Welcome to The Node. This is Daniel Kuhn and Prachi Vashisht, here to take you through the latest in crypto news and why it matters. In today’s newsletter:
Following a “rough year” in the crypto industry, the International Monetary Fund (IMF) has suggested stablecoin issuers and crypto conglomerates impose bank-style capital requirements. In its “Global Financial Stability” report published Tuesday, the agency pointed to collapses of crypto exchange FTX and regional crypto-related banks as an urgent call for “comprehensive and consistent regulation” of the industry to improve consumer protection and corporate governance. This comes days after the U.S. Treasury Department called for tougher money-laundering controls across decentralized finance (DeFi), and as France’s central bank, Banque de France, said financial crypto projects without “intermediaries” could be forced to incorporate stricter surveillance protocols. In fact, the U.S. Securities and Exchange Commission (SEC) is hiring in New York, Washington, D.C., and San Francisco. Finally, Montenegro will pilot a central bank digital currency (CBDC) with blockchain provider Ripple.
Feeling Bullish?
Bitcoin (BTC) recently crossed the important $30,000 psychological threshold for the first time since June. The cryptocurrency is now trading at its highest level in almost two years, while ether (ETH) stagnates ahead of Ethereum’s highly anticipated Shanghai upgrade, scheduled for Wednesday. Analysts say March’s crypto banking turbulence is fading into the background as investors grow increasingly optimistic about risk asset-friendly U.S. central bank monetary policy changes. Elsewhere, in China, short video-sharing platform Douyin added, then removed a bitcoin price ticker within a matter of hours. The ticker was initially seen as an indication that Beijing may be warming up to crypto, but Douyin’s decision to retract it suggests otherwise. Finally, venture capital firm Andreessen Horowitz (a16z) released its second annual “State of Crypto” report on Tuesday, which takes a positive spin on Web3’s prospects.
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Exchange Flows
Early bitcoin investors Tyler and Cameron Winklevoss lent Gemini, the crypto exchange they co-founded, $100 million to support the business amid the market downturn, Bloomberg reported Monday. The brothers were reportedly trying to raise funds for the beleaguered company, which was wrapped up in a U.S. Securities and Exchange Commission investigation and clawback related to a deal with crypto broker (and CoinDesk sister company) Genesis over Gemini’s now-shuttered “Earn” lending product. Elsewhere, DeFi protocol SushiSwap has recovered $186,000 worth of stolen ether from a $3.3 million attack that occurred this weekend, according to blockchain security firm Blocksec. The attack exploited a vulnerability in the decentralized exchange’s “RouterProcessor2” contract, which is used to route trades.
Sound Bites
As that water washes out to sea, what is left are the higher quality projects.”
– Former Bitcoin core developer Jeff Garzik, on NFT hype, on CoinDesk TV’s “First Mover”
The Takeaway: Anti-Bitcoin Bias
For much of March, rumors flew in crypto back channels that the New York Times was working on a major new expose on cryptocurrency. It would, of course, focus on the only crypto topic the New York Times is truly interested in: the massive, apparently catastrophic energy cost of bitcoin mining.
That rumored hit piece arrived on Sunday, April 9, and it is profoundly strange. Its actual findings are stretched to fit a conclusion handed down, it seems clear, from the newspaper’s higher-ups. On its face, the piece is almost comically incoherent, but that very incoherence highlights its real message: Bitcoin is bad because we say it is.
While the headline grandly declares it will expose “The Real-World Costs of the Digital Race for Bitcoin,” the bulk of the article’s factual findings seem to describe failures in a specific load-balancing incentive program in Texas. The program is offered by the Electric Reliability Council of Texas, or ERCOT, and is available to customers in any industry. The bulk of the Times piece seems to take issue only with its use by bitcoin miners.
In the course of this critique, the report repeatedly indulges in wild non-sequiturs, some almost surrealistic in their juxtaposition of bitcoin (BTC) mining with unrelated negative events – “As beautiful as the chance encounter of a sewing machine and an umbrella on an operating table.”
Put another way, this is journalism as an exercise in raw power: throwing disconnected facts under a tendentious headline and calling it a day.
Let’s talk about real problems
To be clear, I agree the Bitcoin network’s energy consumption, and energy consumption model, are less than ideal. The real problem – one not addressed directly in the Times’ piece – is that bitcoin mining has no inherent upper bound. In theory, it could spiral ever higher, though in practice it is reined in by real-world economics.
More generally, it would be great if Bitcoin used a lot less electricity, and that all of that power was zero-carbon. But that’s true of literally everything else in human life that uses power, which is ultimately where all these bitcoin mining hit pieces break down. The truth is many critiques of bitcoin mining are not critiques of power consumption, or their exclusive targeting of bitcoin would be obviously nonsensical. Instead, these pieces all rely on the implicit but unstated argument that Bitcoin has no fundamental utility. This unstated premise is intended to sneak entirely past readers’ critical defenses, as taken-for-granted as oxygen.
I further want to be clear that I respect the investigative work done by reporters and researchers here. They deliver some interesting facts and insights. But those were seemingly not enough to satisfy the agenda of Times higher-ups: Based on the text, it seems likely reporters were pressured to reshape their reporting into something it is not.
This is suggested by the bizarre opening anecdote, which recounts a Feb. 14, 2021, incident when the Texas power grid was struggling under the load of a winter storm. The apparent crime being recounted – the cardinal sin committed by bitcoin miners in this dire situation – was that they turned off so that more Texans could heat their homes.
Texas’ bitcoin miners turned off at this key moment at the request of Texas electrical authorities, and in compliance with one of a few load-balancing programs available to industrial Texas power customers (Bitdeer first signed an agreement with ERCOT in 2021). Anyone in the program can collect a fee for curtailing peak energy usage. In this case, a Bitdeer facility collected $18 million over four days.
The article’s sweeping claims that “the public pays the price” for bitcoin mining largely hinge on this single state program. The article’s problem with bitcoin mining, if you can really call it that, appears to be that miners are too good at doing the thing that the Texas incentives are designed to encourage – turning off at times of peak load.
The point of those incentives is to keep the entire grid healthy, but the article frames it as some sort of nefarious manipulation. More to the point, it uses an isolated, in fact quite unique example – Texas – to support much broader claims that the Bitcoin network is raising energy prices across America.
This exemplifies the basic problem with the piece. The reporters may have uncovered genuine questions about the structure of incentives available to large-scale power customers in Texas. Maybe they’re unfairly lucrative for bitcoin miners compared to customers that can’t switch off as quickly or completely. But instead of addressing a real issue, this finding has been manhandled to support the (in fact non-falsifiable) argument that bitcoin mining consumes too much energy.
Notably, the piece does not meaningfully explore why the Texas program is structured the way it is in the first place. I’m not going to do their homework for them, but it seems reasonable to assume it is because Texas’ power grid, overseen by ERCOT, is a technical and regulatory basket case. It is held together by bailing wire and duct tape after decades of libertarian deregulation that led public and private power companies to starve their systems of investment, both in halted expansion and deferred maintenance.
The Texas power grid is also uniquely isolated from the rest of the U.S. electricity grid. This suggests the price effects documented by the Times would be more acute in Texas than elsewhere because the Texas grid cannot access backup electricity across state lines. This unique feature of the Texas power grid is not mentioned a single time in an article purporting to be a deep analysis of its workings.
It’s the kind of system that requires you to pay customers for not using it too much. A truly daring thinker might argue that’s the real problem here.
At FTX, Multimillion-Dollar Expenses Were Approved by Emoji (WSJ – paywalled)
MiCA: What Europe’s New Crypto Rules Mean for the Industry (Decrypt)
Explained: The Tai Ping Shan dispute between Arthur Hayes and 3AC (Protos)
Is This The Real Reason Behind Crypto’s $200 Billion Bitcoin, Ethereum, BNB, XRP, Cardano, Dogecoin, Polygon And Solana Price Boom? (Forbes – paywalled)
Consensus is less than a month away! Join us to hear from some of the industry’s most sought-after thought leaders, including Yuga Labs CEO Daniel Alegre, CFTC Commissioner Christy Goldsmith Romero, Circle CEO Jeremy Allaire, Edward Snowden and hundreds more. Don’t have a ticket yet? Register today and take 15% off with code NODE15. Learn more and register.
Too late
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