30 May 2018
The Promise and Perils of Canada's Crypto Gold Rush

History has a way of repeating itself. Like the Klondike gold rush of of the late 19th century, which brought a stampede to the perma-wintry climates of Canada’s Yukon Territory, wealth-seekers are again turning their attention to the Great White North.

Instead of mining for gold, they’re hoping to strike it rich with cryptocurrency. Bitcoin mining is a lucrative business. Miners verify transactions on the blockchain, the distributed record of Bitcoin transactions. Mining computers race to solve complex mathematical equations, and winners receive Bitcoin. Today's mining requires special hardware or mining rigs, and this equipment uses a lot of electricity.    

 

Along with Iceland and Georgia, Canada is ideal for cryptocurrency mining due to its cool temperatures, friendly regulatory environment and very low electricity prices for large-power customers. The benefits for miners are clear. Now, Canada's challenge is enjoying this new gold rush without hurting ordinary citizens.


Canada’s Mining Appeal

 

According to a report from Hydro Quebec, Winnipeg, Manitoba’s capital city with a population of under a million people, tops North America’s list of lowest electricity costs in 2017, costing just CAD$0.05 cents per kilowatt-hour. Quebec’s Montreal is next in line with CAD$5.18 cents. To put this into perspective, neighboring metropolis Toronto’s electricity costs CAD$14.55 cents per kilowatt-hour.

“Miners look for three things: cheap electricity, natural cooling instead of applied cooling, and the availability of alternatives,” said Zach Piester, an investor with Intrepid Ventures that backs and develops blockchain startups all around the globe. “Iceland has a surplus of electricity and is an island nation, while Canada has a surplus of hydro electricity.”

Cryptocurrency mining is known to be a relentless and ravenous consumer of electricity, but it’s difficult to pin down exact figures on power usage. Digiconomist, which tracks Bitcoin energy consumption, estimates that 31 US households can be powered by the amount of electricity required by a single Bitcoin transaction.

 

Alex de Vries, senior consultant and blockchain specialist at PwC and  founder of Digiconomist.net, paints a bleak future. “I don’t think mining is sustainable in any location. It took decades to get 1.8% of the world’s electricity to come from solar energy; now Bitcoin is undoing that by already making up for 0.5% of global electricity consumption in no time,” he told Longhash over email.

While mining in Canada won't solve this larger environmental problem, at least it can deliver lower electricity as well as a chillier climate that offers natural cooling for overheated servers.

But natural cooling, according to de Vries, won’t be enough to offset the amount of electricity that miners require. “They [miners] can afford to spend a certain amount of electricity. If that electricity isn’t going to cooling, it will go to additional machines they employ instead. Concentration in a single area might lead to rising rates, and affect residential areas too,” he noted.

 

This year alone, there has been a slew of news reports about mining operations large and small interested in expanding to Canada, especially from China, a highly-developed cryptocurrency community rocked by the central bank’s tightening grip on regulation. Among them, Beijing-based Bitmain Technologies, one of the world’s largest players, has been looking into shifting operations to Canada.

The dark side of mining

Amidst fear of rising electricity prices and heavy environmental impact, Piester points out that there is an opportunity to build progressive and globally competitive cities, and that ecosystems can develop very quickly thanks to the arrival of mining companies. For provinces like Manitoba, which contributed to just 3.3% of the national GDP in 2016 (compared with Ontario’s 39%), there’s a chance to accelerate development.

“What does a large scale mining operation bring to a city? It brings large amounts of human capital in the form of engineers, developers, technologists, and adjacent fields. It will also bring innovation development for the city or region, which is supplemented by others in the innovation ecosystem, such as startups, corporates, venture capital, and universities,” Piester adds.  

“Many of those who are setting up mining operations would be happy to contribute to tax base and subsidy programs in order to operate.”

 

Cryptocurrency mines, however, are not exactly the top generator of jobs as computers are fairly autonomous once they’re set up. Plattsburgh’s Coinmint has six employees, one of which is a security guard, and only plans on growing the team to fifteen. Coinmint’s promise to neighboring town Massena was 75 jobs for 2018, with another 75 in 2019. This is “below the historic average” of 30.5 new jobs per megawatt used, according to the proposal. As these towns have relatively stagnant economies, however, city officials feel like it’s “better than nothing.”


In theory, Canada would profit from China’s cryptocurrency crackdown. But if the mining boom is not handled correctly, ordinary Canadians will end up paying the price. Recent events in the American town of Plattsburgh, New York, which has had some of the cheapest electricity in the world at 4.5 cents per kilowatt hour, provides a cautionary tale for Canadian cities. Back in March, Plattsburgh’s mayor placed a moratorium on cryptocurrency mining after residents reported that electricity costs began rising rapidly, reportedly increasing by US$100 to US$200.    
 

The 18-month moratorium was never meant to be permanent. It was just to slow things down so that city authorities could work with miners on a solution to Plattsburgh’s energy problem. In the end, miners agreed to pay electricity surcharges so citizens won’t have to. Magog, a town in Quebec also followed suit earlier this year with its own ban.

 

“A city can avoid local problems by either raising rates or banning mining altogether. Mines require a constant 24/7 load, so there are limited alternatives,” added de Vries.

Slow And Steady In Manitoba

In Manitoba, a province straddling the east and west of Canada, a similar story is playing out. Utilities provider Manitoba Hydro reportedly received requests from over 100 groups hoping to set up shop in the province in the first quarter of this year. According to spokesperson Bruce Owen, the already operational six cryptocurrency mines in Manitoba are consuming around the same amount of power that 18,000 households demand.

Unlike the events that transpired in Plattsburgh, Owen doesn’t seem to think that mining operations will be a contributor to rising electricity prices. At present, “the current demand on the Manitoba Hydro system for existing cryptocurrency operations is unnoticeable when taken in the context of our overall system load,” he said.

Due to a “high volume of interest,” Owen said that incoming miners should expect a “delayed response,” and it appears that Manitoba Hydro is taking a slow and steady response to all the inquiries. Manitoba is home to only one electric utilities company, Manitoba Hydro, a crown corporation. Quebec, by contrast, has six utilities companies.

 

In addition to cheap electricity, prospective crypto-mining cities will also have to offer adequate physical space to house mining equipment. Winnipeg’s infrastructure, for instance, appears to be ill-equipped for cryptocurrency operations, as the city lacks available, unoccupied building space with the type of power requirements that miners are after.

This doesn't have to be be a problem, as servers don’t need to be housed in traditional buildings. Beyond warehouse spaces, Cold War-era bunkers are reportedly also on the list of structures that can be converted into mining farms. Piester also pointed out that mining operators can even “send over fully-contained shipping containers that are live with all the equipment,” or work directly with the city and electricity providers to build, and equip buildings.

The Way Forward

The early days of the “gold rush,” where prospectors can charge in and freely lay claim to resources, has now passed. As seen in Quebec, the local government is unwilling to let miners plug in and reap the benefits without providing any real value to the economy, and higher tariffs for companies are on their way.  

“If you want to come settle here, plug in your servers and do bitcoin mining, we’re not really interested. There needs to be added value for our society; just having servers to do transaction mining and acquire new bitcoins, I don’t see the value,” said Philippe Couillard, Quebec’s premier at a Montreal conference back in March.

In the same vein as Plattsburgh’s leadership, Couillard is also open to companies interested in creating a “real ecosystem or a real technological transformation centered on blockchain,” even if these are cryptocurrency-backed projects.


The way forward appears to be a collaborative one. Canadian officials will need to work with miners to negotiate the value that this new gold rush will bring.

Iris Leung is a Toronto-based writer.

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