15 April, 2023
The AI Regulation Frenzy
Technology panics now seem to go through fashion cycles. Last month it was Tiktok. The new trend in town is AI regulation. Would-be policy influencers are falling all over themselves to advance the idea that “We are hurtling forward in a way that is not the right level of responsibility, implementing AI …without any legal barriers, without any regulation.” That statement came from Cybersecurity and Infrastructure Security Agency (CISA) Director Jen Easterly. Easterly went on to compare AI to nuclear weapons, as if GPT-4’s weird conversations were comparable to a radioactive explosive that could kill half a million people in minutes. Easterly’s statement follows a hyperventilating statement by the “Future of Life Institute,” calling on “all AI labs to immediately pause for at least 6 months the training of AI systems more powerful than GPT-4.” For a more grounded perspective on AI, here’s a nice paper documenting “Eight Things to Know about Large Language Models.”
Stimulated by Chat GPT’s success in writing essays, the panic is based on three highly questionable assumptions: 1) AI is a single homogeneous technology rather than a diverse set of applications; 2) its development poses new and unique threats to humanity; and 3) government agencies can define and mitigate those threats by certifying or regulating AI applications in advance of their deployment. No one seems to be thinking critically about any one of those assumptions. We will be.
US Commerce Department RFC on AI
Clearly showing who’s the fashion leader among DC agencies, the U.S. Commerce Department’s National Telecommunication and Information Administration (NTIA) issued a formal request for comment on AI regulation April 11. The Wall Street Journal, quoted NTIA director Alan Davidson saying, “We know that we need to put some guardrails in place to make sure that [AI capabilities] are being used responsibly.” “Guardrails” is the new DC buzzword for…practically everything they want to do. The RFC, entitled “AI Accountability Policy” is open for the next two months. NTIA has no regulatory authority but aims to play a lead role in forming policy for the Biden administration. Written comments in response to the RFC must be provided to NTIA by June 12, 2023. IGP will be filing comments.
An assault on proof of work: bad policymaking or a power play for ulterior motives?
Things seem to be moving slowly in the US digital asset space, and SEC enforcement actions aside, we haven’t seen much action coming into Q2 2023. There are pressing concerns with the non-settling war in Ukraine, inflation, failing banks, and shifting alliances on the geopolitical front.
So what else has been going on with crypto lately?
In early March 2023, the Biden administration released its Budget Request for Fiscal Year 2024 with a laundry list of proposed tax amendments to curb the now cartoonishly large US debt. Page 71 includes a provision labeled “impose digital asset mining energy excise tax.” This provision has not received nearly enough scrutiny as it should have.
Proof of work computing which creates the supply of Bitcoin will be subject to a 30% excise tax when mined on US soil based on its “estimated electricity costs”. If approved by the Ways and Means Committee, this proposal will be effective on December 31, 2023, and would be phased in at a rate of 10% per year. The rationale for this tax according to the US Treasury is to curb the negative environmental effects and increased prices for those sharing a grid with a mining operation. The Treasury reasons that reducing mining activity is a viable pursuit for its own sake because of the many harms that it is causing, environmental or otherwise.
This proposal is severely misguided for three reasons.
First, this tax does not distinguish between electricity generated by a hydroelectric power station in Montana and a coal plant in Wyoming. The first can create clean-energy jobs through a viable agglomeration of data centers, mining pools, and human capital running them, and is a win for everyone. Coal-powered Bitcoin farms would, granted, only appeal to a small minority. But why is there a glaring lack of demarcation?
Second, unlike the tobacco industry, taxing the US share of Bitcoin supply at 30% will drive an entire industry offshore to a more favorable operating environment due to the economics of Bitcoin mining. Investors need a predictable environment to offset large capital expenditures over time and mining is only profitable where energy is cheapest. It would be pretty sad/funny if those fleeing miners end up in a coal-subsidized developing economy.
Third, the ideological pitting of Bitcoin mining as an antagonist to environmentalism can only serve to further entrench political divides. Instead of seizing an opportunity to realize environmental goals by incentivizing renewable energy use for mining, thereby bridging the urban-rural divide, and creating more jobs, Treasury’s mining tax will rally Republican voices against what will be perceived as paving the way for exclusive public sector digital money.
Regardless of how one might feel about Bitcoin, its supply inelasticity, or price volatility, it is likely here to stay, for better or worse. There is also no question that Bitcoin mining is shaping the electricity sector in various ways. Attempts are often made to pigeonhole Bitcoin mining into unconstructive discussions about its carbon footprint. With carefully crafted policies, running proof of work has the potential to help stabilize the energy demand response and release stranded supply. It can instantly transfer the value of renewable energy through the blockchain from places where we can’t afford to otherwise funnel it through ultra high voltage power lines. Instead of creating an environment for consumer choice to decide on crypto adoption while incentivizing clean energy use, the Treasury is going to tax Bitcoin, print more money, and sell us a digital dollar. Good luck with that! Why not explore instead how the BTC mining industry could allow us to fix renewable energy oversupply and one up China by attracting its banned crypto economy, conditional on clean energy requirements?
Meanwhile, the state legislatures of Arkansas, Texas, and Montana have moved quickly to protect their crypto-mining industries. The Arkansas House and Senate passed the Data Centers Act of 2023, to protect the right to mine Bitcoin and provide equivalent protection under the law compared to regular data centers. The bill is currently waiting for Governor Huckabee Sanders’ imminent approval. Montana has more recently followed suit and we can expect more to come. Meanwhile, Texas lawmakers are so fed up with the Fed that they are proposing a gold-backed, state-based digital currency and are willing to brave the legal challenges.
IMF puff piece praises India Stack
The International Monetary Fund (IMF) has praised India’s digital identification, payments system and data exchange, commonly clubbed under the label of India Stack.
The authors of the paper, which includes a volunteer from iSPIRT the organization developing and marketing India Stack, describe it as “a world-class foundational digital public infrastructure (DPI)” which has helped foster innovation and competition, expand markets, close gaps in financial inclusion, boost government revenue collection and improve public expenditure efficiency. The paper does not provide any insight into why or how India Stack qualifies as DPI and glides over the privacy, security and competition issues raised by the continuous and expansive collection, storage and sharing of data facilitated by India Stack. Unsurprisingly, the puff piece is being celebrated by the mainstream media, government and industry bodies. The recognition of India Stack comes at a time when the IMF and institutions like the World Bank are looking for ways to increase their investment in financial technologies, the digital infrastructure of developing countries and Central Bank Digital Currencies (CBDCs). The IMF’s endorsement of India Stack sets the stage for the introduction of interventions for digital identification, payments and data exchanges inspired by the model in other developing countries.
