Two crypto regulation bills, now amended, moving ahead

SEN. JOSHUA BRYANT (file)

Two bills attempting to address the hot-button issue of crypto mining were amended and passed out of the Senate City, County & Local Affairs Committee today. They will likely be voted on in the Senate tomorrow.

The bills aim to regulate crypto mining and address some of the problems created by Act 851 of 2023, which sharply curtailed the ability of Arkansas cities and counties to regulate the industry.

Crypto “mining” is the process by which bitcoin confirms transactions and creates new bitcoin, using a network of high-powered computers. Unfortunately, this big-money industry is noisy and terrible for the environment. Crypto mines are a major nuisance for the rural communities where they’ve popped up.

Senate Bill 78, co-sponsored by Rep. Rick McClure (R-Malvern) and Sen. Joshua Bryant (R-Rogers) has four main components: 1) it would impose intensive noise mitigation requirements, via techniques which are spelled out specifically — though it would not set any sort of decibel limit; 2) it would require crypto mining facilities to be at least 2,000 feet from the nearest residential or commercial use structure, or to be located in an area zoned for industrial use; 3) it would return local control to municipalities that wish to regulate crypto mines, with the exception of crypto mining done in the home 4) it would prohibit the crypto mines from being owned by people or governments from certain countries, including China.

Bryant’s bill originally allowed up to 15% ownership from a prohibited country — causing some paranoia for critics who wondered whether this level was set to protect one crypto mining company in particular. However, this was amended to disallow any ownership.

Senate Bill 79, co-sponsored by Rep. Jeremiah Moore (R-Clarendon) and Sen. Missy Irvin (R-Mountain View), creates a new state regulatory system for crypto mines. Originally it imposed a 60-decibel limit on crypto mines (and required a soundproofing enclosure to limit it to 40 decibels), to be enforced by the state, but this was deleted in an amendment. Instead, it will now rely on the noise mitigation requirements imposed by SB78 (the two bills generally work in tandem). It also establishes a process for the attorney general to investigate potential violations of rules against foreign ownership by prohibited nations, such as China. Crypto mines currently in place that have such ownership will have one year for the prohibited parties to divest. Finally, it establishes a state licensing system that requires a permit from the Oil and Gas Commission, including compliance with all aspects of SB78 and SB79.

The rules for the state regulatory and licensing regime under SB79 would be promulgated by the Oil and Gas Commission and approved by various legislative committees (with the exception of the foreign ownership issue, which would be handled by the attorney general). The commission would also be charged with enforcing the rules and regulations in SB78 and SB79 and handling complaints. Financial penalties would not exceed $5,000 per day of violation; the commission could also revoke the permit required to do business as a crypto mine in the state. Crypto mines already operating would have 90 days to get a permit once the rules are promulgated. Previous language in the bill mentioned an application fee for the permit not to exceed $5,000, but that was deleted by amendment — perhaps because a Republican mentioned distaste for any mention of a fee during a debate on the House floor last week.

Previous language gave this rule-making and enforcement authority to the Department of Energy and Environment. Another Republican expressed a concern during a debate on the House floor last week about jurisdiction falling to the Division of Environmental Quality (ADEQ) within that agency, which may have helped prompt the change. I’ve also heard rumors that Governor Sarah Huckabee Sanders requested that the commission take on the oversight role, and that she may believe she has more control over that commission, or expect it to generally be more lenient. The commission is a perfectly reasonable place for oversight on this issue to land, though those with environmental concerns would likely have preferred ADEQ.

The two bills aren’t perfect, but establish mechanisms for regulation of the crypto industry and address many of the concerns raised by Act 851. Much will come down to how the rules are promulgated and enforced by state agencies. But crucially, they will allow municipalities to make their own regulations on crypto mine businesses.

One possible concern: The Bryant-McClure bill still prohibits cities and counties from passing an ordinance that prohibits an individual from engaging in crypto mining from home or requires approval from a local government before engaging in home crypto mining. This is … kind of weird. A few lawmakers have asked why this language was included if the whole point of the bill is to return local control. Why limit municipalities specifically when it comes to home crypto? As best I can tell, the idea is that home crypto operations are unlikely to be a nuisance and unrealistic to regulate. But then why include this prohibition at all? If local governments don’t want to regulate home crypto operations because it doesn’t make sense to do so, they won’t. Why prohibit them from doing that via a state law?

It’s enough to make you wonder whether this is an effort to sneak in a loophole. In practice — I don’t think so. Because of the sheer amount of computer power necessary, mining from home is not really that feasible to begin with, and there are all sorts of practical limits on a home residence that make it unlikely that noise, or overuse of energy or water, would be a problem. If a company or major crypto player tried something sneaky and tried to establish what amounted to a big crypto mine within something that was technically a residence, it would lead to complaints and likely wouldn’t pass muster under the law once investigated. Bryant noted that the original Act 851 legislation established the rule that a crypto mine, as opposed to a home operation, was one that consumed more than one megawatt on an average annual basis, so perhaps that could be the basis for rules that are ultimately promulgated.

Be that as it may, since it doesn’t seem to me that the prohibition on counties making certain laws regarding home crypto operations serves any real purpose, I would advocate for striking it altogether. That would certainly provide some comfort to those worried that this bill, sponsored by the same lawmakers behind Act 851, could have loopholes that present a new round of problems.

Another major area of concern: The elimination of the decibel limit that was originally in SB79. Irvin’s explanation was that the mitigation techniques described in SB78 are so strong that a decibel limit is not necessary. The required procedures involve using liquid cooling or submerged cooling and various structural requirements I won’t pretend to understand. Perhaps these requirements will indeed keep noise levels well below 60 decibels (or the 40 decibels that regulation advocates would prefer), so such a limit would be gratuitous. But again, given the lack of trust on this issue following the fiasco of Act 851, it seems like a no-brainer to establish a specific noise maximum as part of the state’s regulatory regime, just in case.

Six other resolutions on crypto regulation, co-sponsored by Sen. Bryant King, did not receive the two-thirds approval in the House necessary to proceed (most House Democrats were among those who did not vote for King’s proposals).

King argued that SB78 and SB79 are “Trojan Horse” bills that the crypto lobby is sneaking through with language designed to appease critics but still allow shenanigans that will damage local communities and the environment. Certainly, King’s slate of bills had provisions that were tougher — including more intensive regulatory requirements for new or existing crypto mines operating in the state, a requirement that crypto mines file notice with the Arkansas Public Service Commission and the local government six months before purchasing or leasing land, a requirement that crypto mines and home crypto miners be licensed under the Uniform Money Services Act, additional limits on foreign ownership, and various other regulations.

One of King’s resolutions would also task the Arkansas Natural Resources Commission with monitoring crypto mines’ impact on water usage and grant it authority to take action against a mine if the impact of overusage “threatens the critical groundwater supplies of the state.” Water usage is mentioned in SB79, and could wind up in the rules once promulgated, including a ban on using water to cool equipment — though already-existing businesses could still continue to do so for another 24 (!) months. But there is no broad, equivalent watchdog provision on water usage like the one in King’s proposal in either of the bills that remain.

And the biggest hammer in King’s slate of bills, which has no equivalent in SB78 or SB79 (and would be fiercely opposed by the crypto lobby): One of his proposals would have imposed fees on crypto mines for over-usage of electricity, with a fee schedule based on megawatts above certain thresholds.

Rep. David Ray (R-Maumelle), carrying water for the crypto companies, said that if the state imposed significant fees on the crypto miners for massive overuse of energy, relying on the same grid the public does, then crypto miners would no longer be able to turn a profit. That makes me pretty skeptical that we want these things in our state at all, but there you go.

King also has other worries, including the home mining issue and the decibel level mentioned above. He also said that it was problematic that efforts to enforce rules about Chinese ownership would go to Circuit Court rather than federal court; he worries that the governor will be able to manipulate the Oil and Gas Commission to block real reform; he is frustrated that the law continues to allow an exemption from the Uniform Money Services Act for mining; and more.

Finally, both King and other more liberal advocates are worried about non-discrimination language that remains. Precisely the sort of language that caused trouble in Act 851, such provisions disallow governments in certain instances from treating crypto mines differently from data centers, or otherwise making decisions based upon “discriminating” against crypto mines. This one will be up to lawyers: It could be fine, but it could create new avenues for crypto mines to resist regulation in court. We’ll see.

Will some lawmakers try to push these issues and seek further amendments? You might think Democrats would, but they seem to prefer to take a back seat on this issue.

Even granting these concerns, my view is that these bills are a clear improvement on Act 851. I believe regulation would have been a lot stronger if King’s proposals had been in the mix. He is still hoping to run them again in the House, but time is running out. SB78 and SB79, assuming they remain close to their current form, might just be the best that rural communities, environmentalists and others troubled by crypto mines could hope for from the Republican supermajority.

John Whiteside, who is consulting for the Committee to Protect Arkansas, an Arkansas County citizens’ group fighting for more crypto mine regulation, said that he was pleased with where things stand even if he didn’t get everything he wanted. He was pushing for King’s proposals to get a hearing alongside the other two, and he personally liked some of King’s tougher suggestions. But what remains is still pretty good, he argued. Last Thursday, after King’s proposals were killed, Whiteside tweeted in response to Arkansas Democrat-Gazette columnist John Brummett:

Whiteside stressed that there was still work to be done, both in terms of amendments during this session and in the rule-making process to come. He said his group was still in communication with the bill’s sponsors to make the language and intent of the legislation more clear.

“Our job is not done and we must be a watchdog that the rules promulgated by Oil and Gas are effective and are properly enforced to curb bad behavior,” Whiteside said. “I do think rolling back the major offenses of Act 851 and establishing a regulatory body for this industry will be very significant achievements to accomplish, especially considering the impossibly short time frame we were afforded.”

For his part, King remains skeptical, and given his advocacy on the issue, I take his concerns seriously. I certainly hope that if he manages to get another vote in the House tomorrow, his resolutions will be given a chance, and that Democrats will back them this time.

“These are the same [lawmakers] who told us not to worry about the other stuff back with Act 851,” King said.

That’s probably the biggest thing that gives me pause at this point. It’s hard to trust McClure and Bryant after the fiasco of Act 851, especially given some of their comments (and their opposition to King’s proposals). McClure has continually insisted that Act 851 was a matter of “unintended consequences.” In fact, the law’s consequences were obviously intentional and clear as day. And they worked exactly as intended: Act 851 was the law that a crypto mine operation leaned on to sue the quorum court in Arkansas County after county officials made efforts to regulate it. McClure has also made bizarre comments insisting that he had written the bill while admitting in the next sentence that he had copied and pasted sections from another state bill sent to him by the Satoshi Group, a very shady crypto advocacy group widely credited with being the brains and muscle behind Act 851.

During the debate on the Senate side, meantime, Bryant said the crypto miners weren’t trying to cause trouble. “They simply were looking for a preemptive approach to protect their investment,” he said, which is just about the definition of crony capitalism. Doesn’t exactly inspire confidence.

My conclusion? I think Bryant and McClure probably are still carrying water for the crypto mining industry and its lobbyists. There can really be no doubt that’s what Ray is doing after his wacky performance last week. It all comes down to how rules are developed and enforced, and I certainly don’t have great confidence in the governor’s office or the legislature on that front. But I think these are still positive bills overall, or certainly better than nothing. My take is that Act 851 was such a terrible overreach that the crypto mining businesses realized they had to agree to some real reforms or there was a good chance they would get shut out of the state altogether. They were terrified of the King proposals; they probably would prefer to keep Act 851 as it was, but they’re willing to bite the bullet on SB78 and SB79.

They take a few hits and don’t get the sweetheart deal they had before, but they get to keep taking advantage of the cheap land and cheap power in Arkansas — and avoid the sort of truly aggressive fees that would threaten their business model.

We’ll see how the state regulations shake out. There’s good stuff in there, if the Oil and Gas Commission does its job. But if nothing else, if implemented properly, these bills should restore local control on regulating crypto mine businesses, and that is a very big deal.

“Our coalition has always believed that the first and most important outcome of this fight was to return local control,” Whiteside said. “Act 851 handcuffed every citizen, every town, community, and county to address concerns with these operations. The first step towards a long-term solution is when we return the basic rights every community in Arkansas should have to address problems in their community.”

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