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Power-hungry cryptominers push up electricity costs for locals

Photo illustration of a hand holding a bitcoin in front of a power plant
Photo: STRF/STAR MAX/IPx via AP Images

When cryptominers come to town, local residents and small businesses pay a price in surging electricity rates.   

A new Berkeley Haas working paper estimates that the power demands of cryptocurrency mining operations in upstate New York push up annual electric bills by about $165 million for small businesses and $79 million for individuals—with little or no local economic benefit.

“Small businesses operate on very thin margins, so I don’t think they’d be happy paying for the energy that cryptominers are using,” said Asst. Prof. Matteo Benetton, who co-authored the paper with Assoc. Prof. Adair Morse and Asst. Prof. Giovanni Compiani, now at the University of Chicago’s Booth School of Business. “And the profits do not stay local: Bitcoin mining profits can be moved from upstate New York to Italy or Colombia or China in a second.”

While cryptomining has been criticized for its outsized environmental impact, the paper is the first to quantify its negative economic impacts on local communities. Massive cryptomining server farms employ just a few people yet guzzle electricity by the megawatt. That’s because “proof-of-work” cryptocurrencies, such as Bitcoin and Ethereum, require brute computational power to solve the complex math problems required to verify transactions on a blockchain. 

Bitcoin mining alone was estimated to consume 0.5% of global electricity in 2017. From Mongolia to Montana to Washington, cryptominers have flocked to northern locales where it’s easier to keep servers cool. They’re also lured by cheap, abundant power supplies—sometimes with discounts on electricity. 

Impacts upstate

The researchers analyzed upstate New York, where Niagara Falls has fueled inexpensive hydropower and rural communities like Plattsburgh have borne an outsized impact from cryptomining operations that moved into former industrial sites. By looking at surges in Bitcoin prices and electricity demand curves, the researchers estimated that mining pushes up monthly electric bills about $8 for individuals, and $12 for small businesses. 

“That adds up to $250 million just for upstate New York for a year, and if you think of scaling that up for the U.S., we estimated it’s about $1 billion per year—many times that globally,” said Compiani. “These are warehouses full of computers and they only require one or two IT people to run the whole operation, so it’s unlikely that it  brings jobs or stimulates the economy.”

They did find that local governments were able to capture some increased tax revenue—most likely in the form of real estate taxes—amounting to about $40 million per year. That may be why some localities have offered discounted power, Compiani said. However, the increased tax revenue only offsets about 15% of the increased costs to locals.

Chinese price constraints 

The researchers also looked at China, where electricity prices are constrained by the government rather than fluctuating with demand. While the data available was less detailed, they found evidence that mining operations seemed to crowd out other potential industries that may have employed more people, slightly depressing local economies. There is also anecdotal evidence that the increased power demands with constrained prices has led to supply shortages, rationing, and blackouts. 

Implications for data centers

While the paper focused only on the impacts from cryptomining, the researchers noted that large data centers—which are proliferating from the growing processing demands of cloud computing, AI, natural language processing, and quantum computing—may generate many of the same impacts for local communities. 

Read the full paper: “When cryptomining comes to town: High electricity-use spillovers to the local economy.”

New paper highlights manipulation in 5G patent licensing

The value of competing 5G technology standards shouldn’t be judged by number of patents alone, according to new research by David Teece.

Cellular communications tower for mobile phone and video data transmission
Photo credit: Bill Oxford for iStock/Getty Images

Whether its mobile phones or autonomous cars or telemedicine, 5G is a game-changer, enabling cellular connections up to 100 times faster than 4G. Unfortunately, not all 5G implementations are alike: 5G technology portfolios are easily manipulated by patent holders, and determining which set of technologies and standards are most viable is not always straightforward.

That’s according to Berkeley Haas Prof. David Teece, who examined the problem of 5G patents in a new article for California Management Review titled, “Technological Leadership and 5G Patent Portfolios: Guiding Strategic Policy and Licensing Decisions.” Teece, the Thomas W. Tusher Professor in Global Business and director of the Tusher Initiative of Intangible Assets, highlights the flaws of the patent licensing system and the use of patent counts as an indicator of a technology’s value.

Patent licensing systems

When 5G developers patent their technology, they work with standard development organizations (SDOs) that in turn work with the 3rd Generation Partnership Project (3GPP) to make sure that the patents are commercially viable and meet the standardized elements for foundational technologies. Once the patent is licensed, 3GPP and these developers gain their profits from patent licensing fees and royalty payments which are determined by the fair, reasonable, and nondiscriminatory (FRAND) criteria.

Teece observed that under this licensing system, policing unlicensed use of patent data is often complex and difficult. That means that while these patents may be protected legally, they may not be protected practically. Moreover, just because a license is available does not mean royalties will be paid: The SDOs that patent-developers work with only provide the FRAND framework, but do not assist in developing an official licensing program. Teece suggests that patent owners must be willing to develop a licensing program that users must sign up for, and courts must be willing to charge patent infringers. These two actions may help prevent unlicensed users from getting away with not paying royalities.

Manipulation of patent counts

Prof. David Teece
Prof. David Teece

Another problem lies in the way that many companies determine which patents to license. It is tempting to look at the number of patents generated as an indicator of their quality, but quantity does not equal quality. “Patent counts are misleading proxies for technological contribution and leadership,” says Teece. “When well-respected media outlets like the Wall Street Journal and the Financial Times trumpet the patent rankings of companies and countries as proxies for patent value and technological leadership, with minimal if any qualification, it reinforces widespread ignorance about the utility of patent statistics.”

Patent counts can be deceiving and because they are likely biased, he says. For example, one country could hold the most patents, but others may be running the development and deployment services for 5G technology. On another note, the line between patents described as essential and patents simply declared as essential can be ambiguous. This makes patent counting inaccurate and invalid.

More importantly, Teece found that “the patent process is strategically manipulated by some countries and some companies.” For example, as China races to match the success of Western economies, it now owns about 36% of essential 5G patents. They may be partly due to China’s government subsidizing many of the patenting processes, however. Companies also have this same motivation for obtaining license control. In the past, higher patent counts were due to certain companies’ efforts to gain leverage in license negotiations.

With patent counts being easily manipulated, Teece described five key metrics used to understand patent data. Family counts and the number of technical contributions to standard bodies are found to be easy to manipulate and are not meaningful indicators of technological value, he says. On the other hand, forward-citation counts, the number of independent claims, and geographic coverage are difficult to manipulate, but are still not perfect in judging the value of a patent.  For example, forward-citation counts do not always reflect commercial significance.

After understanding how patent data is analyzed, Teece lays out methods to for properly assessing leadership in 5G technology. These include performing a patent-by-patent analysis of leading patents, looking at comparable licenses (with running royalty licenses as the most reliable indicator of royalty rates), and utilizing aggregate market-observed choice data to calculate the profit impact of patented technologies.

“Manipulation happens all too often,” Teece says. Though some of the alternative methods to determine technological value may be costly, these steps can help make vast improvements to the future of wireless technology development and use, he argues

Teece’s article was published in the Spring 2021 issue of California Management Review, a journal that publishes academic work that engages scholars and contribute to the practice of management.