North Carolina, Texas and Arkansas Lawmakers Oil the Wheels of Mining Legislations

The ever-so-often contentious debate around digital assets mining and its purported impact on the environment has retaken the spotlight this week. The latest developments in the niche come barely five weeks since the Biden administration proposed changes to taxes imposed on mining operations powered by electricity from on-grid and off-grid sources. The proposal document presented by the US Department of the Treasury on Mar 9 specified an excise tax calculated as a fraction of the electricity cost incurred by miners to keep their rigs running.

Treasury Department targets mining sector in a tax proposal

The proposed adjustment, whose scope includes all firms that tap computing resources either owned or leased to mine digital assets. In particular, the change will require them to oblige to the specified tax policy derived from the cost of electricity consumed.

Scope and Implementation

The Treasury budget explainer alluded that the new rule aims to tame the fast-growing industry. In compliance with the proposed policy, mining firms must provide detailed reports on their power consumption, including the type and amount they take up. For any electricity purchased externally, the companies must report its associated value. In cases where computational capacity has been leased, involved parties are expected to report the value of the electricity consumed by the lessor firm attributable to the leased capacity.  This information will form the basis for calculating the tax cost.

Mining firms that generate or purchase off-grid power, such as from a specific electricity generation facility, would be obligated to pay a tax equivalent to 30% of the anticipated electricity expenses. If approved, the policy would take effect for taxable years starting from 2024 and would be rolled out over three years in phases, beginning with a rate of 10% in the first year, increasing to 20% in the second year, and ultimately reaching 30% after that. Biden’s 2024 Fiscal Year budget further seeks to end tax harvesting, where niche investors enjoy tax subsidies by selling crypto at a loss and repurchasing it almost immediately. This change would be implemented by standardizing the tax code’s anti-abuse rules to apply to crypto assets as they do for stocks and securities, potentially yielding $24 billion.

Specifics and progress on State Mining Legislation

On the same front, authorities and organizations lobbying against mining operations have continued advocating for curtailment measures, more so in regions where mining firms have flocked. This has been prompted by the increasing complaints regarding noise pollution and footprint from residents living near the facilities.

North Carolina's Buncombe County proposes a one-year mining ban

Citizen Times reported on Tuesday that North Carolina officials seek a temporary suspension of crypto mining in Buncombe County. To that end, the Buncombe County Board of Commissioners presented an argument to impose a standard for land use, enforceable for a dozen months.

WLOS 13 news outlet reported that the officials intend to designate mining activity enabled by server farms as a specific land use different from mining activity entailing data center applications. The discussion raised in the April 4 meeting will be subject to a public hearing in three weeks on May 2. Mining operations based on single-device were not captured in the proposal's scope. Given that the proposition was necessitated by the need to develop clear regulations without stifling innovation, the implied restrictions could be suspended if a different resolution is considered.

The Southern constituent state isn’t the only jurisdiction to mull this approach. The governor of New York enacted a ban on proof-of-work (PoW) operations in November 2022. The 2-year moratorium effectively limited the issuance of permits to mining companies that rely on the latter consensus mechanism

Bill protecting right to mine Bitcoin in Arkansas awaits governor's approval

In Arkansas, legislation seeking to reserve the right to mine got the green light from the State House and Senate. The proposed bill, whose ratification is largely viewed as a step in the right direction as far as regulating the industry goes, has since been submitted to the governor's office. The latter's signature will see the Arkansas Data Centers Act of 2023 go into effect.  The comprehensive bill is partly motivated by the recognition that mining creates jobs and tax avenues, thus proving its economic rationale.

Bitcoin mining businesses seeking to operate in the state must comply with business guidelines and tax policies stipulated in the legislation. These include ordinances regarding operations and safety, utility service rules or rates, and state as well as federal employment laws. The proposed bill also mandates that miners uphold their applicable taxes and government-imposed fee obligations.

In addition to providing clarity around the definition of digital assets mining business terms, the bill asks of miners with facilities in the state to run operations that don’t strain the electric power network. The legislation identified miners as operators of computer resources set up in a singular location which take up more than a megawatt (1MW) unit annually to generate digital assets. It also featured a provision allowing individual miners to set up home operations in conformity with utility regulations and rates.

Texas Senate Committee pushes for a bill seeking an arbitrary cap of miner incentives

Meanwhile in Texas, the Senate Committee on Business and Commerce on Tuesday passed legislation that seeks to enforce a cap on the incentive miners operating in the state have been enjoying. The Senate Bill 1751 legislation, tabled by Senator Lois Kolkhorst, affects mining firms that take part in programs meant to reduce the load on the state's energy grid. Lawmakers convened in an April 4 vote, agreeing unanimously on a (10-0) outcome to advance SB 1751 to the state Senate.

“The commission shall require the independent organization certified under Section 39.151 for the ERCOT power region to ensure that any demand response program operated by the independent organization to respond to emergencies that provides compensation for load reductions is open to participation by a virtual currency mining facility that is registered as a large flexible load under Section 39.360 only if the anticipated demand provided under Section 39.360(b) for all facilities of that type participating in the program is less than 10 percent of the total load required by all loads in the program.”

Following the uncontested result, the legislation seeking to introduce restrictions moved to the full chamber, where approval via a floor vote will see it progress to the state House. Several advocacy groups, including the Satoshi Action Fund, have since expressed their disapproval of the legislation on the grounds that its implementation will limit the benefits that crypto miners enjoy through demand response programs. The Fund's CEO, Dennis Porter, objected to the amendments as they will effectively disincentivize activity previously persuaded by the supportive environment and Texas' low electricity rates.

The states' favorable regulatory nature has partly contributed to attracting mining firms, but an amendment to sections of its utilities and tax code could remove an abatement on state taxes as early as September. Miners who powered down their facilities during periods of high energy demand in the state previously earned redeemable credits. Riot Platforms, one of those subscribed to the arrangement, reported accruing credits of $21 million between January and September 2022. The cumulated figure includes $9.5 million in power credits for July 2022, as revealed in its operation update for the month in question.

Last year, Texas grid operator started slowing approvals for new facilities as many miners showed an active interest in setting up operations. The latest changes now seek to cap miners' participation in demand response programs to a tenth of the total participation.

Opposing views on mining interaction with the power grid

The majority of observers have mostly expressed concern for the future of the niche. Industry experts, on the other hand, opine that the changes to the regulatory environment could work in favor of promoting competition. This would, in turn, contribute to ensuring the market remains healthy.

Markedly, the Satoshi Action Fund isn’t the only group that has protested the bill. The Texas Blockchain Council invited residents to stand against the new law by lobbying their representatives.  Riot Platforms has also urged lawmakers to oppose the bill submitted by a trio of Republican state senators, including Kolkhorst, describing it as misguided. The mining company argued that the changes specified in Texas Senate Bill 1751 would ultimately make the energy grid more expensive and less reliable. VP of Research shared in a tweet that the proposed legislation could prevent it from contributing to economic growth via its programs that create jobs. In the meantime, the company has resolved to initiate communication efforts to encourage elected representatives to oppose the changes. Riot Platforms' miner fleet comprised over 94,000 units delivering a hash rate capacity of 10.5 exahash per second (EH/s) as of the end of Q1.

Marathon Digital has also backed Texas Blockchain Council’s opposition but CEO Fred Thiel confirmed its fleet won't be impacted as much by the legislation. The Nevada-based miner is not an active participant in demand response programs that reward companies for their efforts to sell power back to the grid in high-demand periods. Marathon's operations, supported by 11.5 EH/s in hashrate capacity as of last month, don’t include any significant abatements to its taxes either. White Rock Management, another company operating in Texas, clarified that it would also not be affected as it relies on flared natural gas to power its off-grid operation.

Canada and Russia: Mining developments outside the US

In Canada, British Columbia imposed a temporary ban on crypto mining towards the end of last year. The Canadian province shared in a December statement that it will no longer onboard new crypto miners to the energy grid.  BC Hydro, the government-backed electric utility company, was tasked with enforcing the 18-month-long policy. The restrictions in the province came on the back of critical remarks from Energy Minister Josie Osborne, who deprecated mining. In addition to the significant energy used, Osborne hit out at the industry because of its limited job creation impact. Other Canadian provinces like Quebec have adopted similar restrictive actions against mining activity.

In Europe, Russia recently imposed heavy penalties for non-compliant entities in reporting requirements. The Russian government has established strict reporting requirements for crypto miners, alongside tough penalties for those who fail to comply. Local news outlets reported in early March that all entities mining digital assets must declare their income or risk facing up to four years in jail and forced labor. They must also provide detailed information about their transactions, including wallet addresses, and report their earnings and expenses. The consequences for failing to abide by these regulations would vary depending on income earnings.

Failure to declare income of approximately $200,000 on two separate occasions within three years carries a two-year imprisonment term. Miners who earn over $600,000 and fail to declare the same will face even harsher consequences, including up to four years in prison and forced labor for the same period. The order from Deputy Minister of Finance Alexei Moiseev alluded that a rejuvenated regulatory framework is expected to come soon and introduce registration requirements for crypto exchanges. Mining parties not complying with the framework risk a seven-year prison term.