been deemed a security and will be overseen by the Securities and Exchange Commission.

Although the energy conversation is important, it is largely a distraction. University College London’s Center for Blockchain Technologies studied the environmental impact of Distributed Ledger Technology (DLT), particularly PoS, and concluded that “the exact energy consumption characteristics of PoS-based systems and the difference between them are not widely understood.”

IWF Senior Policy Analyst Mandy Gunasekara explained that Bitcoin mining, for example, accounts for a small amount of total global energy consumption, which provides a better point of comparison.

Bitcoin mining is no different, but the network is far more efficient and arguably has more social utility compared to, say, gaming. Globally, Bitcoin mining uses 188 terawatts of energy annually. Although this number may sound extreme at first blush, it is statistically insignificant, accounting for only 0.122 percent of global energy consumption. For even better context, Christmas lights (201 terawatts) and computer games (214 terawatts) use more energy than the entire bitcoin network.

The White House has admitted that crypto-mining is important, but it can only be acceptable if it is fully in line with the Biden administration’s net-zero agenda. The reality is that bitcoin mining has already proven to be an effective tool for cutting emissions, including methane emissions by capturing otherwise flared or leaked gas to power miners, and is being deployed alongside renewable energy projects to balance out periods.

As the federal government shapes digital assets in the United States, it would be very short-sighted for the White House to undermine the existence of either consensus mechanism, especially so early in its development. To learn more about the White House’s upcoming plans for digital assets, read the report here.