Removal of subsidies on fossil fuels can have significant implications for the crypto industry, as it affects the cost and availability of energy for mining and transactions. According to a report by CoinDesk, crypto miner Hive Blockchain sold its Norwegian unit after the country scrapped a tax subsidy on power consumption for crypto mining. The company cited the increased operating costs and reduced profitability as the main reasons for the decision.
On the other hand, some argue that subsidy removal can also create opportunities for innovation and efficiency in the crypto sector. For instance, a study by Rentschler et al. (2016) suggested that compensating low-income households with cash transfers after removing fuel subsidies in Nigeria could reduce poverty and increase social welfare, while also creating incentives for energy conservation and diversification.
Similarly, crypto companies could benefit from exploring alternative sources of energy, such as renewable or off-grid solutions, to reduce their dependence on subsidized fossil fuels. However, subsidy removal also poses significant risks and challenges for the crypto industry, especially in terms of security and regulation. A recent example is the case of Patricia, a Nigerian crypto exchange that suffered massive losses in crypto assets after a security breach in May 2023.
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The company blamed the incident on the unstable power supply and frequent blackouts that followed the subsidy removal, which compromised its security systems and exposed its users’ funds to hackers. The incident also raised questions about the legal status and protection of crypto assets in Nigeria, where the central bank has banned financial institutions from dealing with cryptocurrencies.
Some possible implications of subsidy removal on crypto
Higher energy costs for crypto miners, reducing their profitability and competitiveness. Subsidy removal can affect the profitability and sustainability of crypto mining operations, especially in countries where electricity costs are high. For example, Hive Blockchain, a Canadian crypto miner sold its Norwegian unit after the country removed a tax subsidy on power consumption for data centers in 2021.
Increased poverty and inequality due to higher fuel prices, especially in regions with low income and high fuel consumption. Subsidy removal can also have significant distributional, and welfare impacts on consumers and households, especially the poor and vulnerable. For example, Nigeria’s attempted fuel subsidy removal in 2012 caused fuel prices to more than double, leading to strikes and violent protests. A simulation study estimated that an uncompensated subsidy removal could increase the national poverty rate by 3-4% on average.
Subsidy removal can expose crypto assets to greater risks of security breaches and thefts, as hackers may target platforms with lower security standards or weaker regulations. For example, Patricia, a Nigerian crypto exchange, suffered massive losses in crypto assets after a security breach in 2023. Lastly, greater exposure to cyberattacks and security breaches, resulting in losses of crypto assets and trust.
Some crypto advocates argue that the subsidy removal is a deliberate attempt by the government to stifle the growth and innovations, which poses a threat to its monopoly and control over the financial system. They claim that the government is afraid of losing its revenue and influence as more people adopt crypto as an alternative form of money and payment.
Others, however, support the subsidy removal as a necessary and justified measure to address the environmental and social costs of crypto mining, which consumes a large amount of energy and contributes to global warming and pollution. They also point out that the subsidy removal will level the playing field for other sectors and industries that need electricity for their operations, such as manufacturing, agriculture, and health care.
The subsidy removal will likely have a ripple effect on the Nigerian crypto market, as the country accounts for a significant share of the global hash rate and trading volume. The reduced supply and increased cost of mining could lead to a drop in the price and security of some crypto assets which was the case with Patricia, especially those that use proof-of-work consensus mechanisms, such as Bitcoin and Ethereum.
On the other hand, some crypto enthusiasts believe that the subsidy removal will incentivize innovation and adoption of more energy-efficient and decentralized solutions, such as proof-of-stake consensus mechanisms, renewable energy sources, and peer-to-peer networks.
The implication of subsidy removal on crypto is a complex and multifaceted issue that requires careful analysis and evaluation from various perspectives. The policy change will undoubtedly have profound consequences for the crypto industry and society at large, both in the short term and in the long term. It remains to be seen how the crypto community and the government will adapt and respond to this new reality.