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According to CoinDesk, the vice-chair of the European Securities and Markets Authority (ESMA) suggested that cryptocurrency mining based on proof-of-work should be banned:

Proof-of-work crypto mining should be banned in the European Union (EU), according to the vice chair of the European Securities and Markets Authority (ESMA).

The main reason for doing so is the relatively high energy consumption this protocol involves while the less energy-intensive proof-of-stake could be used instead.

I am wondering why banning is suggested instead of heavily taxation (e.g. have a very high tax for energy consumption above a certain threshold except for designated industries).

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    The original source is behind a paywall, is the suggestion banning just mining, or also banning transactions involving PoW cryptos?
    – Caleth
    Jan 24 at 13:42
  • @Caleth Not really sure, but the article does not mention banning the transactions anywhere.
    – Alexei
    Jan 24 at 20:35
  • Comments are not for extended discussion; this conversation has been moved to chat.
    – CDJB
    Jan 25 at 11:05

4 Answers 4

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Taxation is already complicated enough, and complicated legal codes create unintentional consequences and loopholes.

"Have a very high tax for energy consumption above a certain threshold except for designated industries" raises the question of what industries are those "designated industries". When there is a new kind of industry which is actually really beneficial for the political goals of the EU but isn't on the exemption list yet, then it might not be economically feasible until the EU updates that list. This could become a blocker for technological innovation. And how exactly do you define those industries? A definition which is too broad might enable cryptocurrency miners to find loopholes which allow them to masquerade as another industry. "We use the heat from our 100 server racks to pre-warm this tiny smelting furnace, so we are actually a steel mill which just does some cryptocurrency mining on the side".

And then there is the question if taxation really stops cryptocurrency mining. One theory about crypto-economics is that cryptocurrency is valuable because it is expensive to mine. When someone wants cryptocurrency, then they can choose between buying it or mining it themselves. A rational person will do whatever is less expensive. But when everyone decides to buy, then demand increases, which means the price increases. Until it reaches the mining price, and mining becomes again the preferred form of acquiring cryptocurrency. Which means that the prices for cryptocurrency will regress to the cost it takes to mine new cryptocurrency. So making mining more expensive means that the prices for cryptocurrency will just increase accordingly making mining profitable again.

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    It's even worse than the steel mill example. It seems possible for people to argue its not even an industry at all. I know of one family who heats their house with a few dozen crypto miners in the floor. "It's not a business, it's our furnace. You're really gonna tax us for being warm?"
    – Ryan_L
    Jan 24 at 19:15
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    It's not that much of a bad faith argument, heating their house with a crypto miner is as efficient as with an electric heater (albeit much less than with a heat pump). But do they turn it off in summer ?
    – Ndech
    Jan 24 at 19:26
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    @fraxinus: All of the electrical energy that goes into the computer is eventually converted to waste heat, so the computer has exactly the same efficiency (100%) as a regular electric space heater. You could tax those too, on account of them being much less efficient than heat pumps and (depending on how electricity is generated) possibly more carbon-intensive than a natural gas furnace, but it doesn't make a whole lot of economic sense to allow electric space heaters but not mining.
    – Kevin
    Jan 24 at 21:10
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    Crypto mining risks inverting that natural incentive since the mining pays for the electricity costs. Governments don't want people to use crypto mining to heat their homes, since that consumes far more energy than essentially any other heat source, so it makes sense they'd want policies to discourage that behavior. But there's no need for new policies to discourage the use of electric space heaters, since anyone capable of reading an electric bill is already discouraged from using them unnecessarily. Jan 24 at 22:06
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    Another issue with 'tax above a threshold' is that it's generally trivial to create a new company, which can break up the usage into an unlimited set of discrete groups none of which would individually exceed the threshold. If they were producing physical products, then it's harder to split up production but since it's all digital then it's pretty simple. Jan 25 at 14:20
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It's fundamentally a different message: "This is an economic activity that is unacceptable" vs "This is an economic activity that we want a larger cut from".

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    Or "this is an activity we disagree with, but can't feasibly ban", like taxes on cigarettes or fossil fuel consumption.
    – nick012000
    Jan 24 at 11:39
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    Except many democracies are gradually banning cigarettes and fossil fuels, certainly in some areas, with plans to eliminate smoking and proposed bans on new ICE cars, gas heating, fossil fuel exploration, etc.
    – Stuart F
    Jan 24 at 12:44
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    @nick012000 Part of that is because those are existing products and fossil fuels still have value where proof-of-work is a new product and people question the value it provides.
    – Joe W
    Jan 24 at 13:26
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    @StuartF "This is an activity we disagree with, and can only feasibly ban if we get enough public support to do so".
    – Zibbobz
    Jan 24 at 20:20
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    @Itération122442 tell that to New Zealand
    – AakashM
    Jan 25 at 11:54
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Enforcement

It's much simpler to determine whether a mining activity is occurring at all or that certain equipment exists (and can be seized) than to measure its quantity in a way that's hard to cheat. Highly taxing it would require either extensive and expensive monitoring, or accepting that it will be circumvented because the equipment and the activity itself would be permitted.

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    I'm not convinced that this argument is actually empirically true. When something is taxed and regulated, most people will follow the law and openly disclose their activities. When something is prohibited, a black market that is entirely designed around hiding the activity entirely from officials tends to arise, that can make enforcement activity more difficult.
    – ohwilleke
    Jan 24 at 22:45
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    "When something is taxed and regulated, most people will follow the law and openly disclose their activities." That may be true, but the vast proportion of mining (in terms of energy use) is done by very few people, and those are people who have invested heavily in crypto mining equipment which won't be profitable if they pay a heavy tax while also competing against other miners who don't have to (or who evade it). So we're talking about a relatively small number of people with strong incentives to evade such a tax.
    – kaya3
    Jan 25 at 6:31
  • @ohwilleke There are two main reasons for people to follow a law, say like the speed limit. 1) they genuinely see the law as useful and don't want to speed for their own safety. 2) They are afraid of the punishment if caught ie., expensive tickets. A large population will disregard the law if there is no punishment for breaking it. So "most people will follow the law and openly disclose their activities" is not something I'd agree on. Yes regulated instead of prohibition is better for the government to keep an eye on instead of driving it underground.
    – BharathYes
    Jan 27 at 14:23
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Ease of Subversion

Governments throughout history have earned a tidy profit through currency debasement. In the modern era of fiat currencies this has been pushed to ludicrous levels. Depending on which numbers you go with, for example, the US Dollar has been reduced in value by as much as 98% since 1900, with the surplus cash going directly to the government and its cronies.

Cryptocurrency is a threat to this major cash cow because it is community controlled, so it is difficult for one actor to subvert it to their own purposes.

Proof of work has no cap on its difficulty. To subvert a network would require ongoing investment in computing power and the electricity to run it. This is not only expensive, it is expensive unpredictably and continuously. Furthermore, it would be relatively easy for someone to notice that a government was doing it due to the space and power requirements for the hardware.

Proof of stake on the other hand, once you've purchased 51% of the tokens, that's it, the network is yours forever, and there's nothing anyone can do about it other than a hard fork. This is still expensive, but it's an easily calculable, one-time expense. Furthermore, it doesn't take a big pile of hardware and power usage that's hard to hide. So obviously proof of stake is preferable for large actors with plans to subvert and exploit a cryptocurrency for their own purposes.

Merely taxing proof of work schemes won't guarantee their extinction, even if it weren't an easy tax to evade. Currency which cannot easily be debased by a third party is, economically, an extremely valuable thing. Applying a tax is likely to simply drive up the price of the tokens to compensate. A total ban with harsh penalties for anyone caught using such systems has a much higher likelihood of success.

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    I am entertained by the war between the up and down votes. Inflation has always been a jealously guarded source of government income. Juan de Mariana, a contemporary of Cervantes, wrote a book saying it was morally permissible to kill the king and they ignored him. But writing one saying that currency debasement was theft got him sentenced to death and he had to flee the country. And that is hardly an isolated example.
    – Perkins
    Jan 28 at 17:06
  • Juan de Mariana may not be an isolated example, but he's also not a recent example, or one that relates to proof-of-work cryptocurrencies. Do you have any examples that demonstrate that current politicians regard proof-of-work cryptocurrencies as a threat to their power of debasement or subversion (as opposed to threats to more day-to-day concerns, such as CO2 targets, energy security, money laundering, drugs, fraud, or tax evasion)?
    – James_pic
    Feb 8 at 11:18
  • @James_pic For crypto specifically? No. Government hasn't been paying attention to it for long enough for much specific evidence of the actual thought process to ooze out between the cracks. Still though, the efforts to get government currency production and interest rate setting audited always meet with phenomenal resistance for no specific reason... And talk of constant inflation not being good in the long-run is always shouted down. Meanwhile, the energy/CO2 cost is the only one of those concerns where the algorithm matters, and that is self-balancing with the cost of electricity.
    – Perkins
    Feb 14 at 19:45

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