Closer Looks this week? Legislators getting on the cryptocurrency bandwagon! If you weren’t already familiar with cryptocurrency, this year definitely introduced it to you. With the huge Bitcoin boom (and bust) in 2017 along with more and more literature about how blockchain and cryptocurrency will influence our digital future, legislators know this technology is not going away; it is no surprise to see some legislatures dipping their toes into the cryptocurrency water. Cue New York introducing NY A8783 – crypto-currency legislation that would create a digital currency task force.
Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us.
–Thomas Carper, Delaware Senator
What is cryptocurrency?
Cryp·to·cur·ren·cy: a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, all operating independently of a central bank.
Think of cryptocurrency like tokens for an arcade – only worth something if someone is willing to accept it; no banks regulate the issuance or value of the tokens. Cryptocurrencies work using blockchain technology (the aforementioned “encryption techniques”); a decentralized ledger duplicated across many computers, managing and recording transactions. In other words, the blockchain is a bookkeeping method that is incorruptible, transparent, and decentralized, giving it enhanced security and making it very difficult to manipulate.
Most cryptocurrencies distribute new units (often known as “coins”) to “miners” to incentivize them to use their resources (computing horsepower and electricity) to add transaction records (or “blocks”) to the common ledger (a chain of blocks) by solving difficult math problems or other proof-of-work systems. The fact that entering blocks into the chain incurs a real-world cost keeps the system safe from fraud. (For a slightly deeper exploration of why and if mining provides fraud protection see this very brief and readable article from The Economist.)
A transaction using cryptocurrency generally follows these steps:
- There is a request for a transaction from a person, which is sent on to the network
- Each computer on the network collects a group of new concurrent transactions into a block, along with a timestamp for each transaction
- Then each computer starts to mine; or work to solve the difficult math problem to add the block to the blockchain
- Once a computer finds a valid solution, it broadcasts the solution and the block to the rest of the network
- Other miners on the network check the solution and verify the transactions in the block against the existing blockchain (one obvious risk with digital currency is that you will try to spend the same coin twice; verifying new transactions against the whole ledger before allowing the transaction to go through prevents that from happening)
- If the solution is valid and the transactions are verified the miner is rewarded with coins and the block is added to the chain, showing the transaction was completed
The popularity of cryptocurrency and blockchain technology
Here is a graph of the history of just Bitcoin value (as of the end of June 2018). You can see how volatile the price has been. In 2017, Bitcoin’s price climbed from below $1,000 to nearly $20,000 on the CoinDesk Bitcoin Price Index (BPI), then falling back to the current $6,184.25.
And here is a chart of how many times “blockchain” has been searched for on google month by month. You can see an awful lot of people have been reading up on this technology.
Interest peaked as the Bitcoin price hysteria peaked, understandably enough, but the number of searches remains quite high. Clearly, the ideas around cryptocurrency and blockchain technology have entered the mainstream and legislatures are probably right that it is worth starting to think about appropriate policies to deal with them.
Legislation
When looking at New York’s bill, the task force will research the impact of cryptocurrencies on the state’s finances by reviewing “the impact of the department of financial services’ regulations on the development of digital currency, cryptocurrency and blockchain industries in New York state.” They want to find conclusive information on how to best develop legislation to either abolish or promote cryptocurrencies within New York by the end of 2019. The task force will consider:
- The number of digital currencies and exchanges operating in New York state
- Their average monthly trade volume
- Digital currencies’ impact on state and local tax receipts
- The amount of energy consumption necessary for cryptocurrency mining
- Possible illegal activities of currency marketplaces
Why is this important? Because New York is very active in crypto – both positively and negatively. In May, Goldman Sachs anounced it would open a cryptocurrency exchange, being the first Wall Street bank to do so. Earlier this year the city of Plattsburgh, NY became the first city in the U.S. to ban cryptomining. Evidently, Plattsburgh has extremely low energy costs – as low as $.02 per kilowatt with incentives. Far below the U.S. average of $.10 per kilowatt. Because of the enormous amount of energy used to mine crypto, one company used 10% of the city’s energy, causing residents bills to skyrocket. In addition to the energy costs, there was a report that crypto trading has risks of fraud. And New York has shown if, that they are not afraid to step in, even if the U.S. Commodity Futures Trading Commission and the Securites Exchange Comission already has. If stories of skyrocking electric bills and fraudulent trading are repeated around the state or in other states, states will take action. Whether states are willing to go out on a limb to protect or to ban cryptocurrency is too early to tell.
Here is a map of all the current legislation having to do with “crypto-currency legislation”: