Regulatory review of blockchain and cryptocurrency is increasing.From cryptocurrency China’s mining ban For President Joe Biden Financial Market Working GroupConvened by Treasury Secretary Janet Yellen, supporting and supporting blockchain economic activities has become an important issue for policymakers. recent, A proposed provision 2021 infrastructure bill Modify the definition of broker to clearly include “anyone […] Responsible for regularly providing any services for transferring digital assets on behalf of others. “
The stated goal of this “mining work as a broker” policy change is to improve the tax revenue of cryptocurrency capital gains by improving the ability of tax collectors to observe cryptocurrency transactions. Since cryptocurrency miners often verify transactions that transfer digital assets (such as cryptocurrencies) on behalf of cryptocurrency holders, these miners seem to meet this definition of a broker.Unsurprisingly, many people in the cryptocurrency industry Attracted attention.
A key feature of blockchain technology is competitive decentralized record keeping. The pros and cons of this new form of record keeping relative to the traditional centralized financial database are a positive debate. But the new regulations may end this debate prematurely.
What are the direct consequences of defining a miner as a broker?
First, miners—at least those located in the United States—will receive significantly increased reporting requirements to the IRS. The cost for miners to comply with these requirements can be substantial and to a large extent fixed. Miners need to bear these costs, no matter how much computing power they have and before they mine a single block. This will prevent entry and may lead to more centralized control or concentration of mining rights.
Second, these broker miners will be responsible for meeting the “know your customer” regulations. In view of the pseudo-anonymous nature of most cryptocurrencies, such a policy will limit the types of transactions that broker miners can handle as non-anonymous transactions. How will this work? Presumably, I will register with the miners (for example associating my driver’s license with a Bitcoin address), and the miners will only verify transactions on behalf of their registered users. But if that miner happens to be small (has little mining power), then my transaction is unlikely to be processed on Bitcoin (Bitcoin) The internet. Maybe it would be better if I (and you) sign up for a larger mining union. Or, we should all use Coinbase only and allow miners to process transactions on Coinbase’s behalf. Again, the impact here is that mining rights are more concentrated.
Taken together, this policy may increase the concentration of cryptocurrency mining in the United States, while increasing mining costs and possibly reducing the total number of mining; in other words, this policy will enable mining in the United States to change from the most recent “super “Shadow anonymous group of coders” Senator Elizabeth Warren describes, But it may increase users’ reliance on such anonymous super programmers outside the United States.
What are the global consequences of defining miners as brokers?
The global impact of the proposed provisions in the Infrastructure Act depends in part on the relative importance of the U.S. cryptocurrency mining business in the global mining context. Recent history provides some insights. In June, China strengthened its enforcement of the Bitcoin mining ban. The result is far fewer miners.We can Observed a decrease in mining difficulty At the beginning of July. The difficulty of mining determines the transaction processing speed (Bitcoin approximately 1 block every 10 minutes). Since there are few miners, the difficulty of keeping the transaction rate constant is reduced.
Lower levels of mining difficulty require less electricity to mine a block. The block reward is constant. The price of Bitcoin did not fall as the difficulty decreased in July. There are three points to note here:
- The mining profits of the remaining miners must have increased.
- The new miners did not quickly replace the Chinese miners who are now offline.
- Competition in the mining industry has declined.
These characteristics are likely to lead to the integration or concentration of mining rights. If the new regulations—especially the designation of brokers for miners—continue to be implemented, we may have a similar impact.
Is higher concentration inherently bad news?
Most of the security arguments of blockchain technology are rooted in decentralization. No one has an incentive to exclude transactions or past blocks. When a miner has strong mining capabilities—it is likely to solve multiple blocks in succession—they may be able to change part of the history of the blockchain. This situation is called a 51% attack and raises concerns about the immutability of the blockchain.
The proposed policy has two related consequences. First, by definition, higher concentration brings miners closer to the tokens that they can effectively change the blockchain ledger. Second, and perhaps more subtle, when the cost of mining drops, the profitability of the attack will be higher-the cost of the attack will be lower.
As my co-author debate However, in ongoing research, this security issue stems entirely from Bitcoin’s mining protocol, which recommends that miners add new transactions to the longest chain in the blockchain. We believe that the potential success of a 51% attack comes entirely from the suggestions of coordinating miners on the longest chain. We show how alternative coordination devices can enhance the security of the blockchain and limit the security consequences of increased mining concentration.
Without competition, there is no blockchain
Regardless of whether the current regulations on digital assets in the U.S. Infrastructure Act of 2021 are passed, policymakers seem to be ready to strengthen supervision and reports on cryptocurrency transactions. Although the debate is mainly focused on the trade-off between the U.S. government’s strengthening of the monitoring of cryptocurrency transactions and the potential harm to U.S. blockchain innovation, policymakers and innovators must consider the possible impact of such policies on cryptocurrency competition. , Because this competition plays a key role in protecting the blockchain.
The views, thoughts, and opinions expressed here are solely those of the author, and do not necessarily reflect or represent the views and opinions of Cointelegraph, Carnegie Mellon University or its affiliates.
Ariel Zetlin-Jones Associate Professor of Economics at Carnegie Mellon University. He studies the interaction of financial intermediaries and macroeconomics. Since 2016, Ariel has been studying the economics of blockchain-how to use economic incentives to shape blockchain consensus and stablecoin protocols, as well as a new type of economic large-scale centralized market that currently supports cryptocurrency transactions.His research is published in American Economic Review, This Journal of Political Economy and Journal of Monetary Economics.