Is crypto dead in New York?

Early last year, the cryptocurrency industry was still flying high. A single bitcoin was worth about $40,000, major cryptocurrency companies like Coinbase, FTX and Crypto.com ran ads during the 2022 Super Bowl featuring major celebrities encouraging viewers to invest in crypto. New York City’s newly elected mayor took his first three paychecks in bitcoin and talked up the industry at every opportunity. And cryptocurrency mining companies lured by cheap electricity prices upstate were flocking to New York.

A year later, things look very different. Bitcoin is worth about $20,000, and the mayor has mostly stopped talking about it. FTX filed for bankruptcy, and its charismatic founder (and major political donor) Sam Bankman-Fried is under federal indictment for allegedly defrauding customers. And the state Legislature has passed a new law limiting the ability of cryptocurrency mining companies to take over upstate power plants.

The future of the cryptocurrency industry in New York has never been less certain. But to figure out where the industry is going, we first have to understand how it got here.

Mining moratorium

By design, mining cryptocurrencies like bitcoin require an astronomical amount of computing power and consume large amounts of electricity. The high electricity consumption is not just a side effect of bitcoin’s protocol; it is the very source of bitcoin’s value.

Bitcoin relies on a “proof-of-work” mining system, which means that new bitcoins are awarded to computers known as “miners” that solve impossible mathematical equations. The only way for the computer to solve them is through random guesses. When a miner does happen to randomly stumble upon the correct solution, they receive a small amount of bitcoin as a reward.

For some time after bitcoin was initially introduced in 2009, it was possible for ordinary users to mine bitcoin using their home computers. But the equations have gotten increasingly difficult over the years, and it now requires entire data centers full of mining hardware to have any real shot at successfully mining bitcoin. Now, bitcoin mining is largely the domain of professional cryptocurrency mining companies, which raise millions of dollars to finance the construction of large data centers and to purchase the large quantities of electricity needed to power their mining rigs.

The increasing consolidation of bitcoin mining, and the industry’s expanding need for more electricity, has led to a curious trend – cryptocurrency companies have started buying their own power plants.

The trend started with Greenidge Generation, which in 2020 turned an unprofitable upstate natural gas plant into a dedicated mining facility.

More recently, the Canadian cryptocurrency mining company Digihost acquired a natural gas plant near Buffalo, and it has plans to turn it into a dedicated bitcoin mining facility. Environmental groups have sued the state Public Service Commission, which must approve the transfer of any power plant, to try to block the sale.

In an attempt to prevent more bitcoin mining companies from taking over fossil fuel-based power plants, Assembly Member Anna Kelles sponsored a proof-of-work bitcoin mining moratorium bill that was signed into law last year. The bill will prohibit the state Department of Environmental Conservation from granting or renewing the Title V air permits of fossil fuel-based power plants that engage in proof-of-work cryptocurrency mining for two years.

Since power plants cannot legally operate without valid Title V air permits, this will eventually prevent fossil fuel-based power plants from engaging in crypto mining when their current permits expire. Neither Greenidge nor Digihost will be affected by the moratorium, since they already have the necessary air permits, but the bill will prevent any more plants from pivoting to crypto – at least for the next two years.

The moratorium only applies to cryptocurrency mining companies that own fossil fuel power plants; miners that just buy their electricity from the grid or own hydropower plants will not be affected.

In addition to imposing the limited moratorium, the law requires the department to produce a full environmental impact statement detailing the effects of cryptocurrency mining on New York’s environmental goals.

Kelles told City & State that it was necessary to implement a limited moratorium as soon as possible because there are currently 49 decommissioned fossil fuel power plants in New York state that could easily be purchased and brought back online by crypto mining companies.

The crypto industry opposed Kelles’ bill, instead advancing a competing bill co-sponsored by Assembly Member Clyde Vanel.

Vanel, the chair of the Assembly Internet and New Technology Subcommittee, is a strong supporter of the cryptocurrency industry who personally owns 10 different types of cryptocurrency and has introduced multiple bills related to cryptocurrency and blockchain technologies. Last year, he co-sponsored a bill to create a Cryptocurrency & Blockchain Task Force. The task force – which would have included a diverse group of stakeholders, including academics, industry representatives, investors, regulators and policymakers – would have studied the issue and then eventually issued a report.

Although both the Kelles and Vanel bills ultimately passed the Legislature, Gov. Kathy Hochul signed Kelles’ bill into law and vetoed Vanel’s bill. Vanel told City & State that he was considering reintroducing the task force study bill in the current legislative session.

The politics of regulation

The cryptocurrency industry has long decried the state’s regulations, mostly because New York is one of the few states that actually does attempt to regulate the industry.

In 2015, the state Department of Financial Services issued new regulations requiring anyone engaged in “virtual currency business activity” to apply for and receive a special state license. This virtual currency license, known as a “BitLicense,” can be difficult to obtain. Over the past eight years, only 22 entities have received a BitLicense.

The cryptocurrency industry has repeatedly criticized this virtual licensing regime. In 2021, for example, the cryptocurrency news site CoinDesk published an op-ed titled, “Kill the BitLicense,” which argued that the BitLicense had prevented innovative cryptocurrency startups from flourishing in New York.

Industry-friendly politicians also advocated for reforming the BitLicense system.

“The New York Department of Financial Services (DFS) has the dubious distinction of being the single worst regulator of crypto in the country,” Rep. Ritchie Torres declared last year in a Daily News op-ed titled “A liberal case for cryptocurrency.”

“The state’s regulatory regime has the cost of inhibiting job creation and innovation without the actual benefit of protecting a single consumer or investor,” he wrote. “It’s a classic case of bureaucracy trumping efficacy.”

At the time it was published in March, bitcoin was worth more than $40,000 and the industry seemed on the cusp of mainstream legitimacy and real political power.

New York City had just elected Mayor Eric Adams, a proud bitcoin fan. One of the mayor-elect’s first moves was to hitch a ride to Puerto Rico on the private jet of Brock Pierce, a child actor turned crypto billionaire. Adams also converted his first three mayoral paychecks to bitcoin and promised to make New York a crypto hub, which among other things involved touting the creation of a worthless new cryptocurrency called “NYCCoin.”

Pierce wasn’t the only crypto billionaire seeking to influence politics. Bankman-Fried, the 30-year-old founder of Bahamas-based crypto exchange FTX, established himself as a major political donor and philanthropist by donating tens of millions of dollars to political candidates across the country. In 2022, he was the second-largest donor to Democratic Party candidates, and recipients of his donations included U.S. Sen. Kirsten Gillibrand, House Minority Leader Hakeem Jeffries, Rep. Gregory Meeks and Torres. (The Intercept reported that Bankman-Fried also hosted a fundraiser for Torres, but the representative denied it.)

Bankman-Fried claimed publicly that he was donating to candidates who shared his passion for preventing the next pandemic, though many recipients of his largesse also happened to sit on powerful committees that could influence the federal government’s approach to cryptocurrency regulation.

In particular, Bankman-Fried advocated for the passage of a bill, co-sponsored by Gillibrand, that would have classified cryptocurrencies as commodities instead of securities. This would have ensured that cryptocurrencies were not subject to the very strict regulations placed on investment securities and the Securities and Exchange Commission’s enforcement of those regulations. Instead, the crypto industry would be regulated by the comparatively more friendly Commodity Futures Trading Commission. The legislation would also have moved congressional oversight of the industry from the House and Senate financial services committees to the chambers’ respective agriculture committees.

Torres, a member of the House Financial Services Committee, told City & State that he did not support Gillibrand’s bill, since it would have taken power away from his committee.

Asked whether cryptocurrencies should be regulated as securities or commodities, he said that there was no one-size-fits-all solution.

“If there’s a crypto asset that resembles a security, it should be subject to SEC regulation, and if it resembles a commodity, it should be subject to CFTC regulation,” he said. “If the digital asset is a stablecoin, it should be subject to the Federal Reserve, which regulates our national currency. So the nature of the digital asset ought to determine the nature of the regulation.”

Bankruptcies and lawsuits

In the past year, numerous cryptocurrency exchanges and lending companies have declared bankruptcy, and hundreds of thousands of customers who invested in these companies have lost access to their funds.

The trouble started in May, when the stablecoin Terra – which was never supposed to be worth less than $1 – declined in price. Companies that owned Terra lost money, which meant they could no longer afford to pay back their loans, which meant that their creditors lost money, and so on. As the contagion spread throughout the industry, a number of cryptocurrency firms – including Three Arrows Capital, Celsius, Voyager and BlockFi – filed for bankruptcy.

Bankman-Fried and FTX attempted to acquire BlockFi and Voyager to protect their customers from losing their money. But in November, it was revealed that FTX had also lost many of its customers’ deposits. FTX declared bankruptcy and Bankman-Fried was soon arrested, extradited to the United States and indicted on federal charges related to securities fraud, commodities fraud and campaign finance violations. The price of bitcoin sank below $20,000.

Compared to citizens of other states, New Yorkers were relatively protected from the cryptocurrency downturn – since many of the crypto companies that have lost customers’ deposits were never allowed to operate in the state in the first place.

“New Yorkers for the most part have been insulated and protected from the downfall of Voyager, of Celsius, of FTX.” Vanel said. “One of our agencies, DFS, came out with something called the BitLicense. It was enacted and put in place in 2015. And since then, no New Yorker that abided by the rules has gotten caught in Celsius, Voyager, FTX.”

These days, even Torres seems supportive of the BitLicense, albeit with tweaks.

“I have one criticism of New York state,” he said. “It takes too long to get a BitLicense. It should not take three years. But having said that, New York is regulating crypto more effectively than the federal government. If the SEC or the CFTC had had the same kind of framework that DFS adopted back in 2015, then a scandal like FTX could have been prevented.”

Neither the state Department of Financial Services nor state Attorney General Letitia James have been shy about going after cryptocurrency companies that have failed to follow the state’s regulations.

In February 2021, the state attorney general reached an $18.5 million settlement with the stablecoin Tether and its affiliated cryptocurrency exchange Bitfinex, which required both companies to stop operating in the state. The company was cagey about disclosing proof of its cash reserves and its murky relationship with sister company Bitfinex, and the state attorney general’s office accused it of hiding $850 million in losses.

Later that year, James sued Coinseed for allegedly defrauding customers and forced the company to shut down.

In June 2022, the state attorney general secured a $1 million settlement with BlockFi for offering unregistered securities.

This month, James filed a lawsuit against former Celsius CEO Alex Mashinsky for allegedly defrauding investors. Even more lawsuits against cryptocurrency companies are expected in the coming months.

The Department of Financial Services, meanwhile, just reached a $100 million settlement with Coinbase for failing to comply with the state’s anti-money laundering laws.

What’s next?

After the major disruptions of the past year, the future of the cryptocurrency industry in New York is more uncertain than ever.

The signing of Kelles’ bitcoin moratorium bill promises to reshape the upstate cryptocurrency mining landscape. Miners may have to embrace hydropower and other renewable energy sources to power their bitcoin mining operations. Another possibility is that the industry will increasingly abandon proof-of-work mining.

While proof-of-work was the original method of mining cryptocurrency, alternatives do exist. A number of newer cryptocurrencies, including Solana, use an approach called “proof-of-stake,” which uses orders of magnitude less computing power and electricity. Ethereum, the second-largest cryptocurrency after bitcoin, switched from proof-of-work to proof-of-stake last year.

“We put all this emphasis on (proof-of-work) cryptocurrency mining, but it is the dinosaur,” Kelles said. “It was the first one created, but if you are looking at newer technologies, they are very nimble, and that is where a lot of the innovation is happening.”

Kelles said that she would like to see bitcoin switch to proof-of-stake, though she doubts that it ever will.

Torres is also a fan of proof-of-stake: “All cryptocurrency should transition to sustainable alternatives to proof of work for the sake of combating climate change.”

Over the past eight years, New York state has proven that it is possible to comprehensively regulate the nascent crypto industry. But so far, the state’s approach has not been replicated by other states or the federal government. Last year, California’s governor vetoed a bill that would have introduced a virtual currency license modeled on New York’s BitLicense.

On the federal level, cryptocurrency remains a largely unregulated sector, but it will not remain that way forever. And when Congress does finally take steps to seriously regulate the industry, it seems likely to look to New York’s approach as a model to emulate.

The cryptocurrency industry is hopeful that the feds will take the right lesson from New York’s experience.

“I would hope that the BitLicense is a ceiling rather than a floor for regulation,” said John Olsen, the New York state lead for the Blockchain Association. “In some respects, it’s worked very well, but enshrining in the country standards of that magnitude, I think, would force a lot of companies to rethink domiciling in the United States simply because of the costs required to actually operate legally.”