Cryptocurrency Mining: The Legal Issues
Blockchain technology and its application to cryptocurrencies are becoming increasingly prominent in Quebec. While the technology has been in existence for some 10 years, the development of large-scale real estate projects dedicated to cryptocurrency mining1 is currently in full swing. The availability of large tracts of land, the relatively cold climate and the low cost of electricity combine to make Quebec a favourable environment for the development and growth of this industry.
It is against this backdrop that Hydro-Québec recently asked Quebec’s energy regulator, the Régie de l’énergie (the “Board”) to intervene pursuant to ministerial order no. 2018-004 of the Ministry of Energy and Natural Resources2 (“Order 2018-004”). The subsequent decisions of the Board will impact the majority of entrepreneurs engaged in cryptocurrency mining using Blockchain technology in Quebec.
In this regard we are publishing a series of bulletins on the legal issues specific to cryptocurrency mining, of which this first is a summary of the four major impacts of Order 2018-004 and the Board’s subsequent decisions.
1. Suspension of requests for electricity by the Ministry of Energy and Natural Resources
On May 31, 2018, the Ministry of Energy and Natural Resources issued Order 2018-004, suspending the processing of new requests for electricity for cryptographic processes involving blockchains. As the potential energy demands of these data-mining projects are considerably greater than Hydro-Québec’s current power-generation capacity, this measure was intended to ensure adequate distribution of electricity throughout Quebec. The suspension was to remain in effect until September 15, 2018 or until such time as the Board sets the rate applicable to such requests.
CONSEQUENCE: Hydro-Québec is not processing any new requests for the supply of electricity to power computer equipment for the purpose of making cryptographic calculations specific to Blockchain transactions.
2. Provisional rates and conditions of service
On June 14, 2018 Hydro-Québec filed an application asking the Board to set rates and conditions of services for customers engaged in cryptocurrency mining. Hydro-Québec also asked the Board to approve, on an urgent basis, a new category of customers for electricity destined for cryptographic uses involving blockchains. In this regard, Hydro-Québec specifically requested that the Board:
- provisionally establish conditions of service to suspend the processing of requests for electricity for cryptographic processes applicable to blockchains;
- set a deterrent rate applicable to any existing contract where the customer wishes to substitute its current use for a cryptographic use to be applied to blockchains, or to obtain an increase in power supply for that purpose;
- adjust the conditions applicable to municipal power distribution networks insofar as cryptographic processes involving blockchains are concerned.
On June 18, 2018 the Board issued a provisional order3 in response to Hydro-Québec’s application.
CONSEQUENCE: A new category of consumers was created, such that any existing customer intending to change the way it uses electricity or increase its consumption for a cryptographic use to be applied to blockchains is now faced with a new deterrent rate of 15 cents per kilowatt-hour. The order was valid only until June 28, 2018 but was extended for an additional 15 days, i.e. until July 13, 2018.
3. Safeguard order: setting rates and conditions of service
Following the provisional order of June 18, 2018, the Board issued a safeguard order4 approving the new customer category of blockchain users and set the deterrent rate proposed by Hydro-Québec.
In support of its decision, the Board based itself on the following considerations:
- Hydro-Québec and its clientele will suffer serious or irreparable harm if the provisional rates are not established;
- the electricity demand for possible cryptocurrency mining projects is considerably greater than Hydro-Québec’s production capacity;
- Hydro-Québec’s capacity balance is already in a deficit position even without taking into consideration the new requests for power for blockchain purposes;
- the adoption of the provisional rates and conditions is in the public interest, as it would spare Hydro-Québec the burden of issuing calls for tenders for significant amounts of power and energy that could well prove to be superfluous given the high risks associated with the cryptocurrency mining industry.
Following this decision, on July, 19, 2018 the Board approved the provisional rates and conditions of service for cryptographic uses of electricity for blockchain purposes5.
CONSEQUENCE: the deterrent rate and the conditions of service applicable to cryptocurrency mining projects using blockchain technology were maintained in effect pending a final decision by the Board in this regard.
4. Municipal networks
In its decision of July 13, 2018 the Board also ruled on the second aspect of Hydro-Québec’s application, namely its petition to limit the distribution of electricity through municipal networks for cryptographic uses to be applied to blockchains.
The Board acceded to Hydro-Québec’s request, concluding that the new deterrent rate and the conditions of service should apply to municipal networks, except in the two following cases, where the LG rate (general rate for large-power customers) will continue to apply:
1) where a supply agreement already exists between a municipal network and its customer, but only for the installed power already being supplied for a cryptographic use applied to blockchains;
2) where the available energy capacity for a cryptographic use applied to blockchains at the connection point to the municipal distribution network has been confirmed in writing by the municipal distribution network and accepted in writing by the customer prior to June 7, 2018.
CONSEQUENCE: it will be impossible to avoid paying the deterrent rate imposed by the Board by requesting electricity directly from a municipality.
The safeguard order of July 13, 2018 will remain in effect until the Board completes a detailed study of the file, following which it will rule on the merits of the two aspects of Hydro-Québec’s application.
The Board will first consider:
- the creation of a new category of electricity consumers for cryptographic uses applied to blockchains;
- the creation of a dedicated block of 500 MW and associated energy for a maximum term of five years for cryptographic uses applied to blockchains;
- the components of the selection process;
- a deterrent rate of 15 cents per kWh applicable to all new accounts for a cryptographic use applied to blockchains, as well as to any substitution of use or increase in electricity supply for a cryptographic use applied to blockchains;
- the rates and conditions of service applicable to municipal networks with respect to cryptographic uses applied to blockchains.
Then the Board must approve the components of the selection process for new supply requests and set the rates and conditions of service applicable to customers using blockchain technology.
We will be monitoring the progress of these studies, as well as the Board’s decisions, and will provide an update on developments in a forthcoming bulletin.
1 Validating cryptocurrency transactions: successful miners obtain new cryptocurrency as a reward.
2 Ministerial order no. AM 2018-004
3 Decision D-2018-073
4 Decision D-2018-084
5 Decision D-2018-089