Background

What is Crypto?

“Crypto” is a broad term used to describe a variety of technologies powered by Blockchain technology. A Blockchain is a digital record-keeping system (ledger) that can store a variety of different types of information. However, unlike traditional ledgers, which are often maintained by a single entity, a Blockchain is decentralized and distributed across many entities. This structure ensures that records are secure, accurate, and transparent.

How Does Blockchain Work?

At its most basic level, Blockchain uses open-source computer code to transform requested transactions into a “block.” The block is then sent to every node (computer) in the network scattered across the world. The network of computers then solves equations to confirm the transactions validity, also known as crypto mining. Once confirmed to be legitimate, the nodes receive a reward for facilitating the proof of work, and the block is chained together with other blocks to create a long history of all transactions.

The Rising Importance of Crypto

“What the Internet did to publishing, blockchain will do to about 160 different industries.” -Patrick Byrne, Former CEO of Overstock

Perhaps the most important and disruptive innovation enabled by blockchain technology is its ability to enable secure peer-to-peer digital transactions anywhere in the world without the need for a centralized intermediary platform.

For example, while historically transferring money to someone across the world would have required coordinating with multiple banks and could take several days to settle, cryptocurrency enables anyone to transfer money directly to another person in a matter of seconds.

Similarly, sending communications online today, such as an email or posting on social media, is done through centralized platforms run by a single company that acts as a gatekeeper, controlling access and connections between people. Users are required to log in with personal information, and their data is stored on the company’s servers and often sold to advertisers. Blockchain technology, on the other hand, has enabled the creation of Decentralized Applications (dApps) on the next evolution of the web, Web3. Web3 dApps can be designed to be censorship-proof and do not require any personal information to access the app.

In the crypto industry, this peer-to-peer innovation is referred to as “trustlessness,” meaning anyone can communicate, interact, and transact with others on an app without needing to trust an intermediary.

Across the globe, Crypto is fundamentally reshaping how the economy works. Empowered by smart contracts and peer-to-peer transactions, Crypto is enabling an entirely new form of decentralized finance (DeFi), where businesses and individuals can engage in fast and secure financial transactions around the world without the need for intermediaries. It is now common for the number of monthly Crypto transactions to surpass 75 billion.

This widespread adoption isn’t isolated to the United States. Across the world, individuals are turning to Crypto as a way to circumvent government censorship, avoid government currency manipulation, and avoid government issued central bank digital currencies. Some countries have even gone further by clarifying that Crypto like Bitcoin is a legal tender.

The skyrocketing use of Crypto has also pushed traditional financial firms to establish exchange-traded funds (ETFs) for customers who want exposure to popular Crypto currencies like Bitcoin and Ethereum, but don’t want to invest directly.

Within industries, Crypto is streamlining supply chain management by enabling buyers and sellers to verify the authenticity of products, tracing them all the way back to their exact place of origin. Additionally, Crypto is decentralizing physical infrastructure, allowing individuals to earn rewards renting out spare storage space on their computer, which can be used for file storage or even decentralized AI computing. Crypto is even enabling organizational governance structures to organize and operate in a decentralized manner.

Leaders are recognizing the geopolitical importance of crypto to the future world economy and the need to ensure America leads this industry. For instance, Donald Trump has pledged to make America the “crypto capital of the planet and the Bitcoin superpower of the world.”

How Can Crypto Benefit Montanans?

The adoption, growth, and investment in Montana’s Crypto industry can deliver significant benefits to the state’s economy, empowering Montanans to gain greater independence from an increasingly intrusive federal government.

1) Energy Demand

Crypto mining, like any sizable Datacenter operation, requires substantial energy, accounting for roughly 0.6% to 2.3% of total U.S. electricity consumption. Promoting Crypto mining in Montana can drive demand for baseload power, which in turn helps keep critical reliable energy infrastructure operational and economically viable.

2) Stabilize the Power Grid

Crypto mining can play a crucial role in stabilizing the energy grid by providing a flexible load that utilities can manage to maintain grid stability. Like any other Datacenter, Crypto mining involves using computers to solve complex mathematical problems that enable blockchain networks to function. However, unlike traditional Datacenters, Crypto mining has the ability to scale operations up or down immediately based on energy availability. This flexibility allows utilities to enter into agreements with cryptocurrency mines to adjust operations as needed to maintain grid capacity. By enabling load balancing, this capability helps prevent blackouts and brownouts by adjusting energy consumption during peak demand periods. A notable example occurred during the 2022 Polar Vortex in Texas, where major Bitcoin mining facilities reduced their operations by up to 97%, freeing up 1,500 megawatts for the grid—enough to heat over 1.5 million small homes. Encouraging such practices in Montana can enhance grid stability and support the state’s energy infrastructure.

3) Decentralizing High Skill, High Wage Industries

As Crypto continues to disrupt and decentralize sectors, it opens the door for high-skill, high-wage industries to thrive in states far from the traditional financial and tech hubs, like Montana. Furthermore, the powerful decentralization effect of Crypto will empower more Montanans to pursue entrepreneurial opportunities in this emerging sector—all without having to leave Montana.

4) Promote More Freedom and Independence

Crypto holds much promise in its ability to help Montanans achieve more independence from an increasingly heavy-handed federal government.

• Free Market Money. Bitcoin, the most prominent cryptocurrency, operates as a true free-market digital asset that cannot be controlled by any government. This independence offers an alternative to fiat currency with inflation levels controlled by the federal reserve, or more concerning federal reserve digital currencies (CBDCs), which could potentially be used for authoritarian social credit scoring systems that monitor and control individual behaviors. 
• Reduce Censorship: Crypto technology enables direct transactions between individuals, cutting out centralized intermediaries in tech, finance, and government that act as gatekeepers, and restoring power over data and assets to individuals. This shift promotes greater freedom of expression and autonomy by bypassing centralized platforms that often impose restrictions or censorship.
• Increased Autonomy: Similarly, crypto technology also promotes greater individual autonomy by enabling people to bypass centralized intermediaries and share information directly. For example, anyone with a smartphone can download a crypto wallet, hold cryptocurrency, and securely and privately transfer funds directly to another person anywhere in the world in a matter of seconds. Contrast that with the frustrating paperwork, bureaucracy, and regulation of requesting a funds transfer in the traditional banking sector that typically takes days to settle.

History of Crypto in Montana

The intersection between Crypto and Montana began around 2018, after Crypto mining companies moved forward with plans to build facilities in southwest Montana. In May of the following year, HB 584 was signed into law, making Montana one of the first states to recognize utility tokens and exempt them from securities laws.

Despite the efforts to position Montana as a pro-Crypto state, Missoula County took an opposing stance, opting to pass one of the first zoning ordinances in the nation targeting this burgeoning technology. In response, the 2023 Montana Legislature passed SB 178, again positioning Montana at the forefront of Crypto leadership by protecting the right to mine Crypto and preventing taxation of Crypto when used as a payment method.

Central Crypto Policy Issues

The central Crypto policy issues center around securities and banking regulation.

A significant emerging issue in Crypto Technology is whether digital assets should be classified as commodities, like gold, and regulated by the Commodity Futures Trading Commission (CFTC), or as securities, like stocks, and regulated by the Securities and Exchange Commission (SEC).

The SEC has two primary methods of regulation: a forward-looking approach that involves issuing guidance to clarify rules and regulations, and a backward-looking approach, known as ‘regulation by enforcement,’ where it takes enforcement actions against parties after they have acted. Under Gary Gensler, the SEC has almost exclusively relied on ‘regulation by enforcement’ in relation to Crypto companies, even penalizing groups that repeatedly sought guidance on how to comply with securities laws.

By refusing to issue clear guidance for Crypto companies and instead relying on enforcement actions, the SEC has effectively created de facto laws that overstep its congressional mandate and infringe on states’ rights by encroaching on consumer protection regulations traditionally under state jurisdiction.

For example, in an amicus curiae filed by Montana Attorney General Austin Knudsen, he stated, “Crypto assets are not automatically securities. The SEC’s overly broad interpretation of investment contract means that the SEC is exceeding its authority by attempting to regulate non-securities.”… “Such an expansive view would turn ordinary baseball card collectors into securities investors and third-party sellers of baseball cards into securities exchanges.”

This debate underscores the ongoing struggle to define jurisdiction and authority in the rapidly evolving landscape of Crypto technology, raising critical questions about the appropriate level of oversight and the role of states in safeguarding innovation and commerce amidst federal government power grabs.

Without leadership from states and clear guidelines on whether Crypto projects will be classified as commodities or securities, it is highly likely that we will continue to see a mass exodus of Crypto companies from the U.S., effectively ceding leadership in this emerging technology to adversarial nations.

What Else Should You Know?

Unfortunately, it’s not feasible to unpack every detail relevant to Crypto technology in a single report. For specific questions about terms and applications, I recommend checking out this introductory glossary of Crypto terms.

The Montana Advantage

Montana can leverage an innovation-friendly regulatory environment, low taxes, abundant energy resources, and a growing tech sector to make our state the USA’s “crypto capital.”

Weather

Like Datacenters, crypto mining operations generate excessive amounts of heat. To maintain proper operating temperature crypto mining operations invest heavily in cooling. In Montana’s case, our dry, cool climate creates ideal conditions for Crypto mining, especially in comparison to the hot, humid climates that many crypto mining facilities are currently being built in.

Energy Portfolio

Montana has a unique energy portfolio, featuring both abundant, reliable sources like coal and plentiful clean energy sources such as wind power. These clean energy sources present both a challenge and an opportunity. As the crypto mining industry increasingly seeks to reduce emissions, Montana’s clean energy resources make it an attractive location. Meanwhile, the prevalence of these intermittent power sources enables crypto mining to play a crucial role in stabilizing the grid. By ramping up or down operations based on energy availability, crypto mining can absorb excess power during peak generation times and scale back during low production periods, helping to balance supply and demand and integrate renewable energy more effectively.

Geography

In nearly every other area, Montana’s large, spread out geographic size presents a challenge; however, that is not the case with Crypto technology. Its decentralized nature means a Crypto mining operation could just as easily be established in Bozeman as in Colstrip, requiring only electricity and internet access via fiber optic or satellite. Additionally, establishing crypto mining operations can provide a much-needed boost to shrinking tax revenues in rural communities. This unique combination of factors positions Montana to turn its geographic challenges into advantages through the strategic deployment of Crypto mining.

Growing Tech Sector

Over the past decade, Montana’s tech sector has experienced rapid growth, at times expanding nine times faster than the statewide economy. This trend is likely to continue, especially with significant grant funding for Montana’s new Headwaters Tech Hub. A thriving tech sector attracts companies by offering a skilled workforce and fostering innovation.

Montana’s growing tech sector helps position the state as a hub for high-tech companies, including those working in Crypto technology.

Friendly Regulatory Environment

While some states have actively taken an adversarial approach to Crypto technology and its applications, Montana leaders have embraced the innovation. For example, Montana was among the first states to provide legal protection for crypto mining. Furthermore, Montana is the only state in the U.S. that does not require a money transmitter license, reducing regulatory hoops Crypto companies must go through to begin doing business.

Montana’s Challenges

Regulatory Uncertainty

While Crypto represents significant technological breakthroughs, leaders in Washington, D.C., have refused to provide clear guidance on rules while simultaneously using enforcement actions to punish Crypto entrepreneurs for failing compliance. This “regulation by enforcement” has left Crypto entrepreneurs hanging, either waiting on regulatory guidance about their product or proceeding anyway and risking getting punished.

The following are some of the largest areas of regulatory uncertainty that Crypto entrepreneurs face:

• Know Your Customer (KYC) Laws. Traditional banking institutions are required to comply with strict “Know Your Customer” (KYC) regulations, which mandate the verification of their clients’ identity. However, the uncertainty regarding how Crypto entities will be regulated has pushed banks to be cautious or even reluctant to engage with these businesses, sometimes even debanking these entrepreneurs entirely.
• Self-Custody. A related issue to the uncertainty around “Know Your Customer” laws is their impact on self-custody. Self-custody refers to the practice of individuals holding and managing their own digital assets, such as cryptocurrencies, without relying on third-party custodians like banks or exchanges. In a self-custody model, individuals maintain control over their private keys, akin to keeping cash in a personal wallet instead of a bank account.
• Federal Securities Laws. Under the leadership of Gary Gensler, the Securities and Exchange Commission (SEC) has taken a hostile stance on regulating the Crypto industry. This includes efforts to classify a wide range of digital assets as securities, potentially subjecting them to stringent regulatory oversight. Such federal power grabs create an uncertain environment for Crypto entrepreneurs, who may face retroactive penalties, even when following the law.

Uncertainty in each of these areas can lead to hesitation among Crypto businesses and investors, as they may fear potential legal repercussions or compliance challenges.

Federal Power Grabs

Amid the current uncertainty surrounding cryptocurrency regulations, federal regulators have seized the opportunity to expand their power, often without clear legal authority from Congress. This aggressive expansion by federal agencies is not just an overreach; it represents a fundamental challenge to the principles of federalism that have long governed the balance of power between the federal government and the states, undermining the states’ autonomy to govern and innovate within their own borders.

In the Amicus Curiae filed in SEC v. Payward, Montana’s Attorney General, supported by seven other states, framed the issue this way, “The SEC’s actions seek to radically expand its authority into areas of traditional state regulation and other fields of law such as general consumer protection, which could preempt state laws that are more protective of consumers than the securities laws.”

If left unchallenged, this federal power grab could lead to a stifling of innovation, a loss of economic opportunities, and a weakening of the states’ ability to govern in a way that reflects the unique needs and aspirations of their residents.

Energy Supply

While Montana’s energy portfolio offers a unique advantage, it also presents a challenge. At first glance, Montana’s energy potential seems more than sufficient to support an energy-intensive industry like Crypto mining. However, the reality is more complex. While Montana has high energy potential, a combination of factors–ranging from an unclear permitting process to federal crackdowns on affordable, reliable energy sources–has made tapping this energy potential increasingly difficult.

To make matters worse, these challenges are occurring at the exact time when it is expected that “electrification of the transportation sector and other parts of the economy” will increase in coming years. This growing demand, coupled with a lack of a way to quickly increase energy supply will further undermine reliability and increase prices.

While Crypto mining can help drive demand for energy and assist in addressing issues with intermittent power sources, these benefits will never be realized without reforms that make it easier to actually access our full energy potential.

Montana’s Opportunity

Proactive state policy reforms to address regulatory uncertainty, coupled with continued pro-innovation regulatory and tax policies, will enable the crypto industry to flourish in Montana.

Address Regulatory Uncertainty

While the issue of regulatory uncertainty won’t be solved with a single change, Montana leaders can begin to address these challenges with some of the following reforms:

• Reduce legal ambiguities for blockchain based businesses. One way in which Crypto can be used to facilitate decentralized file storage or computing power, often referred to as “Network Tokens.” However, like all Crypto applications, there remains uncertainty as to how they will be regulated. By working to provide a path that distinguishes Network Tokens from securities, the state can reduce legal ambiguities and create a more favorable environment for these types of Crypto projects. Not only will this clarity attract businesses focused on developing decentralized applications, but it has the potential to help put Montana consumers back in the driver’s seat of everyday services they use.
• Protect Self-Custody. By far one of the most compelling reasons for Crypto technology is that it restores control back into the hands of individuals and away from powerful third parties. This concept fundamentally opposes those who seek greater control over our daily lives and has become a major focal point of attack by such individuals. Montana can address this by explicitly protecting the right to self-custody digital assets, ensuring that individuals and businesses have the legal recognition to hold and manage cryptocurrencies and other digital assets without relying on third-party custodians. This assurance can attract investors and companies focused on developing secure wallet solutions and self-custody platforms, emphasizing the state’s commitment to individual financial sovereignty and privacy.
• Establish a legal framework for Decentralized Autonomous Organizations (DAOs). In an effort to provide regulatory clarity, some states have created new legal entity structures tailored to the unique aspects of Crypto technology. For example, in March 2024, Wyoming passed a law recognizing DAOs as legal entities, allowing Crypto networks to operate within the bounds of applicable laws without compromising their decentralization. Building on the Unincorporated Nonprofit Association (UNA) legal entity structure, Wyoming introduced the Decentralized Unincorporated Nonprofit Association (DUNA). This new legal framework addresses many of the challenges faced by regulators, courts, and businesses in determining how to legally recognize and manage DAOs.

Proactively Protect the Right to Compute

One of the biggest threats to new, emerging technologies is how they might be regulated. Will old and outdated regulations created long before the internet be manipulated to try and crush today’s innovative ideas? Will new, shortsighted regulations with massive unknown consequences destroy these technologies before they ever get started?

Crypto is computers doing math. Even more poignant, Crypto technology is humans using their property to engage in free expression via numbers. When put in those terms, regulation of Crypto implicates people’s fundamental rights to think, express themselves and make use of their tools (their property).

Montana could get out in front of regulatory threats and take steps to proactively protect people’s freedom to compute. Explicitly recognizing people’s right to utilize computational power as an aspect of fundamental rights to free expression and use of property would help shield those using and developing Crypto innovations in Montana from the threat of heavy-handed local, state or federal regulation.

This would not only attract high-tech businesses to Montana by creating a safe harbor for current Crypto developers, but it would also foster competition, guaranteeing that Montana’s future Crypto entrepreneurs retain the freedom to innovate and utilize Crypto technologies.

If regulations are to be promulgated for cutting-edge tech like crypto, they should be applied only at the application level, not at the technology, math, or algorithm level.

Assert State Sovereignty

Montana has already been a leading voice in advocating for fair treatment of Crypto technology by the federal government. To position itself as a leader in Crypto technology, Montana must continue to assert its sovereignty; otherwise, federal regulators may persist in their power grab. One way to do this would be to proactively provide regulatory clarity.

• Forward-Looking Securities Regulation. Washington D.C. and the SEC’s approach to regulating crypto has been “regulation by enforcement” – refusing to issue clear guidance to companies trying in good faith to comply with the law, and then targeting them with enforcement actions for violations, has left nearly all digital assets that could increase in value potentially subject to SEC enforcement. As Attorney General Knudsen has noted, this hostile stance to crypto from federal regulators “could potentially preempt important state law protections for consumers related to crypto assets that the securities laws do not provide.”

 Montana should assert its rightful delegated authority over consumer protection by taking the opposite approach of the SEC and adopt a forward-looking approach to securities regulation that encourages crypto innovation.

In absence of federal leadership, Montana’s elected Securities Commissioner could adopt forward-looking securities regulation in the following ways:

1. Proactively issue formal advisory opinions about what crypto products or services will or won’t be considered an investment contract subject to securities regulation in the state.
2. Issue guidance establishing a formal “open door” policy for prospective crypto entrepreneurs to approach the office for a determination of whether their product or service will be subject to securities regulation.
3. Directly push back on federal SEC overreach by actively engaging in crypto-related federal lawsuits that implicate the state’s rightful authority over consumer protection via amicus briefs and other involvement.

Unleash Energy Abundance

Today’s energy projects, whether they involve coal, wind, or geothermal energy, all face a lengthy and exceptionally bureaucratic permitting process. Transforming Montana from a state with immense energy potential to one with full energy utilization will require our leaders to take significant steps toward streamlining and simplifying procedural laws, such as the Montana Environmental Policy Act and the National Environmental Policy Act. This will help unleash the abundant energy necessary to power today’s Crypto innovations.

Furthermore, Montana leaders should explore ways to leverage cryptocurrency mining’s unique ability to balance supply and demand in energy markets. By doing so, Montana can increase its energy supply while also creating a reliability buffer to assist in load balancing between different energy sources and peak demand.

Continue Pro-Innovation Tax and Regulatory Environment

As with any innovation, addressing excessive and overburdensome regulations is key to unlocking its full potential. Fortunately, Montana leaders have been working hard over the last few years to reduce the state’s regulatory burden and make it easier for Montanans to do business. Leaders should continue this work, and lock in this regulatory relief in order to prevent the future accumulation of regulations.

Finally, Montana leaders could explore ways to reform taxes to accommodate the unique benefits of Crypto. For example, other states, like Texas, have reduced or exempted severance taxes on the use of natural gas if it would have otherwise been vented or flared.

Montana 2050 Vision

Crypto technology offers Montanans the opportunity to boost economic growth, create high-paying jobs, and promote greater freedom and independence. By adopting this technology early, Montana can position itself not only as the top destination in the U.S. for crypto innovators but also as a global hub for these pioneers.

However, this vision won’t become a reality on its own. Achieving it will require reducing regulatory uncertainties, asserting state sovereignty, unleashing energy abundance, and maintaining a pro-innovation tax and regulatory environment. With decisive action and strong leadership, Montana can lead the way in the Crypto revolution, securing a more prosperous and free future for every Montanan.