SEC Climate Disclosures and Bitcoin Mining

The Securities and Exchange Commission (SEC) on Tuesday released a 534-page proposal for climate change disclosures for comments. The wide-ranging proposal requires publicly traded companies to disclose their business’s greenhouse gas emission numbers. It asks them to identify climate risks, conduct scenario analysis, and transition away from business processes harmful to climate. The environmental impact disclosures will help investors, institutional and retail, who have recently poured money into green companies.

The proposed rule has special significance for publicly listed crypto miners because their business model relies on access to continuous and increasing amounts of electricity to power specialized systems for bitcoin mining. According to recent studies, most of this electricity is sourced from harmful fossil fuels. The environmental impact is tremendous: numerous studies and debates have catalogued the expensive energy costs – that, at times, equals the electricity consumption of entire countries – for bitcoin mining.

The SEC has already taken note. At an Aspen Institute discussion last year, current SEC chair Gary Gensler mused that the conjunction of climate change concerns and cryptocurrencies was an “interesting intersection”. He also discussed requiring publicly listed crypto mining companies to disclose their greenhouse gas emissions.

The proposed rule, if it becomes a reality, affects economics at crypto miners and their business. At the four publicly listed crypto miners – Stronghold mining, Cleanspark Inc., Riot Blockchain, Marathon Digital Holding – the rule could multiply the cost of operations and introduce regulatory complexity. It could also be a death sentence for miners without access to adequate and inexpensive renewable power sources as investors shift their funds away from unsustainable business models.

How Will the Proposed Rule Affect Existing Miners?    

In the aftermath of an intense spotlight on bitcoin mining’s energy consumption last year, a consortium of crypto companies came together to form the Crypto Climate Accord. None of the publicly listed companies have signed or supported the accord. But the spotlight ensured that they are making efforts to curtail their environmental impact. That impact differs between bitcoin miners.  

For example, Cleanspark does not consider climate change legislation a serious threat to its business. The company calls itself a sustainable bitcoin mining company and states its goal as “100% renewable energy.” [It is unclear whether the company’s goal is for its bitcoin mining operation or for society as a whole]. Along with being a bitcoin mining operation, Cleanspark is also an energy services company that sells solar panels. The company purchases renewable energy credits to offset the environmental effect of non-renewable energy sources used in mining operations. In its annual report, the company stated that it does not see “existing or pending climate change legislation, regulation, or international treaties or accords” as being “likely to have a material effect in the foreseeable future on our business or markets.”

But other crypto miners might have a more circumspect view on the same topic. The crown jewel of Riot Blockchain’s mining operations is Whinstone – the world’s biggest cryptocurrency mining plant. It consumes $750 MW daily but its energy sources are not documented or publicly available. But the company says it provided a breakup to senators in Jan. 2022.

Riot’s annual report, however, provided clues to the makeup of its power sources. “…the negative media attention given to the energy consumption of cryptocurrency mining may lead to the implementation of new taxes, laws and regulations affecting our access to energy, a decline in the demand for new Bitcoin, or other factors that could have a material adverse effect on our business, results of operations, and the market price of our securities, regardless of our efforts to control the climate impact of our operations,” the company stated.

Marathon is also on shaky ground. Thirty thousand of its bitcoin miners are in Hardin, Montana at a facility which sources power from coal fired up at Beowulf Energy’s power station nearby. While it has not mentioned climate legislation as a risk factor in its filings, Marathon may see its operational and compliance costs multiply as a result of the proposed SEC disclosures.  

Stronghold Mining included climate and energy legislation as a risk factor in its prospectus last year. The company made headlines after inaugurating a coal refuse power generation facility in Scrubgrass, Pennsylvania. Coal refuse, which is waste from the coal mining process, is classified as a Tier II alternative energy source in the state. [But its environmental credentials are suspect]. The coal refuse facility at Scrubgrass helped cut down its energy costs from $7 million in 2019 to $518,397 in 2020. The company has made further investments in coal refuse generation plants to scale its mining operations.

Moving Fast Towards Renewable Energy

The proposed rule could also accelerate the move by crypto miners towards renewable energy sources. Bitcoin’s price volatility and a constantly changing difficulty level for its algorithm has made mining a capital-intensive industry. Only large miners with thousands of mining machines stacked up in data centers have been able to weather the shifting economics of bitcoin mining through the crest and trough of its prices.

While private markets have financed the biggest bitcoin miners, public capital markets are emerging as a viable option for miners with the mainstreaming of cryptocurrencies. The proposed rule could act as a gatekeeper for access to public markets and weed out smaller players, who lack the necessary power contracts required for bitcoin mining, and promote a greener crypto mining ecosystem.