Under pressure amid a brutal crypto winter, Canadian Bitcoin miners are teaming up to convince various levels of government to drop a series of proposed policy changes they say risk making the country an uncompetitive place to do business.

In 2022, on top of a broad downturn in the crypto sector that has been particularly rough on Bitcoin-mining companies, five provinces issued or proposed restrictions on miners. On Wednesday, a coalition of Bitcoin miners will make a presentation to the House of Commons Standing Committee on Industry and Technology to oppose another proposal from Finance Canada that would prevent miners from claiming a credit for some sales-tax payments, which the industry estimates could increase their costs by five to 15 per cent.

Some provincial electrical utilities cited environmental concerns related to the industry’s massive energy use among their reasons for restricting Bitcoin miners’ access to the grid. But Jaime Leverton, chief executive of the Toronto-based Bitcoin-mining company Hut 8, said it would be much worse for the environment if the industry were driven out of Canada. 

“The reality is if Bitcoin mining is discouraged in Canada with this type of regulation, it will have no choice but to move into other jurisdictions that potentially don’t have as much clean power,” she said. “That would ultimately actually lead to higher emissions.”

Bitcoin miners provide the computing power necessary to generate random winning results that the network accepts as adding a valid block of transactions to the blockchain, a shared digital ledger. By design, it takes a lot of computing power—and racks up big electricity bills—to make enough guesses to be statistically likely to win, which makes it profitable to be a good actor and extremely expensive to attempt to sneak inaccurate transaction records into the blockchain.

The Bitcoin-mining companies that operate in Canada typically sell their computing power to groups called mining pools. Under a typical contract, the mining companies collect a fee from the mining pools whether their computers successfully generate the winning result that adds a new block to the blockchain or not.

Some cryptocurrencies like Dogecoin and Monero also use mining, but other blockchains are increasingly making use of a different mechanism for adding transaction blocks, called proof-of-stake. Bitcoin’s biggest competitor, Ethereum, moved to proof-of-stake following “the Merge” in September.

Despite pressure from some politicians and environmental groups, most observers agree Bitcoin is highly unlikely to ever make a similar switch. Proponents of Bitcoin’s proof-of-work system argue it is more decentralized, secure and resistant to tampering than proof-of-stake.

There’s no arguing that Bitcoin mining is extremely energy intensive, but the size of its carbon footprint is hotly contested. Cambridge University’s Centre for Alternative Finance estimates 37.6 per cent of electricity used by Bitcoin miners comes from sustainable sources, while the Bitcoin Mining Council puts that figure at closer to 60 per cent.

Johnson Jose Mathew, a research assistant at York University’s Blockchain Lab, said most existing methods of estimating Bitcoin’s energy use could use improvement. Mathew is collaborating with other academics to create a more rigorous system for evaluating how much energy the network consumes. He said his team of researchers believes it may actually use up to 20 per cent more energy than the most commonly cited models suggest.

Still, Mathew said Canadian Bitcoin miners are likely right that it would be worse for the environment as a whole if they were to leave the country for a jurisdiction with an energy grid with fewer renewables. “Bitcoin mining is not inherently the polluter. It’s where the energy is coming from,” he said.

Besides its relatively clean and abundant energy, Canada has a lot of other qualities attractive to Bitcoin miners, including its stable political environment and cold climate, which helps prevent the machines from overheating. Those qualities have helped the sector attract about $2 billion in investment since 2019, creating more than 1,500 jobs since 2018, according to the Fair Tax Treatment for Responsible Digital Asset Mining Coalition, the group opposing the proposed taxation changes. In 2021, after China banned Bitcoin mining, Canada became the fourth-largest destination for the industry in the world.

In 2022, the fortunes of the Bitcoin-mining industry changed. High energy prices and massive crashes in the price of the crypto asset battered the sector, leading to bankruptcies and loan defaults. Bitcoin mining data and research firm Hashrate Index estimates Canada’s share of the Bitcoin network’s hashrate—a measure of its security and computing power—fell from a high of 13 per cent in 2021 to between seven and eight per cent in 2022. The stock prices of Canadian public mining companies Hive, Hut 8 and Bitfarms have all lost about two-thirds of their value over the past 12 months, although a recent Bitcoin price rally has provided some relief.

Despite the industry’s struggles, provincial hydro agencies say they continue to experience unprecedented demand from crypto-mining companies hoping to connect to their energy grids. At the same time, Canada’s hydro agencies are also preparing for increased demand from other sources as the economy electrifies and shifts away from fossil fuels.

“While BC Hydro welcomes new load, and has strategic plans for electric vehicles, heat pumps and clean technology, the growing interest from cryptocurrency miners in B.C. could make it more difficult to meet electrification targets and keep rates low for customers,” said B.C. Hydro spokesperson Susie Rieder in an email.

Amid that backdrop, the provinces and the federal government have made numerous proposed policy changes over the past 12 months that the Bitcoin-mining industry says add up to a significant burden.

In March 2022, Ontario’s energy ministry issued a proposal that would prohibit crypto miners from participating in a program that allows businesses to save money by reducing their energy usage during peak hours. In November 2022, Quebec and Manitoba announced they would stop accepting applications from crypto miners to make new connections to their energy grids.

A spokesperson for Newfoundland and Labrador Hydro confirmed to The Logic that the province issued an order in council that month that would allow it to do the same. B.C. issued a similar moratorium in December.

In emails to The Logic, spokespeople for B.C. Hydro and Hydro Quebec said the agencies made their decisions independently and did not coordinate with the other provinces. Jill Pitcher, a spokesperson for Newfoundland & Labrador Hydro, told The Logic that the agency reviewed how other jurisdictions are approaching the issue before releasing the order. 

Energy Ontario provided a response that did not clarify whether it decided to make its proposed change independently or in consultation with the other provinces. Manitoba Hydro did not respond to a request for comment by deadline.

In February 2022, Finance Canada issued proposed changes to the Excise Tax Act that would classify Bitcoin mining as not a “commercial activity” in most cases, making miners unable to claim credits for any sales taxes they paid on certain costs. In a submission made as part of consultations in advance of the 2023 federal budget, the coalition of miners opposing the changes said, “Finance Canada has provided no reasonable explanation of the policy analysis or rationale that led to this proposal.”

Finance official Marie-France Faucher did not respond to a question asking what the policy goal of the proposed changes is, but said in an email that excluding crypto miners from claiming sales tax credits “aligns with other countries such as the UK and Germany.”

Ben Harper, a Calgary-based financial associate at Hashrate Index who also serves on the policy committee of the Canadian Blockchain Consortium, an industry group, said he believes the flurry of proposed policy changes that came out in Canada in 2022 played a major role in the country’s declining share of the Bitcoin network’s computing power. 

“Canada should be a global leader in this space,” he said. “Regulatory and political certainty is something that’s very important for where Bitcoin miners are located.”

Eric Hittinger, a public policy associate professor at the Rochester Institute of Technology in New York who studies electricity markets and climate economics, said the highly mobile nature of the Bitcoin industry means miners may one day pick up and leave even if Canada keeps taxes low and makes connecting to the power grid easy, however. 

“If you think it’s socially responsible to apply taxes to the crypto-mining industry, then you should do it,” he said. “There’s no guarantee that if you did not apply these sorts of taxes or restrictions, the crypto mining industry would stay. They’re always in search of a place where the regulatory regime and the electricity prices are more favourable.”

David Robertson, a tax expert at Ernst & Young who is advising the Fair Tax Treatment for Responsible Digital Asset Mining Coalition, said these particular proposed tax changes are highly unusual, however. Finance Canada is proposing making an exception to the tax credit exclusion for miners who can identify everyone they are performing the mining activity for, which Robertson interprets as meaning everyone making Bitcoin transactions in each block added to the blockchain by a mining-pool client.

“It’s an improper use of tax policy,” Robertson said. “They’re basically putting know-your-client responsibilities on the mining company. … It’s like telling a Canadian technology company providing services to the New York Stock Exchange that it can only recover the GST it incurs if it can identify every person selling shares on the exchange.”

Leverton, the Hut 8 chief executive, said her company is the only publicly trading Bitcoin mining firm whose operations are entirely in Canada. She said she hopes Finance Canada and the provinces will reconsider their proposals so she can keep it that way.

“We’ve been proud of our all-Canadian heritage,” Leverton said. “The reality is this type of legislation really hurts that position and our continued ability to remain.”