An elegant solution to regulators’ crypto energy struggle

It is probably fair to say that at a regulatory level, the response to the rise of crypto has been tepid in many countries. There is plenty of investigation going on into the potential of central bank digital currencies (CBDCs) but in the main though, governments in most countries have been distinctly ambiguous. The problem is that while governments try to develop a response, alternative solutions are taking the opportunity to fill the void, and communities are missing out as a result.

The burgeoning crypto industry has the potential to offer a range of benefits to people around the world, but it is arguably being held back by two things: the speed of regulatory response and the high cost of energy.

The first problem can’t be solved quickly. Regulators take their time to make decisions because they want to try and make the right choices based on the broadest possible good for the widest spectrum of society. It seems likely that most will come to an accommodation with the crypto sector within a decade because the speed and efficiency of the blockchain means that there is money to be made and money to be saved. Some governments have come to this realisation quickly, others are instinctively more reticent.

Markets abhor a vacuum

While governments and their regulators drag their heels, the technology keeps evolving and improving. The result is a glaring gap between what is possible and what is technically allowed. And as ever, gaps don’t exist for long and there has been a string of recent incidents where systems are being set up illegally or semi-legally to syphon energy off a national grid, or generate power from natural gas sources without the necessary permissions, and use it to power data centres for crypto-mining.

These illegal or non-compliant data centres are being set up inconspicuously in industrial estates all over the world. They are discovered when someone spots some unusual activity and reports it to the authorities. The police show up expecting a marijuana farm and instead discover racks of servers merrily working away solving hashes and earning money for owners who are rarely found.

China’s recent handbrake turn on supporting crypto mining is likely to be making the situation worse. A significant proportion of global processing capacity was suddenly removed as a result of the Chinese government’s decision, so demand for server capacity has gone up. This in turn has increased prices, making it an even more attractive space to be working in.

There is money to be made, the legal position is often ambiguous and the energy required is expensive. It’s no surprise that a parallel economy has sprung up to meet demand. Authorities now have to expend resources to hunt down these illegal server farms.

The second challenge has a simple fix

Regulators will make decisions in their own time, but we already have an elegant way to solve the energy issue.

Utilities regulators have a duty to ensure that the market is fair and as a result, in some jurisdictions power plants are obligated to connect to national power grids. This gives regulators oversight over power sales and encourages a balanced market. If you add crypto onto the list of demands on a national grid, prices would go up or, in the worst case scenario, the amount of power available for consumers and existing businesses would fall.

The best approach is to take advantage of energy that is not being used.

There are vast volumes of stranded and wasted natural gas that can be turned into power that is an almost perfect fit for the needs of both the crypto sector, the power sector, and the wider community. This stranded gas is often too remote to make it possible to connect it to national grids, the infrastructure costs would simply be too high to make it economically viable, particularly when there are often only relatively small pockets of gas that are quickly used up. In all likelihood, by the time you’ve got the relevant permissions and built the pipeline, the natural resources would be used up.

What PermianChain has done is create a digital energy platform that allows regulators, miners and energy producers to monitor a new power market supplying electricity to small, relatively mobile data centres that can be placed unobtrusively onsite at an oil and gas project, powering them with natural gas that would otherwise be wasted. It is an approach that is already being implemented at sites across North America, and we are in the process of expanding the offerings on our platform to host activities in the Middle East and North Africa. It is an approach that is already delivering several benefits:

  1. It is helping support innovative crypto projects
  2. It is not competing with existing power users so there is no pressure on prices
  3. By capturing flared gas, it is helping prove the oil sector’s commitment to responsible use of the world’s resources
  4. The data centres can be moved to different projects as resource availability changes
  5. The power can be efficiently tracked so that regulators can understand what is being processed and ensure that communities get their due
  6. It is delivering a new source of revenue for exploration and production firms
  7. It is using energy in remote places so there is little community disruption
  8. It is enabling crypto companies to operate openly, potentially enhancing dialogue between utilities, regulators, communities and users so that better decisions can be made

The size of the prize

Translating this into simple economics and based on a recent whitepaper that PermianChain developed alongside The Blockchain Research Institute, a 1,000 kWh bitcoin mining data centre could fit around 290 high-spec servers that could generate around 0.15 bitcoins per day, or around 4.4 bitcoins each month. Bitcoin’s price has oscillated significantly over the last year, but take a simple average of US$30,000 per coin and a reasonably sized project could generate around US$135,000 per month before expenses and operating costs.

If the operating costs could be kept low by utilising previously wasted natural gas at source, the money generated could be used to support jobs, services and opportunity for a community. The alternative is to continue to waste resources hunting down unregulated server farms and then embark on the long and expensive process of pursuing their owners through the courts.

The bottom line is that the crypto sector presents a superb opportunity for innovation that can enhance the way that businesses, governments and communities interact. It is likely to take some time for governments and regulators to reach a supportive position, but in the meantime there are ways to start getting the benefits of the blockchain that reduce waste and don’t increase pressure on national grids. It is a legal, already active and offers an elegant solution to a new and increasing problem.

About PermianChain

PermianChain is a proprietary technology platform that brings together the crypto-mining and oil and gas sectors. Using a permissioned access blockchain, PermianChain makes it possible to utilise stranded and wasted energy resources, unlocking liquidity and transforming the way that oil and gas projects are funded, produced, bought and sold. Established in 2018, PermianChain Technologies is a pioneer member of the Blockchain Research Institute (BRI) and start-up member of the Petroleum Technology Alliance Canada (PTAC).

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