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Could a new Bitcoin tax stifle blockchain’s greener future?

As lawmakers debate bringing in new tax requirements for cryptocurrency, greener forms of blockchain tech look set to suffer the most significant blow.

As cryptocurrency becomes progressively more mainstream, it’s no surprise that lawmakers are lobbying for new tax systems.

The White House hopes to bring in new framework to offset the rush of crypto spending with a $28 billion levy over the next 10 years.

An initial bill was drafted together over the weekend, which placed a broad requirement on crypto brokers to report transactions within their tax returns. Welcome to the real world Doge buffs.

While the general consensus in the financial sector is that crypto rightfully should be taxed, the fine print of who will bear most of the brunt is causing several issues.

Chief among them is a technicality that would leave emerging (and greener) forms of blockchain technology at risk. If passed, this deal could drive even more people towards the most energy-intensive forms of trading.

After this week’s harrowing IPCC report, that would not be a good look for crypto.

‘Proof-of-work’ vs ‘proof-of-stake’

Advocates are concerned that uneven bookkeeping requirements within the tax bill could lead to a lasting split between different blockchain technologies.

If, like many, you’re still confused by exactly what blockchain is, it refers to the background applications that allow for crypto transactions to be made in the first place.

The two main variants of blockchain are ‘proof-of-work,’ which uses a supercomputer to certify trades along one continuous ledger without a third party, and ‘proof-of-stake,’ which uses physical validations in the form of equity stakes – much like a deposit.

Because the proof-of-stake method is using validators (albeit inadvertently) to create blocks on its ledger and not an autonomous algorithm, crypto companies employing this mechanic will be registered as ‘brokers’ on the tax amendment.

This decision is obviously divisive, as the vague definition could lead to proof-of-stake currencies fronting the bulk load of this $28 billion quota, whilst proof-of-work systems like Bitcoin avoid most fees.

Not only would this effectively deaden any momentum proof-of-stake has as a burgeoning mode of blockchain, it could drive all crypto traders back to the energy intensive methods of proof-of-work.

Many had hoped proof-of-stake would address the lack of sustainability in crypto trading going forward, but as Senator Ron Wyden declared, the current bill resembles a ‘safe harbour for the most climate-damaging form of crypto tech.’

Just how damaging is proof-of-work?

As previously stated, proof-of-work blockchain systems use supercomputers to run thousands of processes at once with no third-party overseer.

In terms of efficiency in facilitating sales, it’s incredible. In terms of its impact on the environment, it’s nothing short of abhorrent.

One of the most used forms of cryptocurrency today, Ethereum, is said to use as much electricity in a year as the entire country of Libya. Like countless other proof-of-work coins, it has been mired in controversy for relying entirely on offsets to keep its carbon footprint down.

For many – reportedly including Ethereum – proof-of-stake had provided a promising new avenue to potentially keep cryptocurrency thriving in a green way, without eating up so much energy.

If the draft bill is to go ahead without major changes though, you can all but write off proof-of-stake for good. After all, it’s in no trader’s best interest to pay heaps of tax when they don’t have to.

In the ultimate aim of finding sustainable solutions for crypto, such a move would prove completely counter intuitive.

As much as 25% of Gen Z is currently invested in some form of digital currency, but without a blueprint to becoming more sustainable, this interest will inevitably be short lived amid our climate emergency.

As cryptocurrency becomes more recognised as a legitimate commodity, it makes sense to hold its key players to the same standards as their traditional equivalents. However, with the current bill on the table, it seems the loopholes are far too significant to roll with.

If you’re invested in crypto and concerned by the prospect of the new amendment, Coinbase CEO Brian Armstrong urges you to ‘contact your senators’ and make your voice heard.

Until we see a realistic path to becoming more sustainable, I for one certainly won’t be dropping dollars on an NFT asset anytime soon.