Will Bitcoin Be Done In By Terrible Zoning Laws?
Local ordinances threaten upstart crypto-mining operations.
Since late 2020, a steady hum has been emanating from 15 large metal containers sitting next to an electricity substation in the small community of Limestone in rural Washington County, Tennessee.
Those boxes make up a bitcoin "mine." Inside each one, a network of linked computers works to solve equations that keep bitcoin's decentralized network up and running. In exchange for solving these equations—for performing the work of keeping the bitcoin network alive—the mining computers are rewarded with bitcoins. This process is how bitcoins and many other forms of cryptocurrency are brought into the world; it's complex and computationally intensive, a little like running a video game with cutting-edge graphics.
As anyone who has ever found himself feeling a burst of metallic warmth after pushing his laptop to its limits knows, that constant computational intensity means those boxes are hot—hence the hum, which is produced by all the fans needed to keep this bitcoin "mining" machinery from overheating.
The Limestone bitcoin mine is a mutually profitable enterprise for both BrightRidge, the utility company that owns the substation, and the mine's operator, crypto company Red Dog Technologies.
BrightRidge, which also owns the land on which the bitcoin mine is located, brings in revenue by selling excess power to Red Dog's power-hungry mine, which also happens to be its largest customer. Red Dog, meanwhile, says it expects to make a net operating profit of $36 million on its Limestone bitcoin mine over the next 18 months.
Indeed, the mine seemed uncontroversial enough that the Washington County Commission unanimously voted to approve a rezoning of the BrightRidge property to allow for the construction of a "block chain data center" in February 2020 with no debate or discussion.
Soon enough, however, the county began to change course.
In May 2021, the neighbors started complaining that the incessant vibrating noise coming from the mine's containers of computer equipment was eliminating their ability to peaceably enjoy their own property. Red Dog responded by installing sound barriers, consisting of wood and sound-absorbent padding, while promising to do more to get the noise issue under control.
The county wasn't mollified. Commissioners complained at public meetings that BrightRidge had misled them about the precise nature of this new data center, downplayed the noise it would make, and hid the fact that it wouldn't be operated by the utility company directly.
Some of these accusations are more on point than others.
BrightRidge, per a county planning staff report, had promised that noise from its facility would be "small and will not impact or be heard from adjoining properties."
Neighbors' complaints show that BrightRidge was, charitably, underestimating the noise impacts of the mine.
On the other hand, court filings show that county staff were having meetings with employees from Griid (Red Dog's predecessor company) nearly a year before the county claims it first learned about the company and the real nature of its operation.
In November, the county sued BrightRidge. The county's lawsuit argues that the rezoning of the property to an A-3 business agricultural district might have allowed a blockchain data center, but it didn't allow a "Bitcoin blockchain verification facility," otherwise known as a bitcoin mine, and certainly not one operated by an undisclosed third party. (The zoning code itself is silent on what difference, if any, there is between a blockchain data center and a bitcoin mine, and therefore why one would be allowed but not another.)
In short, Red Dog's bitcoin-mining computers were having code problems—but with zoning rather than ones and zeroes.
For close to a century now, the ever-more-elaborate zoning codes of America's cities, towns, and rural counties have been frustrating the plans of individual entrepreneurs and whole industries to try out new ideas and practices on their own properties.
Cryptocurrency is no exception. The computerized mines that create and sustain these digital monies and the blockchain networks they're built on have raised the ire of private citizens and planning commissions alike. The former primarily object, sometimes reasonably, to the noise and vibrations emanating from the mines that open up next to their quiet rural properties. Planners and politicians, however, have taken some of those more reasonable complaints and used them as excuses to attack the mines for their power consumption, and the perceived damage they do to locally set goals of fighting climate change.
As cryptocurrency continues to rise in value, and some foreign countries put pressure on mining, these conflicts are likely to grow more numerous and less amicable. So even when officials are responding to real externalities, the rush to regulate could end up handicapping this new industry and even make some of the problems they seek to combat worse. Bitcoin and its attendant technologies will inevitably face many political and legal challenges in the coming years, but its first big regulatory fight won't be in Congress. Instead, it will be over a mesh of poorly designed local zoning laws.
Heigh-Ho, High Hums
The bitcoin network is built on a decentralized ledger known as a blockchain. That ledger is a public record of bitcoin transactions that allows everyone involved to know which anonymized bitcoin wallet owns which individual bitcoin, and prevents someone from making fraudulent digital bitcoin copies.
Keeping the blockchain current and accurate requires lots and lots of computers called application-specific integrated circuits (ASICs) plugging away at solving mathematical equations and earning new bitcoins for their efforts. The computations needed to keep the blockchain up to speed are complex. The bitcoins generated from mining go to the machines that solve them first. Those two facts mean you need a lot of ASIC machines burning through a lot of electricity to have a profitable mine.
"These ASICs are not energy efficient. They consume a lot of power," says Artem Bespaloff, CEO of Asic Jungle, which sells the machines to bitcoin-mining operations. He says your average ASIC consuming between 1,400 and 3,500 watts of power is enough to heat up a 900 square foot room in about 10 minutes.
The power consumption needs of bitcoin mining have a major influence on where these bitcoin mines—the largest of which have tens of thousands of ASIC machines—set up shop, Bespaloff tells Reason.
Popular destinations for bitcoin mining in the United States include Texas, where natural gas is plentiful and energy regulation is not, and Montana with its cool climate and cheap, available hydroelectric power.
Indeed, bitcoin mining is so energy-intensive that many utility companies are actually trying to court these businesses. In some cases, they have offered incentives to set up shop near their power plants and substations in the hopes of getting a reliable customer to soak up spare power.
In Limestone, BrightRidge offered $100,000 and discounted power to the company that would become Red Dog to build its bitcoin mine, according to reporting from WJHL reporter Jeff Keeling.
The same power consumption features of bitcoin mining that determine where they end up also create externalities that can irritate neighbors.
The heat generated by banks of ASICs requires fans to keep everything cool. Those can produce a tremendous amount of noise as they spin, particularly at the scale at which bitcoin mines now operate.
Traditional zoning regulations usually try to account for noise externalities by relegating heavy industry to specific areas of the city and setting decibel limits for those operations. That sometimes isn't enough to wholly account for the particular, and often constant, sound emanating from some bitcoin mines.
The chief building inspector in Plattsburgh, New York—which has become something of a hub for bitcoin mining—told The Wall Street Journal that the problem isn't so much the volume of bitcoin mines, which is what decibels measure, but the irritating high-frequency pitch that they can produce.
Other people who spoke to the Journal described the sounds of bitcoin mines as akin to the whine of a jet engine, a dental drill, or thousands of hair dryers blowing all at once.
The vibrations can also apparently produce an unpleasant physical sensation. "It's more than a noise. It's a vibration that you can feel across your whole body," said one resident who owns a farm near Red Dog's Limestone bitcoin mine to WJHL.
Even when these mines sit in industrial areas, and often inside older industrial facilities, they still provoke complaints given that the fans hum at a consistent volume for hours at a time, unlike the more sporadic noises produced by industrial machines of old.
In response to complaints from neighbors, some mine owners in the U.S. have switched to water-cooling methods, which produce less noise, or installed lighter fans that give off less sound. Some have also installed sound barriers and berths on the property—basically sound-absorbing walls that surround the mines themselves and which suck in some of the noise they give off.
In many cases, the noise can be addressed through individual negotiation with mining companies. But it can still prove to be a burden on neighbors—what economists call a "negative externality," or a cost born by someone who didn't choose to participate in a project, and isn't a party to any potential benefits. And these sorts of externalities can be difficult to resolve through private mechanisms.
Yet regulatory responses often have serious problems of their own. Cities have adopted bitcoin mining–inspired noise rules that are both heavy-handed and ineffectual. Plattsburgh, for instance, imposed an 18-month moratorium on the establishment or expansion of bitcoin-mining operations in 2018, which obviously attracted the ire of local miners and made starting or expanding bitcoin businesses impossible. And by grandfathering in existing operations, that moratorium obviously didn't address the immediate concerns of neighbors.
Then there's Washington County, which launched a lawsuit against BrightRidge that was initially sparked by noise complaints. Yet one of the issues raised by the county against the company is that its approved site plan didn't include the noise barriers the county had later urged it to install. The county's complaint was that the noise was too loud and BrightRidge should do something about it—and also that the noise mitigation measures hadn't been approved.
And noise complaints have served as catalysts for local governments to take a tougher approach to regulating all aspects of bitcoin mining. That was certainly the case with the nation's first true cryptocurrency zoning ordinance.
The Bark Is Worse Than the Bit
Missoula County, Montana's first bitcoin mine began life as a project that was warmly welcomed by government officials. In April 2017, the company Project Spokane set up its data center in an old timber mill in the small town of Bonner. In June, the mine was blessed by then-Gov. Steve Bullock with a $416,000 grant from the state's Big Sky Economic Development Trust Fund.
Soon enough, however, the whir of fans coming from the Project Spokane site—which would later be taken over by the company HyberBlock—began attracting complaints from neighbors.
"Even some of the longtime residents that clearly remembered the noise from the lumber mill when it was operational at that site said this is very different," says Diana Maneta, the sustainability program manager for Missoula County's Community and Planning Services Department.
While the lumber mill was loud, the noise it produced would come and go. Maneta says people described the consistent hum from the bitcoin mine as more like "a jet engine that never lands."
Prior to the noise complaints, the Project Spokane facility, and indeed the entire cryptocurrency industry, wasn't on the county government's radar. But as those complaints surfaced, Maneta says county staff were directed by the county commission to "learn a little more about this industry and whether it might have other local impacts that we should be aware of."
That piqued the county's interest about Project Spokane's electricity use.
Bitcoin mining's energy intensiveness has made it a target for both environmentalists and already crypto-skeptical politicians who are eager to find any flaw in the decentralized digital currency.
"It's terrible for the environment," claimed Sen. Elizabeth Warren (D–Mass.), who is fond of saying that the average bitcoin transaction uses more electricity than the average U.S. household uses in a month—a misleading statement since there's no direct link between the number of bitcoin transactions and the amount of energy that's needed to sustain the blockchain. Other critics point out that bitcoin uses as much energy as countries like Argentina or the Netherlands, without noting that industries like cement and paper production use even more.
Those concerns were nevertheless enough to push Missoula County—which estimated that the Project Spokane/HyberBlock mine was using about a third as much energy as all households in the county—into action.
Beginning with a temporary zoning ordinance in 2019, which was then made into a permanent ordinance in February 2021, the county imposed a number of new restrictions on cryptocurrency mines. That included requirements that they locate in industrial areas and go through the process of getting special conditional use permits—which comes with additional noise restrictions.
The most significant requirement of the zoning ordinance, however, was its green energy regulations. From now on, any cryptocurrency mining operation setting up shop in Missoula County would have to purchase or produce enough renewable energy necessary to offset 100 percent of a mine's energy use.
Without this requirement, Maneta says the county would be at risk of not achieving its set climate goals of net-zero carbon emissions by 2050.
It's also a significant entry tax to cryptocurrency mining operations that might want to set up in the county. One of the draws of Montana is the fact that there's already so much plentiful cheap energy in existence. That advantage is negated when new mines have to either build out or purchase potentially more expensive renewable energy to cover all their consumption.
It's also a requirement that doesn't apply to any other industry. A developer could build a new suburban subdivision or another sawmill without having to do anything to offset its power consumption.
Project Spokane's successor, HyperBlock, which was grandfathered into the new regulations, ended up ceasing operations in May 2020. Later that year, it settled a lawsuit with the local energy provider, Energy Keepers, which claimed that it owed $3 million in overdue power bills.
Maneta says that some cryptocurrency miners have inquired about setting up in Missoula County since the new ordinance has passed, but none have done so yet. Perhaps they've learned all they needed to know.
Go East, Young Man
Bitcoin miners might be having a tough time in Bonner, Montana, and Limestone, Tennessee. Those in China are having a much worse experience.
Beginning in June 2021, the Chinese government ordered five state-run banks to cut off all cryptocurrency transactions. That was followed in September by the Chinese central bank's total ban on cryptocurrency transactions.
This has been hugely disruptive for bitcoin. Prior to the ban, as much as 80 percent of new cryptocurrency was being minted by Chinese mining operations, according to Nikkei Asia. The industry is now fleeing the country, with North America being the primary destination.
"These miners that have become quite well to do have the means now to transfer their hardware overseas," says Max Song, a partner at Hong Kong–based investment firm Pacific Century Group. "So we see now a huge concentration of the world mining in North America, specifically in Canada and the United States."
With more mining operations establishing themselves in the U.S., local conflicts about noise and energy consumption are only going to grow more frequent. That presents a challenge for local governments and the industry itself.
The noise produced by bitcoin mining can be a serious nuisance. It's reasonable that neighbors would want those noise impacts mitigated, and there's a role for local governments to play in making that happen.
Too often, however, governments' response to the racket—as the cases of Washington County and Plattsburgh show—has been to use heavy-handed rules to shut down the cryptocurrency industry rather than pursue peaceful coexistence.
Worse still, legitimate concerns about noise externalities can morph into a wholesale effort to regulate other aspects of the bitcoin-mining industry—including its energy use.
Those regulations, as the example of Missoula County shows, can be a huge effective entry tax on bitcoin mining. That's economically costly, and potentially environmentally counterproductive.
Mines that would have once set up in the county to take advantage of its abundant (carbon-free) hydroelectric power could instead go to other areas of the state or country where dirtier coal-fired power is king.
Elsewhere, companies are installing mines at oil and gas wells where they use spare fuel—that would otherwise be "flared" or burned off into the atmosphere—to power their operations. Those mines are thus reducing carbon emissions. Under Missoula's regulations, they'd still be required to build out more renewable power anyway.
Bitcoin, and cryptocurrency generally, is a new industry that's hard for most people to understand and even harder for politicians to control. The result is a drive to quash or regulate it at all levels of government. As more and more cryptocurrency mines are set up in the U.S., it looks like the real threat to the industry isn't the U.S. Securities and Exchange Commission, but rather the local county planning commission.