Legal Seminar, Denver, CO

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IN PRESS

[m7;July 3, 2018;21:58]

JID: CLSR

computer law & security review 000 (2018) 1–8

any related transaction fees processed in that block. 65 This al- gorithm is designed to be completed in about ten minutes, so that new Bitcoin are added and the blockchain is updated on this cycle. 66 Miners require these rewards to fund the costs associated with their activities, which require investments in computers, human capital, and significant electricity usage. Notably, by about 2040, when the fixed number of Bitcoin are expected to reach the asymptotic limit of 21 million, miners will have to be compensated through transaction costs alone. 67 How- ever, query whether this predicted limit will hold, particularly if computing power growth outpaces the ability effectively to utilize cryptography. 68 This indirect cost of adding new Bitcoins to the market- place is not imposed directly on those engaging in transac- tions, but it is an indirect cost affecting all owners. Currently, there are approximately 17 million Bitcoin, leaving about 4 million to be added when future miners complete additional transaction blocks. 69 In this sense, it is akin to shareholder dilution from stock-based executive compensation. Although specific accounting rules that require disclosure of the impact on corporate shareholders, no similar disclosure rules apply to Bitcoin. One firm looking at the costs associated with process- ing Bitcoin assesses the cost of mining on a per country ba- sis, ranging from a low of $531 in Venezuela to $26,170 in South Korea. 70 A combination of energy costs and regulatory costs and restrictions drive these figures, with many countries falling somewhere in between at levels at or below the current value of Bitcoin. Bitcoin mining operations utilize computing power that requires huge quantities of electricity to run the machines and additional energy requirements to cool them. 71 To illustrate, one operation in Mongolia reportedly utilized 25,000 mining computers, with 21,000 devoted to Bitcoin. At that time, this represented nearly 4% of the processing power. It generated approximately 1800 Bitcoin per day through block rewards and another 200 coins from fees, but it consumed around 40 megawatts of electricity each hour. 72 Global energy consumption from Bitcoin mining is cur- rently estimated to exceed the energy consumption for the en- tire country of Switzerland. 73 If carbon-based electricity forms 65 See id.; Digiconomist, Bitcoin Energy Consumption Index, http: //digiconomist.net/bitcoin-energy-consumption (visited April 25, 2018). 66 See Hayes & Tasca, supra note 64, at 217. 67 See id. 68 See, e.g., Alex Hutchinson, Hacking, Cryptography, and the Countdown to Quantum Computing (Sept. 26, 2016), https:// www.newyorker.com/tech/elements/hacking-cryptography-and- the-countdown-to-quantum-computing . 69 See https://blockchain.info/charts/total-bitcoins (visited May 22, 2018). 70 Aaron Hankin, Here’s how much it costs to mine a single bitcoin in your country (May 11, 2018), https:// www.marketwatch.com/story/heres-how-much-it-costs-to-mine- a-single-bitcoin-in-your-country-2018-03-06 . 71 See Digiconomist, A Deep Dive in a Real-World Bit- coin Mine (October 25, 2017), https://digiconomist.net/ deep-dive-real-world-bitcoin-mine (visited April 25, 2018). 72 See id. 73 Digiconomist, supra note 65.

are utilized, this translates into a significant carbon footprint. By comparison, this is several thousand times more energy than is used to process a Visa transaction. 74 This energy- intensive approach to transactions may simply reflect the cost of a competitive, comparatively private, environment, but it also presents a concern for future viability of the Bitcoin system. 75 As long as the marketplace values Bitcoin at a level in which Bitcoin rewards and transaction fees compensate min- ers for their costs (perhaps in a cooler climate with a sta- ble government and cheap electricity – like Iceland perhaps?), miners will continue to perform their function. If the value of Bitcoin falls, as it has from time in its history, the incentives for miners to participate will decline, and holders of Bitcoin will have to pay up for processing to continue. But query where de- mand for Bitcoin comes from if other cryptocurrency alterna- tives may exist that do not require such a large energy outlay to complete? Despite these concerns, investors remain interested in cryptocurrencies. Hundreds of millions of dollars have been pouring into cryptocurrency firms engaged in “initial coin of- ferings”, 76 which are fueled by a combination of investor op- timism about the promise of distributed ledger technology in payment applications and a speculative desire to participate in the successful appreciation experienced in the Bitcoin ex- ample. However, government regulators are concerned about the absence of protections for investors (as compared with se- curities offerings); badges of fraud are frequently presented. Wall Street Journal reporters recently reviewed 1450 digital coin offerings and identified 271 (18.6%) with “red flags that in- clude plagiarized investor documents, promises of guaranteed returns and missing or fake executive teams.” 77 Regulators in the U.S. and Canada recently announced a spate of pending in- vestigations and enforcement actions into cryptocurrency of- ferings, which was characterized as the “tip of the iceberg”. 78 Apart from regulatory concerns about initial coin offer- ings, which may lead to the proliferation of hundreds more cryptocurrency options, governments also remain concerned about the environment of disintermediation permitted in the cryptocurrency world. The ability to circumvent existing regu- latory measures, which often involves imposing reporting re- 74 See id. 75 Not all commentators see the massive energy costs for Bitcoin as problematic. See, e.g., Berentsen & Schar, supra note 1, at 14 (noting that Central Banks can also be quite costly, and positing the usage of alternative consensus proposals that may not rely as extensively on computational resources). 76 See https://www.coindesk.com/ico-tracker/ (visited May 22, 2018) (showing cumulative investments of over $12 billion (U.S.) in ICOs. 77 Shane Shifflett & Coulter Jones, Buyer Beware: Hundreds of Bitcoin Wannabees Show Hallmarks of Fraud, Wall Street Journal, May 17, 2018, available at https://www.wsj.com/articles/ buyer-beware-hundreds-of-bitcoin-wannabes-show-hallmarks- of-fraud-1526573115?mod=searchresults&page=1&pos=2 .

78 Gabriel T. Rubin, State and Provincial Regulators in U.S. and Canada Target Initial Coin Offerings, Wall Street Jour- nal, May 21, 2018, available at https://www.wsj.com/articles/ state-and-provincial-regulators-in-u-s-and-canada-target-initial -coin-offerings-1526918512?mod=searchresults&page=1&pos=1 . Please cite this article as: E.A. Morse, From Rai stones to Blockchains:The transformation of payments, Computer Law & Security Review: The International Journal of Technology Law and Practice (2018), https://doi.org/10.1016/j.clsr.2018.05.035