Reports & Analysis

The prospect of extracting digital currencies in the light of new US fiscal policies


Finally, after much conflict and challenge, Joe Biden’s $ 1 trillion bill was passed to improve infrastructure in the US Senate. The law, called the “Infrastructure and Jobs Investment Act,” covers a variety of areas, including transportation, road construction, telecommunications, drinking water systems, the Internet, climate change and energy. New US fiscal policies also include clauses related to digital assets.

The data suggest that the law will increase oversight and tightening in the field of digital assets. The clauses of the new bill specifically address the issue of digital currency extraction and include new regulations related to them. In this article, help an article From the Coin Telegraph website, we examine the effects of Joe Biden’s new law on digital currencies, and in particular the issue of their extraction.

Digital currencies and legal barriers

The prospect of extracting digital currencies in the light of new US fiscal policies
US Secretary of the Treasury Janet Yellen

Legal restrictions on the Blockchain and digital currencies are growing. If we look at the recent actions of governments around the world, we can clearly see this.

News of a ban on digital currency extraction in China has recently spread around the world. In the United States, on the other hand, Joe Biden formed a new working group called the Financial Markets Working Group, chaired by US Treasury Secretary Janet Yellen.

Economic activities that support the Blockchain, or, conversely, activities that are supported by the Blockchain, seem to have been of great concern to politicians.

One of the key points of the new law on digital currencies is the change of definition Broker (brokerage). In one of the clauses of this law, the definition of a broker is changed to “any person who, on behalf of another person, is responsible for the regular provision of services related to the transfer and transfer of digital assets.”

With a little care we realize that under this new definition, Miners (Or the same as digital currency miners) in the category Brokers Digital currencies are included. The purpose of the law is not only to collect taxes on digital currency earnings, but also to enable taxpayers to monitor digital currency transactions.

Because miners regularly validate transactions containing digital assets by their holders, they will be subject to a new broker definition. So, as expected, some members of the digital currency community have expressed concerns about the new law.

One of the main pillars of Blockchain technology is decentralized transaction records as well as the competition that exists to do so. The advantages and disadvantages of this new form of record keeping compared to traditional financial databases are still debatable; But these new rules could be an early and unfair end to these debates.

Read more: How does Bitcoin work and how are its transactions done?

Direct consequences of placing miners in the category of brokers

The prospect of extracting digital currencies in the light of new US fiscal policies

The first consequence of this for miners (at least those operating in the United States) is that they are subject to strict reporting requirements. Internal Revenue Services (Internal Revenue Service).

Most likely, the cost of meeting these requirements will be very high for miners. They must pay these costs, regardless of their processing power, before extracting each block. This makes it more difficult for new members to enter the extraction arena and, as a result, concentrates extraction power.

Second, in such circumstances, miners are required to comply with Customer Recognition (KYC) regulations. Given the semi-anonymous nature of most digital currencies, this policy will limit the types of transactions that miners can process. In other words, miners will only be allowed to accept traceable transactions and are not allowed to process non-traceable and anonymous transactions.

But the question is, how does this system work? It will probably be the case that we first register our information with a miner (for example, we register an identity document for our bitcoin address) and then the miner will only validate transactions submitted by authenticated users.

But if the miner we choose has little processing power, our transactions on the Bitcoin network will probably not be processed. So we have to go for miners with high processing power, or we all have to use an exchange like Coin Base and allow a miner to manage transactions on behalf of Coin Base. In either case, both methods will concentrate the extraction power.

As a result, such policies in the United States increase centralism, increase extraction costs, and reduce participation in the extraction process (decrease US hashtags). Perhaps these policies can free mining in the United States from the clutches of “secret and anonymous programmers”; But they make users more dependent on these people in other parts of the world.

Global Consequences of Putting Miners in the Category of Brokers

Part of the global impact of the proposed clauses depends on the relative importance of the mining operation in the United States and the extent to which it affects the entire mining industry. In this case, we can draw on our recent historical experience.

China enacted a ban on bitcoin mining in June. The result of this law was a significant reduction in the number of miners. This consequence can be seen in the reduction of network extraction difficulty in early July.

Extraction difficulty is a factor in the speed of transaction processing (processing each block on the Bitcoin network takes an average of 10 minutes). As the number of miners decreases, the network stiffness automatically decreases so that the number of transactions processed per unit time remains constant.

Decreasing the extraction hardness means less power consumption to extract a block, and the block reward is fixed anyway.

The prospect of extracting digital currencies in the light of new US fiscal policies
Changes in the price and difficulty of the Bitcoin network; Source: Blockchain.com

However, it is noteworthy that the price of bitcoin did not fall after the reduction of network difficulty in July. So here are three things to look for:

  • Mining profits are likely to be higher for other miners who are still active;
  • The vacancies of closed miners in China are not being filled quickly;
  • Competition in extraction has decreased.

All of these can lead to the consolidation or concentration of extraction power. Similar rules can be expected if new regulations (especially the designation of minors as brokers) are implemented.

Also read: China wanted to kill bitcoin, but it was stoned!

Is the focus of extraction inherently bad?

Most security theories in China’s blockchain technology are rooted in decentralization. Despite this decentralization that governs the nature of the Blockchain, no one has the incentive to change previous transactions or delete blocks registered in the general ledger.

But if decentralization weakens and gives way to centralism, then the likelihood of such things happening increases and the security of the Blockchain is threatened. When a miner has a lot of extraction power (that is, he can extract several blocks in a row), he may be able to change part of the history of the Blockchain. This is called a 51% attack, and if it occurs, it will raise concerns about the immutability of the Blockchain.

We mentioned in previous sections that the new US policies will lead to centralization in the extraction process. Such policies have two predictable consequences. First, the higher concentration of mining puts miners in a position to have the power to change the Blockchain headquarters (meaning that the miners themselves can become a threat to the Blockchainkade), and second, the lower the cost of mining, the greater the likelihood of attack; Because doing this is no longer as expensive as before.

If there is no competition, it is not the Blockchain

Whether or not the digital asset clauses in the US Infrastructure Bill 2021 change, policymakers appear to be prepared to enforce the rules and requirements for reporting on digital currency transactions and tracking transactions.

Although the debate has so far focused on achieving a balance between US government oversight of digital currency transactions as well as undermining Blockchain innovations, both policymakers and innovators need to be wary of the impact of this policy on Compete in the extraction of digital currencies; Because this competition plays a vital role in securing the Blockchain.

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