Crypto’s Energy-Intensive Process

But why is the crypto industry so energy-intensive? Some cryptocurrencies rely on something called “proof-of-work” mechanisms to validate transactions. This is done by crypto “miners,” who use computers to solve mathematical problems to monitor and validate new crypto transactions on block chains, the public ledgers which maintain a record of all crypto transactions. The aim of each miner is to solve these mathematical equations before others so that they can be paid out a set number of cryptocurrency for their work.

In the race against other miners, crypto mining operations require a vast amount of real-world energy both to run the computer processors and to cool them down. The electrical energy required to complete a single transaction for Bitcoin, the world’s most popular cryptocurrency, could power the average U.S. household for nearly 27 days and has a carbon footprint equal to nearly one million VISA card transactions.

Such massive energy demands have led to crackdowns all over the world as countries institute regulations that address both the energy and climate issues posed by crypto mining facilities.

For more than a decade, the United States and China were the major locations for crypto mining companies, accounting for 50 to 80 percent of all crypto mining. But starting in 2020, China clamped down. While Chinese authorities sought to regulate all cryptocurrency in the country, “illegal” crypto mining activity was specifically targeted due to its “disorderly” nature and disruption of the country’s carbon mitigation goals.

Meanwhile, Iran recently banned mining for four months after major power outages were allegedly caused by unlicensed mining operations. And Sweden has urged the EU to ban or heavily regulate cryptocurrency mining in order to reach the Paris Agreement’s targets regarding carbon emissions.

Crypto Mining’s Connection to Conflict

In the mad rush to move centers from China and other locations tamping down on crypto mining, many operations began to look for haven elsewhere. The ideal environment for crypto mining is a cold place with cheap, subsidized electricity and poor regulation. Enter Kazakhstan, an authoritarian country which provides subsidized energy to pacify its population and influential oligarchs.

Initially, this looked like a win-win. The Kazakh government actively courted crypto mining companies to the country, and crypto mining companies thrived in Kazakhstan’s cheap energy market. Within a short period of time, Kazakhstan became the world’s second-biggest host country for crypto mining. But by the end of 2021, mining operations made up an alarming seven percent of Kazakhstan’s entire energy generating capacity. The country’s outdated power grid, which still heavily relies on post-Soviet infrastructure, was deeply strained.

In 2022, this all came to a head. The increased demand tipped the grid over and power shortages led to localized blackouts in parts of the country, exacerbating existing tensions over corruption, inequality and the rising cost of fuel. In January, a poorly planned sharp increase in subsidized liquid natural gas prices led to mass protests across the country. The ten-day-long protest led to more than 200 deaths and nearly 10,000 arrests.

Within weeks, the government cut crypto miners off from the national grid, bringing the boom to an abrupt end. In the immediate term, dozens of mining operations shut down. Add to the mix a new law limiting the amount of electricity crypto miners can use, and many international crypto miners have moved on or are contemplating moving on.

Crypto Mining Turns to Renewable Energy

In some cases, crypto mining companies are turning to renewable energy sources to overcome tensions with electrical grids. This is driven partly by requests from states, such as Quebec and New York, which have temporarily paused all new mining operations unless they are powered by renewables. The hope is that deploying renewables may help to stabilize vulnerable energy grids and offset some of the carbon emissions produced by crypto mining.  

But crypto companies are also reading the room. Over 200 companies and individuals signed the Crypto Climate Accord, an effort to move the entire industry to net-zero emissions by 2030. However, the extent to which renewable energy is powering crypto mining and thereby reducing its environmental impact is up for debate.

Even with these gestures toward renewable energy, studies have found that the industry is trending toward environmental unsustainability. Right now, cryptocurrency produces slightly less climate damage per dollar created than burning gasoline.

Crypto Mining’s Water Implications

While policymakers and crypto companies recognize mining’s impact on energy systems and carbon emissions, there has been little to no reflection regarding its impact on water resources. Yet, water is used in all phases of energy production — and crypto mining is both directly and indirectly dependent on water.

Most directly, crypto mining often pumps water through its facilities to cool down computer processing systems. But energy systems rely on water in some way to produce energy, and crypto mining’s immense demand for energy correlates to an increased demand for water. This is clearest in the case of hydropower, where water is used to generate electricity. However, even coal plants use water to extract, wash and sometimes even transport coal.

In addition, electricity that directly powers mining operations may also impact local water. At thermal power plants, water is withdrawn from rivers or lakes to cool down the plant. Both the withdrawal process and the warmed water released back into the environment harms fish and wildlife and has a negative effect on water quality. Rising water temperatures can also lead to more organisms that drive algal blooms, leading to toxic conditions in local waterways.

This is concerning, as some of the most popular destinations for crypto mining — and those that may be the next destinations in the face of increasing regulations — are often water scarce and vulnerable to increasing tensions over the resource.

In Central Asia, a notoriously water scarce region, water has become a highly contested and strategic resource since the fall of the Soviet Union. Central Asia is even prone to conflict over water: As recently as 2021, water tensions led to violent clashes on the Kyrgyz-Tajik border, which resulted in the death of more than 40 people and displacement of 30,000 people on the Kyrgyz side.

Countries such as Uzbekistan, Turkmenistan and Kazakhstan face added water challenges. The two major water sources in the region, the Amu Darya and Syr Darya rivers, are controlled by upstream neighbors Kyrgyzstan and Tajikistan. Thus, water-scarce countries partake in complex transboundary water agreements that trade energy, such as oil and natural gas, for water access from Kyrgyzstan and Tajikistan. If energy isn’t readily available because of domestic demands, then energy-for-water swaps may be in jeopardy.

Despite this, Central Asian countries continue to negotiate energy-water swaps, including in 2022 when Kazakhstan was grappling with its energy crisis and Kyrgyzstan dealt with climate-related drought. In a clear sign of cooperation, in January of this year, after nearly a decade, Kazakhstan, Kyrgyzstan and Uzbekistan agreed on a roadmap agreement to build a hydropower dam on Kyrgyzstan's Naryn River, Kambar-Ata-1 Mega Dam.

Understanding the Ripple Effects of Cryptocurrency Regulation

Certain states and countries once friendly to crypto mining will continue to adopt new restrictions in an attempt to limit carbon emissions and hedge negative energy impacts. Meanwhile, crypto miners will continue to seek out new opportunities and move to locations that provide cheap and readily available energy — and will target countries where weak governance and corruption may make regulations less likely.

Crypto mining companies are already seeking out new frontiers, including other nations in Central Asia and parts of Africa, such as a new project in Virunga National Park in the Democratic Republic of Congo. These sorts of pushes do little to ameliorate worries of energy-water nexus conflicts.

In 2022, the White House released a report which determined there is a need to regulate crypto mining’s impact on energy demands. Further, the White House’s 2022 Comprehensive Framework for Responsible Development of Digital Assets may be a starting place for enabling policymakers to address the issue of crypto mining above and beyond energy issues.

First, government entities must be tasked with tracking the environmental impacts of crypto mining. This may lead to more robust and comparable performance standards

Second, given the knock-on effects of national regulations, there must be some form of global governance on the issue to prevent crypto miners from simply seeking out new regions with accessible energy resources and poor regulation. One avenue for achieving this is through increased collaboration across global enforcement bodies, such as the Egmont Group, as well as information sharing and capacity building. International standard-setting bodies — including the G7, G20, the Organisation for Economic Co-operation and Development, the Financial Stability Board, the Financial Action Task Force, and the International Organization for Standardization — must also play a role.

Finally, crypto mining continues to expand its overall share in the United States in the wake of both the Chinese and Kazakh governments’ moves to regulate it. If the issue of crypto mining is to be addressed holistically, the United States must make good on its intention to play a leading role in this work.

Chris Collins is a senior program assistant on the policy, learning and strategy team at USIP.