Guest authors Brad Brooks-Rubin and Jane Khodarkovsky, partners at Arktouros PLLC, examine Bitcoin mining and strategies to mitigate operational and political risks.
Humans began mining the Earth for ores and metals for manufacturing, communicating, and eventually exchanging value more than 40,000 years ago. Mining digital assets, including Bitcoin through computer-based problem solving to validate and secure the network, began around 15 years ago.
Despite the time gap in their origin stories, traditional mining for some of the oldest forms of value, such as gold, can teach those mining the newest forms of value, such as Bitcoin, much about ensuring smooth business operations and productive community engagement. These considerations include addressing “license to operate” and “stakeholder management,” which are increasingly relevant for the crypto space and broader technological development. And although they may seem less urgent for those in the crypto world, as investors in traditional mines have learned over many decades, ignoring what doesn’t initially meet the eye can eventually lead to unforeseen delays, clashes with communities and governments, and even scrapped projects and lost profits.
One of the longer-standing attractions and arguments for crypto is that it challenges traditional intermediaries like banks, corporate structures, currency, and, to a degree, regulatory approaches.
Put another way, crypto creates new spaces, often in a fourth dimension – including cryptographic, timestamped sequencing that helps prevent double-spending and block manipulation, supporting the core function of data integrity and resistance to tampering. That is most clear in the Bitcoin mining space – where specialized computers solve complex mathematical puzzles that validate and record transactions on the Bitcoin network, adding new blocks to the blockchain and releasing new bitcoins as rewards to miners in exchange for verifying and securing the network – but extends to other corners of the crypto ecosystem where validators perform computation and security functions and are rewarded for that work. Contrast that with the ways humans generally considered the concept of value in physical materials, or at least with investment and exchange concepts that had a physical form and human intervention somewhere, generally starting with extracting them from the ground.
Yet crypto remains tethered to the three-dimensional and human world, whether for the infrastructure needed to undertake Bitcoin mining, the locations of key hubs of personnel and investment, or the governments that back (or don’t) the companies involved. And in that realm, although crypto forges its own path, the road traveled by traditional mining over many millennia can be instructive when it comes to assessing and mitigating risk, not because it’s nice to have or a do-good approach, but because it determines operability, development, and profitability.
The key issues can be summarized as: Operational (Logistical), Social (or License to Operate), and Political/Reputational/Macroeconomic.
As countries, including the United States, and localities seek to attract overall crypto development and investment, such as with tax and other incentives, mining is a significant piece of the puzzle. According to a recent BBC article, there are more than 130 Bitcoin mining centers already in the United States, with plans for many more to come.
For any individual mine or mining-related business, it is essential to identify the actual on-the-ground needs and considerations for scaling and growth. While the aspects and needs of a physical mine bringing ore out of the ground and moving it to a port and processing plant are certainly more tangible than for crypto computation centers, the crypto world’s physical and human requirements are far from zero and still need careful, long-term diligence, assessment, and planning.
It is critical that every company develop its own framework to ensure that issues are identified in advance, ensuring that plans are developed, responsible and skilled staff hired and empowered, and strategies for outreach developed, including:
In addition to ensuring smooth operations, use of a clear and distinct framework for the above can translate into more successful engagement on the next two sets of issues and counter some existing narratives focused only on crypto mining’s detrimental effects.
A digital asset mining company requires ensuring its operations have community support and account for local needs and expectations. The development of a major mine is more comprehensively disruptive to a community – in many cases, requiring them to be relocated – than the infrastructure of a computation center. Because of the extensive history of clashes over such disruptions, frameworks such as the need for a company to seek “free, prior, and informed consent (FPIC)” from local communities have been developed. And despite deep experience with using FPIC and similar frameworks, companies still continue to deal with debilitating clashes from communities upset with how a project has been developed or their interests have been managed.
Bitcoin mining in the United States – with the BBC reporting on numerous communities concerned with the impact of electricity usage, noise, and other disruptions – is already facing backlash. To date, these community issues have been contained and nonviolent, but the experience in traditional mining shows that these undercurrents of criticism can escalate quickly, especially in developing countries like Ethiopia and Bhutan, where Bitcoin mining is expanding quickly. In addition to managing downsides of corporate operations, it is also essential to integrate management of expectations for community benefit, jobs, and profit-sharing. While Bitcoin miners and other crypto companies may not need to adopt FPIC, per se, their introduction into a community does require considering:
Crypto “mining” operates in a different dimension from traditional mining, but the scrutiny and attention the industry receives means that business and reputational issues can affect it over time. This is especially relevant for those investing and establishing operations in countries that are politically unstable, or that do not have a legal infrastructure that adequately applies to new technology. In such countries, reputational issues, including the appearance that the industry is too close to the respective government, could become media fodder, whether of the social or mainstream varieties.
In traditional mining, companies must establish themselves in resource-rich jurisdictions, which are limited to where the rocks are in the ground. On the surface, it may seem that crypto mining companies have more choice because they are not tied to geology. But the reality is that scarcity of resources determines the choice of where crypto mining can operate, particularly the availability of electricity. This has resulted in choosing to access inexpensive electricity in countries like Ethiopia or plentiful hydroelectric power in Bhutan. However, there may be heightened risk in these types of jurisdictions, where ongoing conflicts and the confluence of a range of other regional political challenges could impact not only short-term but long-term success of the operations. Similarly, the same can be true in the United States, where, in addition to community concerns about electricity usage and the impact of servers, scrutiny is also turning to political contributions and connections.
Over the decades, traditional mining (and natural resources more generally) promise for potential profit windfalls have led some governments and their respective macroeconomic policies to fall victim to what has become known as “Dutch disease.” Put very simply, Dutch disease describes a situation where the reliance on natural resources shifts broader economic policy (and even currency valuation) heavily towards that sector, crowding out other aspects of the economy and potential diversification. That over-reliance can lead to long-term economic downturns and ultimately negatively impact the companies operating in the mining sector. It is too soon to tell whether developing countries or smaller economies choosing to focus on crypto mining could catch a case of Dutch disease, but companies being courted by or looking into these jurisdictions should be conscious of the potential risk and prepare accordingly.
Indeed, the lesson from traditional mining is not to try to avoid such issues – but to be prepared and conduct thorough geopolitical risk and planning whether in the United States or abroad. Each company should have a framework and experienced staff responsible for considering:
Similarly, beyond outright conflict, what happens if:
This has been a consistent challenge for traditional mining companies. With international organizations like the IMF and OECD engaging government counterparts and demanding that there be plans for these issues, companies will need their own approach and frameworks to avoid being dragged into battles among competing public stakeholders.
Traditional mining companies have learned, usually the hard way, that there is no avoiding these issues. As crypto mining companies may be operating in other new and innovative dimensions, these earthly and human issues can quickly ground the effort to get beyond the third dimension precisely back into it.
Brad Brooks-Rubin is a former senior official at the U.S. Department of State and Treasury. He is currently a partner at Arktouros, pllc and focuses on the intersection of different types of risks – sanctions, corruption, money laundering, political, human rights – across a range of geographies and sectors, including natural resources, and then identifies tangible, practical, and creative solutions.
Jane Khodarkovsky is a former Trial Attorney and Human Trafficking Finance Specialist in the Money Laundering and Asset Recovery Section (MLARS), Criminal Division, in the U.S. Department ofJustice (DOJ). She is currently a partner at Arktouros and focuses on financial integrity, product counseling and litigation matters for fintech and web3companies.
