Proof of Stake White Paper

MEMORANDUM
date: January 10, 2020

to: Proof of Stake Alliance Inc.
from: Paul Hastings LLP
subject: Proposed Tax Treatment of Earning Proof of Stake Awards
I. Introduction
We represent the Proof of Stake Alliance (“POSA”), an industry association whose members
include the leading enterprises that advance or service existing distributed ledger (or blockchain)
networks that are built on Proof of Stake (“PoS”) consensus mechanisms pursuant to which
transactions in a native digital asset1 of such networks are validated and recorded.2
The PoS consensus mechanism3 is the most widely known and developing alternative to the
Proof of Work mechanism (“PoW”) that is utilized by Bitcoin and other similar early generation
digital assets.
POSA’s goal is to increase adoption of PoS networks by:
(ii) illustrating how the emerging PoS technology will help to create jobs and grow
the U.S. economy;
(iii) demonstrating the far-flung applications of the blockchain and/or distributed

ledger protocols;
(iv) highlighting the comparatively miniscule energy consumption utilized by PoS

networks as compared to PoW networks, and
1
As used herein, “digital asset” (often called a “virtual currency,” “virtual commodity,” “cryptocurrency,” “digital
currency,” “digital tokens” or “digital coins”) means a digital representation of value based on (or built on top of) a
cryptographic protocol of a peer-to-peer network. However, a digital asset could include a record
2
See. https://www.proofofstakealliance.org/. Current members of POSA include Polychain Crypto Laboratory LLC
(dba “Polychain Labs”), Blockfolio, Inc., Ava Labs Inc., Simple Rules Company (dba “Harmony”), Interchain
Foundation, Polychain Crypto Laboratory LLC, Tocqueville Group, Inc., Kava Labs Inc., Cole-Frieman & Mallon
LLP, Lukka Inc., ZeroDB, Inc. (dba “NuCypher”), 01 Labs Operating Corporation (dba “Coda”), Web3 Foundation
(dba “Polkadot”), Cardano Foundation, Coinbase Custody and Bison Trails. Co.
3
Like a PoW network, a PoS network is described as a permissionless distributed ledger where anyone with a digital
asset balance recorded on the network may submit proofs of stake.
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(v) promoting participation in PoS networks by their stakeholders.
POSA has prepared this white paper for the following purposes:
● To provide a description of the various ways in which the blockchain, or distributed

ledger technology, is already influencing the world economy;
● To provide an overview of the PoW and PoS protocols as well as a description of the
staking-related services associated with PoS networks; and
● To set forth an appropriate tax treatment for compensation earned by token holders on
the PoS networks.
POSA’s ultimate goal is to educate regulatory and policymakers as to how PoS token holders
operate in the digital asset ecosystem. We are proposing how best to treat token holders in order
to encourage these activities to occur in the United States. The U.S. economy would benefit and
U.S. regulators can ensure that PoS networks are not used for nefarious purposes.
II. Economic Growth Because of Blockchain
Investment in blockchain companies and projects has skyrocketed into billions of dollars in 2018
and has created thousands of jobs. IBM reported that it increased the number of employees
focused on blockchain projects from 400 to 1,500 in the span of a year.4 According to LinkedIn,
in July 2019, the total number of job vacancies related to blockchain and cryptocurrency had
increased over the previous seven months. 5 Additionally, Indeed’s data shows that from
September 2018 to September 2019, the share of cryptocurrency job postings per million on
Indeed have increased by 26%.6 TechCrunch estimates that venture capital funds, and other
private investors, invested $1.3 billion between January and May of 2018 into blockchain and
blockchain adjacent early stage companies.7
4
Michael del Castillo, Blockchain’s Boom Year: Job Market Grows 200%, Coindesk (Dec. 12, 2017),
https://www.coindesk.com/blockchains-big-year-competitive-job- market-grows-200/
5
Julia Magas, Blockchain and Crypto Jobs Markets, (Aug. 14, 2019), CoinTelegraph,
https://cointelegraph.com/news/blockchain-and-crypto-jobs-market-2018-vs-2019-by-the-numbers
6
Benjamin Pirus, Bitcoin And Blockchain Job Hunts Drop 53% Over Past Year, Forbes,
https://www.forbes.com/sites/benjaminpirus/2019/11/07/bitcoin-and-blockchain-job-hunts-drop-53-over-past-
year/#6f147d8c22d0
7
Jason Rowley, With at Least $1.3 Billion Invested Globally In 2018, VC Funding for Blockchain Blows Past 2017
Totals, TECHCRUNCH (May 20, 2018), https:// techcrunch.com/2018/05/20/with-at-least-1-3-billion-invested-
globally-in-2018-vc-funding-for-blockchain-blows-past-2017-totals/
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According to the Bureau of Labor Statistics’ Occupational Outlook Handbook, “[e]mployment of

computer and information technology occupations is projected to grow 12 percent from 2018 to
2028, much faster than the average for all occupations.”8 These occupations are projected to add
about 546,200 new jobs. 9 Demand for these workers will stem from greater emphasis on cloud
computing, the collection and storage of big data, and information security.10 The median annual
wage for computer and information technology occupations was $86,320 in May 2018, which
was higher than the median annual wage for all occupations of $38,640. 11
While many people may be aware of blockchain technology because of Bitcoin and other virtual
currencies, the blockchain technology will likely allow new types of businesses to flourish in
much the same way that the Internet created the environment for new technology giants like
Facebook and Google.12
III. Blockchain / Distributed Ledger Technology
The technological benefits of the blockchain technology cannot be overstated. The term
“blockchain” refers to a digital ledger composed of blocks of data that are (i) linked together in a
sequential chain through cryptographic hashes and (ii) maintained by a network of computers
where each node has an identical copy of the ledger. Importantly, the ledger and information
regarding all balances on the blockchain are available to the network all the time.
Blockchain networks are governed by a set of rules called a protocol that is built into the
software and specifies how the network operates. The blockchain is updated when there is a
consensus among the nodes regarding new data and a block of data is verified by the network.
A. Payment Processing and Money Transfers
Blockchain technology promises to facilitate fast, secure, low-cost payment processing services
(and other transactions) through the use of encrypted distributed ledgers that provide trusted real-
8
BUREAU OF LABOR STATISTICS, OCCUPATIONAL OUTLOOK HANDBOOK,
https://www.bls.gov/ooh/computer-and-information-technology/home.htm
9
10
11
12
Bitcoin and Blockchain: What Will Survive If the Bubble Bursts? Corporate Counsel (Online) (Feb. 16, 2018).
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time verification of transactions without the need for intermediaries such as correspondent banks
and clearing houses. Existing systems are often old, slow and costly, according to a report by
Credit Suisse, which notes that today’s cross-border wire payments can take days to clear and
involve fees as high as 10 percent.13
For institutional entities, the most immediate application of blockchain is within the international
transfer system. Transfers between banks internationally rely on an expensive messaging
network, known as the Society for Worldwide Interbank Financial Telecommunication
(“SWIFT”) Network. The SWIFT network does not settle funds itself; rather, it sends messages
on financial transactions between the banks, who then settle the transactions between themselves
using corresponding accounts.
Cross-border payments supported by blockchain provide significant advantages to businesses

and consumers. Blockchain-based payments are cost-effective, almost immediate, secure and
transparent.14 Deloitte estimates that business-to-business and person-to-person payments with
blockchain result in a 40% to 80% reduction in transaction costs, and take an average of four to
six seconds to finalize (compared to two to three days using the standard transfer process).15
As the transfer of virtual currencies is the equivalent of transferring information, they effectively
perform the same function as the SWIFT network and reduce the high transaction costs of
international transfers. Consumers already see the value of virtual currencies in international
payments and are currently using them for international remittances outside of the traditional
banking system.
B. Smart Contracts
A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the
negotiation or performance of a contract. Smart contracts allow the performance of credible
transactions without third parties.16 Nick Szabo, a computer scientist and cryptographer
13
Blockchain: The Trust Disruptor, Credit Suisse; https://www.finextra.com/finextra-
downloads/newsdocs/document-1063851711.pdf
14
How Blockchain Is Transforming Cross-Border Payments, Forbes, (Mar. 12, 2019),
https://www.forbes.com/sites/forbestechcouncil/2019/03/12/how-blockchain-is-transforming-cross-border-
payments/#19551e7b7df2
15
Deloitte, Cross-border Payments on Blockchain,
https://www2.deloitte.com/content/dam/Deloitte/global/Documents/grid/cross-border-payments.pdf
16
Nick Szabo, Smart Contracts: Building Blocks for Digital Markets, (1996),
http://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool2006/szabo.best
.vwh.net/smart_contracts_2.html
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described “the humble vending machine is the original form of a smart contract.” The amount in
the vending machine should be less than the cost of breaching the mechanism and the machine
takes in coins, and via a simple mechanism, which dispenses change and product fairly.17
In the normal world, parties to agreements might hire an attorney and notary to ensure
appropriate execution of a contract. With smart contracts, the purchaser would simply pay for
the goods or services without the need for attorneys and notaries. A smart contract is a software
application designed to execute the arrangement agreed on by parties to a transaction on the
occurrence of a pre-programmed triggering event.18 The smart contracts are programmed to
automatically execute, verify and enforce the performance of the agreed-upon transaction. The
main goal of a smart contract is to remove the need for an intermediary and to enable parties to
conduct business over the internet. These transactions are trackable and irreversible.
The smart contracts can be executed on blockchain platforms that are programmed to support
them, automatically execute, verify, and enforce the performance of the agreed-on transaction.
Although the concept of a smart contract is hardly new, they have caused a great deal of
enthusiasm in the blockchain community because blockchain can potentially eliminate the need
to rely on a trusted third party to enforce the contract. When a set condition occurs, the smart
contract automatically transfers cryptocurrency (or other information), thus executing the
contract without the action of a third party. The key novelty of the blockchain technology is its
consensus mechanism which ensures trust and security guarantees the smart contract will execute
as programmed without any intermediaries to enforce it. Instead, it relies on incentive
mechanisms to create a system of validators that ensure the contract is valid and correct. There
are various consensus mechanisms including Proof of Work and Proof of Stake.
Smart contracts have applications across industry lines and are discussed, below, within the
context of each industry.
C. Monitor Supply Chains
Supply chains are comprised of a significant number of participants including raw material
providers, manufacturers, suppliers, resellers, distributors, wholesalers, retailers, franchisers.
sales representatives, agents, brokers, shippers, carriers, freight forwarders, warehouses, logistics
providers, insurers, banks, trade financers, customs officials regulators, consignees and finally
end users.
17
Id.
18
Jeffrey D. Neuburger, Wai L. Choy,and Jonathan P. Mollod, Blockchain and Supply Chain Management,
Proskauer Rose with Practical Law Commercial Transactions (June/July 2019),
https://www.blockchainandthelaw.com/files/2019/06/Proskauer-Blockchain-and-Supply-Chain-Management.pdf
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Supply chains can lack (i) visibility from one part of the supply chain into another, (ii)
coordination of the databases used by each of the supply chain participants, (iii) agreements or
understandings that tie all the participants together, and (iv) communication among the supply
chain participants.19 A missing form or a logistical failure can delay delivery and financial
settlements for suppliers and can cause smaller entities to endure administrative burdens and
difficulties in obtaining trade financing. It can also be difficult and time-consuming to trace the
origin and journey of a specific good in a traditional supply chain framework.20
The blockchain offers the following to supply chain participants:
● access to real-time, immutable, validated information about the status of any

specific product in the supply chain flow anytime;
● transparency into the participants' respective actions; and
● the ability to leverage automation, digital records, and internet-connected devices
to conduct business more efficiently.21
The blockchain allows for the following within the supply chain:
● allowing for end-to-end track and trace as well as a secure, validated record of the
provenance of goods;
● lowering costs associated with documentation and bureaucracy;
● improving quality control through integrated “Internet of Things” sensors to
maintain the "cold chain" for temperature-regulated goods and deter product
tampering;
● digitizing bills of lading and other documents into a single shared, auditable form
that is continuously validated through network consensus;
● automating trade documentation for legal and customs compliance including
freight invoices, proofs of delivery, proof of insurance, manifests, letters of credit,
receipts, and tax documents; and
19
20
21
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● reducing error and waste in processing transactions and mistakes in freight

invoices that result in overcharges.22
For example, Walmart uses blockchain to keep track of its pork it sources from China and the
blockchain records where each piece of meat came from, processed, stored and its sell-by-date
whereas Unilever, Nestle, Tyson and Dole also use blockchain for similar purposes.23
D. Data Sharing / Data Protection
Due to the immutable nature of the blockchain, the ability for market participants to share data
on a trusted basis will increase significantly. Certain features of blockchain lend themselves to
enhanced cybersecurity and the protection of digital assets stored and transferred over such a
platform:
• Information Integrity: Malware can burrow secretly into a network; in some cases,
companies may not discover an intrusion for months. Researchers are developing
protections by leveraging blockchain’s immutable ledger to stop data tampering
and detect if network data has been accessed or modified.
• User Verification: Beyond being used to detect any manipulation of data,

blockchain may one day also be used to verify users’ identities and indicate proof
of ownership of physical and digital assets (i.e., smart property) to facilitate safe
and transparent transactions and deter identity theft.
• Distributed Denial of Service Avoidance: Blockchain's distributed nature could

one day be an alternative to the centralized HTTP structure that is prone to
distributed denial of service attacks that overwhelm websites and Internet
providers.
• IoT Security: Given the growth of Internet-connected devices and the attendant
data security concerns, some have proposed a Ledger of Things that would
purportedly help to organize, secure and share the automated collection of data
from billions of devices.24
22
23
How Blockchain Will Transform The Supply Chain And Logistics Industry, Forbes, (Mar. 23, 2018).
24
Blockchain: The Key to True Cybersecurity? New York Law Journal (Online) June 5, 2017
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The blockchain stores data on a decentralized ledger. If the data is accessible by anybody on a
network but encrypted and scattered across the network, it is not so easily the target of thieves.
The system essentially spreads information across the network simultaneously hiding the correct
information behind code only decryptable by those on the network.25
E. Real Estate Tracking
Blockchain technology adds the value of transparency, efficiency, and cost savings by removing
many of the existing inefficiencies in key processes in real transactions.26 Blockchain
technology and smart contracts may affect a real estate transaction in several ways.
First, it creates a transparent multiple listing service (MLS that enables all parties to view
available properties based on their own requirements. Generally, users upload property listings
onto a MLS blockchain granting both parties access to data available on the multiple listing
service. This would customize and streamline the search process for purchasers and sellers as
well as lessors and lessees.27 This would also improve the property search process.28
Second, blockchain and smart contracts enable the creation of smart identities that drive the
efficiency and accuracy of due diligence by automating background checks, prior transactions,
and searches for encumbrances on the property.29 When parties transact on the blockchain, a
digital identifier consolidates the parties’ information including property vacancy rates,
purchaser or tenant profiles, financing and entity status, or performance metrics. Additionally,
the history of the parties and the property is created, providing a valuable online record for the
parties and property and greatly easing the due diligence process.30 When satisfied, agreements
are verified by the accounts, the deposits, security deposits, and agreed upon advances, while
also officially recording the transaction.
25
Data Breaches: A Decentralized Solution to a Typically Centralized Problem, The Recorder (California)(Feb. 7,
2019)
26
Raymond Tram, Portable Reciprocity: A Way Towards a Blockchain Agnostic World to Facilitate Cross-Border
Real Estate Transactions, 53 Real Prop. Tr. & Est. L.J. 447.
27
Raymond Tram, Portable Reciprocity: A Way Towards a Blockchain Agnostic World to Facilitate Cross-Border
Real Estate Transactions, 53 Real Prop. Tr. & Est. L.J. 447.
28
Deloitte Center for Financial Services, Blockchain in Commercial Real Estate: The Future is Here (2017).
29
Tram, Raymond, Portable Reciprocity: A Way Towards a Blockchain Agnostic World to Facilitate Cross-Border Real Estate
Transactions, 53 Real Prop. Tr. & Est. L.J. 447.
30
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Third, the smart contract eases leasing and subsequent property and cash flow management.31
Smart contracts could use payment, rent, or crypto-currencies for automated payments to real
estate owners, property managers, and other stakeholders along with near real-time
reconciliation.32 Real-time data is available as the digital identities of individuals, properties, and
organizations are recorded during the transactions.33 Additionally, the prospect of an immutable
land registry that cannot be falsified changes how to verify ownership. A certificate stating a
community owns a forest can be recorded in the blockchain and can be authenticated by a
document returning the same hash.
Fourth, the blockchain would allow for efficient and reliable property searches. A blockchain-
based MLS would enable data to be distributed across a peer-to-peer network in a manner that
allows brokers to have more control over their data, along with increased trust, as listings would
be more freely accessible.34 This enhanced, blockchain-enabled MLS would also provide clear
details on property location and address, comparable rental rates, capital values, ownership
history, tenant details, age of the property, and title clarity.35
Fifth, loan origination, servicing and securitization will benefit significantly from innovations in
blockchain technology. The founders of Provenance, estimate that the warehouse, securitization
and liquidity benefits of the blockchain represent up to $90 billion or more in reduced fees,
technology and personnel costs and improved transparency and liquidity annual securitization
space.36
F. Medical Recordkeeping
1. Data Security
Many of the problems surrounding the transfer, storage, and access of healthcare information can
be solved using blockchain. Currently, healthcare information is stored independently by each
31
32
Greg Dickason, Bitcoin, Blockchain and Real Estate, REB (May 9, 2016),
https://www.realestatebusiness.com.au/tech/10596-bitcoin-blockchain-and-real-estate.
33
Greg Dickason, Bitcoin, Blockchain and Real Estate, REB (May 9, 2016),
https://www.realestatebusiness.com.au/tech/10596-bitcoin-blockchain-and-real-estate.
34
A Decentralized Multiple Listing Engine and Real Estate Smart Contract Application,” Rex, (Oct. 27, 2016).
35
A Decentralized Multiple Listing Engine and Real Estate Smart Contract Application,” Rex, (Oct. 27, 2016).
36
https://provenance.io/documents/provenance-whitepaper-070719.pdf
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person or entity that collects it. A healthcare information exchange built on a blockchain changes
this, allowing healthcare information to be spread and shared across a network. Blockchain can
create new levels of security for healthcare information, increasing the difficulty of unauthorized
access. This control can give ownership of healthcare information to the patients themselves,
and, with this ownership, patients can determine what access to grant to specialists throughout
the healthcare experience. Finally, as data controllers can rely on the access limits and
protections of personally identifiable information, they will be more likely to share the important
data with the persons that can benefit most from it.
2. Electronic Medical Records
Simple coordination of care has created the need for an electronic health records platform that
allows multiple healthcare providers can view, edit, and share reliable patient data.37 The
sensitive nature of health data, the ongoing challenges posed by interoperability, patient record
matching, and health information exchange, make a potential solution to the management of
patient health records in electronic format invaluable.38 Blockchain is a platform that can
securely store medical records, is amenable to real-time updating, and can be securely accessed
by anyone given access to the chain. A single, national blockchain-based approach would allow
patients to become the owners of their data and allow the information to travel with them.39
Use of blockchain is already being utilized by some of the United States’ premier medical
facilities. For example, Medicalchain has signed a working agreement with the Mayo Clinic to
explore different distributed ledger initiatives at the health system.40 Likewise, blockchain
startup MediBloc entered into a three-year project with Massachusetts General Hospital to help it
become one of the first healthcare institutions in the world to leverage blockchain technology for
secure and accessible data storage.41
3. Automated Health Insurance
37
J. Mark Waxman, Kyle Faget and Ben Daniels, Blockchain: A tool with a future in healthcare, Med Ec Blog,
News (July 15, 2019)
38
39
40
Mayo Clinic exploring blockchain EHR use cases with UK startup, Healthcare IT News, (June 20, 2018).
41
Blockchain Healthcare Platform MediBloc Partners with Massachusetts General Hospital, Coin Journal, (Nov. 9,
2018)
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Insurance products, by their very nature, require a central authority. Insurance companies use
complex calculations to determine the rates set, the conditions in which payments can occur, and
whether or not those conditions are met by customers. Insurers offer multiple lines of coverage,
which can involve multiple repositories for customer information. Claims processing can take
some time as information works its way through legacy systems.
A blockchain can streamline overall functions, recordkeeping, and the claims process through a
combination of smart contracts and internet-of-things (“IoT”) enabled devices. The blockchain
enables efficient and effective recordkeeping and information sharing among stakeholders within
an insurance company. Moreover, with the use of smart contracts, insurance companies can
streamline the claims process and user experience.
Using automotive insurance as an example, a smart contract can be executed to record the policy,
driving record, and report of all drivers that have purchased the policy. Using IoT enabled
devices, establishing vehicle self-awareness, the vehicle can assess its own damage using sensors
and can execute initial insurance claims and police reports. This removes the duplicative work
that is required by various agents within the insurance entity itself, saving money and time, thus
streamlining the process.
In 2018, MetLife Asia’s Singapore-based innovation center, LumenLab, began testing the
world’s first, automated insurance solution using blockchain technology to offer pregnant
women financial protection in case of gestational diabetes, without ever needing to make a
claim.42 According to the company, the product offers customers improved data security as it
performs parametric underwriting on the customer’s mobile device, meaning the insurance
company does not require access to the underlying medical data to confirm insurability.43
G. Food Safety
The same benefits that blockchain provides for the supply chain industries will be equally
applicable for the food industry and for food safety in general. The main culprit in most
foodborne illnesses is inefficient tracking. When outbreaks occur, traditional food supply
methods make tracing the origin of the contamination difficult and time consuming. Blockchain
is being championed as a solution. FDA Commissioner Scott Gottlieb said food suppliers should
experiment with blockchain because it could link outbreaks “to a specific grower, specific farm
and a specific distributor."44
42
MetLife’s New Blockchain Health Insurance Product Eliminates Claims, Market Watch, (Aug. 20, 2018)
43
MetLife’s New Blockchain Health Insurance Product Eliminates Claims, Market Watch, (Aug. 20, 2018)
44
IT PAIRS WELL WITH ANY FOOD: HOW BLOCKCHAIN IS IMPROVING WHAT YOU EAT, Mar. 14,
2019 https://builtin.com/blockchain/food-safety-supply-chain; FDA Puts Together Supergroup for Track and Trace
Pilot Drug Industry Daily (June 14, 2019).
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IBM has partnered with food suppliers such as Walmart to apply blockchains to the food supply
chain. 45 The chain would run through the producer to shipping, storage and retail, helping
determine the origins of issues such as E. coli or salmonella contamination.
IBM also announced it is working with a consortium that includes Dole, Driscoll's, Golden State
Foods, Kroger, McCormick and Company, McLane Company, Nestlé, Tyson Foods, Unilever,
and Walmart on blockchain-based asset tracking solutions.46 The goal is to reduce food safety
risk, increase traceability and transparency of the food supply chain, and create a smarter, more
efficient, and more trusted global food system.47
H. Tracking Prescription Drugs
Congress established a national standard for drug security by expanding the Food & Drug
Administration’s (FDA) oversight of compounded drugs through the Drug Quality and Security
Act (DQSA), which includes the Drug Supply Chain Security Act (DSCSA). The purpose of
DSCSA is to improve tracking, detection, and removal of counterfeit, misbranded, or potentially
harmful drugs from the drug supply chain. The DSCSA establishes a national standard for drug
security, as opposed to the varying state requirements that had been regulating the space, by
mandating the development of a prescription drug traceability system encompassing the full
supply chain from manufacturer to dispenser for pharmaceuticals distributed in the United States.
The system essentially mandates a blockchain-like verification system whereby drug supply
chain stakeholders are required to verify upstream information about a product (e.g. who
manufactured the product, when it was sold, who it was sold to, etc.) and provide downstream
information (e.g. passing along the same information to the next entity in the chain).
Applied to the pharmaceutical supply chain, blockchain could allow users to access a platform
that tracks a drug from its creation all the way through to its delivery to a patient. Such a ledger
“has the potential to transform how pharmaceutical data is controlled, managed, shared and acted
upon throughout the lifetime history of a drug.”48
45
Walmart implements IBM's blockchain for food traceability, ZDNet, (Sept. 24, 2018).
46
How a Global Supply Blockchain Could Stop Foodborne Outbreaks, PC Magazine.
47
How a Global Supply Blockchain Could Stop Foodborne Outbreaks, PC Magazine.
48
IBM, KPMG, Merck and Walmart to collaborate as part of FDA’s program to evaluate the use of blockchain to
protect pharmaceutical product integrity, IBM (June 13, 2019)
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The FDA has asked Merck to team up with IBM, KPMG and Walmart to put together a new
pilot program testing whether blockchain can help regulators track and trace prescription drugs
along the increasingly complex supply chain.49 The FDA wants the companies to find the most
efficient way to track and trace prescriptions while still complying with federal safety laws.
Backers are hoping that the new network will speed up regulatory oversight while increasing the
accuracy of the data. The companies have until the end of this year to come up with proposals
and the FDA hopes to publish findings shortly thereafter.
The ability of blockchain to track and store data chronologically across a peer-to-peer network
makes the technology particularly well suited to solve for the traceability requirements imposed
by the DSCSA. In addition, blockchain is uniquely secure, which could reduce common issues in
drug supply, such as drug counterfeiting.50 For example, if a product is presented at any point in
the supply chain without the correct hash, the distributed network can identify and reject the
product as counterfeit.51
Because blockchain offers such an elegant solution to DSCSA compliance, vendors are already
piloting blockchain solutions to DSCSA requirements. For example, the MediLedger Project
initiated by a San Francisco-based company, Chronicled, is developing a blockchain system that
can demonstrate DSCSA compliance.52
I. Digital Voting
Blockchain integrates cryptography into software in a unique way. It creates a tamper-free record
that can easily be checked to ensure votes are accurately recorded.53 Due to the secure and
immutable nature of blockchain, votes may be cast by computer or mobile device instead of
having voters show up at a local polling place or cast a mail-in-ballot to be processed manually
by election officials.54 Votes tracked through a blockchain provide for a quicker, tamper-proof
way of counting votes.
49
FDA Puts Together Supergroup for Track and Trace Pilot, Drug Industry Daily, (June 14, 2019)
50
51
News (July 15, 2019).
52
News (July 15, 2019).
53
Blockchain And The Future of Voting, IntelligentHQ, November 7, 2018
54
Blockchain And The Future of Voting, IntelligentHQ, November 7, 2018
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West Virginia is piloting a program to allow its citizens serving in the military overseas to vote
remotely and securely via a blockchain-enabled platform from abroad. In November 2018, all
overseas veterans from West Virginia were offered the opportunity to vote via the blockchain
network. The votes were distributed and stored in 16 different locations – meaning hackers
would need to hack into multiple locations in order to tamper with the results.55 The West
Virginia Secretary of State of reported a successful first instance of remote blockchain voting
when 144 military personnel stationed overseas from 24 counties were able to cast their ballots
on a mobile, blockchain-based platform.56 The process worked so well that West Virginia will
offer the same voting opportunity to overseas veterans in the 2020 elections.57
Blockchain could eventually become a powerful instrument for the spreading of representative
democracy.58
J. Digital Identity
Consumers continue to share personal data online and the number of data thefts that occur are
continuing to increase. Information used to prove identities online include social security
numbers, names, and birthdates. These are both highly sensitive and widely used. Theft of this
information can be used to file fraudulent tax returns, obtain personal loans, and open credit
cards. Regaining identity information and clearing fraudulent items on a record attached to that
identity can be costly and time-consuming.
The implementation of cryptography and blockchain in digital identity may provide at least two
major benefits. The first is that users will be able to control over how and when their personal
information is used.59 This would greatly reduce the dangers associated with storing sensitive
55
The Future of Voting Is Blockchain, Digital Chamber of Commerce, https://digitalchamber.org/the-future-of-
voting-is-blockchain/
56
West Virginia Secretary of State Reports Successful Blockchain Voting in 2018 Midterm Elections,
Cointelegraph.com (Nov.17, 2018) https://cointelegraph.com/news/west-virginia-secretary-of-state-reports-
successful-blockchain-voting-in-2018-midterm-elections
57
West Virginia Will Use Blockchain Voting in the 2020 Presidential Election. Why?, Longhash, (Apr. 14, 2019).
58
Blockchain And The Future of Voting, IntelligentHQ, (Nov. 7, 2018).
59
Blockchain Use Cases: Digital Identity, (Sept. 20, 2019) https://www.binance.vision/blockchain/blockchain-use-
cases-digital-identity
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data in centralized databases.60 Blockchain networks can provide higher levels of privacy
through the use of cryptographic systems.61
The second advantage is that blockchain-based digital identification systems are more reliable
than the traditional ones.62 The use of digital signatures could make it relatively easy to verify
the source of a claim made about a user.63 The blockchain systems would make it harder for a
person to falsify a piece of information, and could effectively protect all sorts of data against
frauds.
Additionally, counterparties to transactions that require identity verification can benefit as well.
Storing personal information can trigger regulatory obligations depending on the type of
transaction and the nature of the information. If the counterparty can verify information without
storing it, they can limit their regulatory duties. For example, businesses that verify identities as
required by law (i.e., Know Your Customer regulations) would be able to do so in an efficient
way, without having to retain records of that information.
K. Data Security and Portability
Because the blockchain provides for an immutable record, as discussed above, new levels of
security are available which increases the difficulty of unauthorized access. This control can
give ownership of information to the individuals themselves, and, with this ownership, those
individuals can determine what access to grant to their information. However, issues have been
raised regarding whether that information can be effectively moved from one blockchain to
another.64 Once a user chooses to use one blockchain, he or she may be unable to remove his or
her previous records of transactions and transfer them to a new system as those transactions are
60
61
62
63
64
See Chris Jaikaran, Blockchain: Background and Policy Issues, Congressional Research Service
7-5700 (Feb. 28, 2018) https://fas.org/sgp/crs/misc/R45116.pdf
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part of the blockchain and any alteration to the chain would result in users being unable to
generate legitimate hash values for new block.65
Blockchain technology may be able to complement a data portability. For example, blockchain
may be capable of addressing the issue of “switching costs” in the data portability context
because it can facilitate direct relationships and transactions between an individual and multiple
organizations.66 An individual could change service providers by granting access to his or her
data on the existing blockchain.67
Likewise, decentralized databases may have vastly superior performance, reliability, scalability
and security characteristics for maintaining data storage. For example, it will be able to
consistently offer great performance during peak times but not require the same amount of
hardware to be committed during low usage times.68
L. Future Applications
We have identified a number of current applications for the blockchain technology.

Undoubtedly, with any new technology there will be uses and functions which are entirely
unforeseen.
Now is the time for the United States to encourage the developers of this nascent technology
before other countries take the initiative. The Chinese government has recently reversed course
and is now embracing the blockchain technology. Xi Jinping, general secretary of the
Communist Party of China Central Committee, highlighted blockchain as a core technology,
urging more efforts to accelerate the development of blockchain technology and industrial
innovation.69 According to state media, Mr. Xi told top Communist Party leaders that the
65
Id.
66
Gary Tse and Benita Lau, Synergy between Blockchain Technology and Data Portability, Lexology, (May 23,
2019), https://www.lexology.com/library/detail.aspx?g=70ee5dd0-f1c3-40fb-b529-955e3a4ea875
67
Id.
68
Decentralised data storage in a blockchain future, Compare the Cloud Net,
https://www.comparethecloud.net/articles/decentralised-data-storage-blockchain/?source=post_page-----
5509e476995f
69
Ouyang Shijia and Chen Jia, China embracing blockchain technology as new frontier of innovation, China Daily,
(Nov. 1, 2019), https://www.chinadaily.com.cn/a/201911/01/WS5dbb96efa310cf3e35574e50.html
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technology was at the heart of China’s innovation and “key to increasing China’s influence and
rule-making power in the global arena.”70
Now is the time for the United States to encourage development of the blockchain technology
which has such far-reaching potential.
IV. Proof of Stake and Proof of Work Protocols
Generally, the process for adding blocks to the blockchain can be accomplished through either
the PoW or the PoS protocol. As discussed in this section the PoS protocol is more efficient than
PoW. There is much interest from technologists in advancing this novel technology and the
United States has an opportunity to foster and gain significant economic value from this
innovation.
To submit a transaction on the blockchain, the sending user inputs the receiving user’s address,
similar to a public account number. The sending user confirms this information and “signs” it
with a private account number, a private key or password. The transaction is then broadcast to a
network of interconnected computers for processing and confirming. Transactions are processed
through the network’s chosen consensus mechanism, which is the method that the network uses
to come to an agreement on transactions.
A. Proof of Work Rewards Earned Based Upon the First to the Finish Line
Bitcoin’s consensus mechanism is based on PoW – a method by which the participants solve
complex math problems to confirm transactions. Each computer running Bitcoin software is
connected to the distributed Bitcoin network, and receives transaction information each time
users consummate a transaction. The network then works to verify this information and package
this transaction data into a “block” together with other transactions. The block is then added and
secured cryptographically to the Bitcoin distributed ledger or chain.
The individual computers on the PoW network are given a “mining reward” for their successful
efforts. To obtain this reward, each computer competes to verify and package the transactions
within certain cryptographic parameters to “solve” a block. The winner of this process receives
a predetermined amount of newly minted bitcoin (the native digital asset to the Bitcoin network)
each time a block is created and broadcast to the ledger.
Within the Bitcoin community, the individuals or entities compete against each other to solve a
mathematical equation, which would then broadcast the new block to the ledger. Because there
70
Cao Li, China Gives Digital Currencies a Reprieve as Beijing Warms to Blockchain, NY Times, (Nov. 6, 2019),
https://www.nytimes.com/2019/11/06/business/china-bitcoin.html
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is a financial incentive to solve the mathematical equation first, so-called miners have created
“mining pools” where vast quantities of computing power are utilized. Mining pools typically
split the reward based upon the amount of work a particular miner contributed to solving the
mathematical equation.
These mining pools use vast amounts of energy in the competition to receive the mining reward.
As the value of Bitcoin increases, more people participate in mining which in turn requires more
and more energy usage to “win” a block. First, the computers utilize electricity in order to run.
Second, the mining pools need to ensure that the computers do not overheat and, therefore,
require the means in which to cool them. Generally, the mining pools are located in areas where
energy is cheap or the climate cool as the so that the mining pools are not required to spend as
much on cooling the computers.
Additionally, as the blockchain becomes larger, it is more difficult to solve the mathematical
equation or puzzle in the PoW protocol. The complexity of the puzzle depends on how quickly
previous “puzzles” were solved over the previous 2015 blocks (or roughly two weeks). As a
result, the complexity adjusts with the value of the network, increasing as the price of the
underlying currency increases.
Unlocking a bitcoin requires a significant amount of computational power and, as a result, PoW
uses considerable amounts of electricity. According to the Bitcoin Energy Consumption Index,
Bitcoin mining globally on an annual basis uses about as much energy as Austria.71 This is to
process (currently) about 2.5 transactions per second. The use of energy is deliberately high, and
incrementally adjustable so as to enforce an unavoidable cost on all who participate.72 Even if
all bitcoin miners were running very efficient hardware, the bitcoin network would be consuming
enough power to supply the daily needs of about 268,990 average American homes.73
As of September 19, 2019, Bitcoin’s network hash rate passed a record 102 quintillion74 hashes
for the first time in history.75 Hash rate refers to the amount of computing power involved in
71
https://digiconomist.net/bitcoin-energy-consumption
72
Andrew Tayo, Proof of work, or proof of waste?, Hackernoon, (Dec. 14, 2017) https://hackernoon.com/proof-of-
work-or-proof-of-waste-9c1710b7f025
73
Christopher Malmo, A Single Bitcoin Transaction Takes Thousands of Times More Energy Than a Credit Card
Swipe, Vice, (Mar. 7, 2017) https://www.vice.com/en_us/article/ypkp3y/bitcoin-is-still-unsustainable
74
A quintillion is a 1 followed by 18 zeroes: 1,000,000,000,000,000,000.
75
William Suberg, Bitcoin Hash Rate Hits 102 Quitillion in Historic Network Milestone, Cointelegraph (Sept. 19,
2019), https://cointelegraph.com/news/bitcoin-hash-rate-hits-102-quintillion-in-historic-network-
milestone?utm_source=Newsletter1&utm_medium=email
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processing Bitcoin transactions. The higher the number of hashes, the more implied competition
there is among miners to obtain the block reward.76
According to a U.S. Treasury Department publication,77 the percentage of all mining activity
around the globe is:
1. China 81%78
2. Czech Republic 10%
3. Iceland 2%
4. Japan 2%
5. Georgia 2%
6. Russia 1%
Despite its technological advancements, free marketplace, and the rule of law, the United States
does not have even 1% of the mining power of bitcoin.
Additionally, China maintains a very favorable market for the acquisition of Application Specific
Integrated Circuit (ASIC), which have more computational power and require less electricity
than standard chips.79 These ASIC chips are specifically designed for the task of computing the
Bitcoin hashing algorithm and are the standard technology found in every large-scale PoW
facility.80
76
William Suberg, Bitcoin Hash Rate Hits 102 Quitillion in Historic Network Milestone, Cointelegraph (Sept. 19,
2019), https://cointelegraph.com/news/bitcoin-hash-rate-hits-102-quintillion-in-historic-network-
milestone?utm_source=Newsletter1&utm_medium=email
77
Internal Revenue Service, Cyber Crimes, Tax Notes 2019-25765, p. 55 of 181,
https://s3.amazonaws.com/pdfs.taxnotes.com/2019/2019-25765_TNTDocs_CI-Cyber-Crimes_PDFONLY.pdf
78
Other authors suggest that China’s mining “only” comprised 77% of the hash power on the Bitcoin network.
Kaiser, B., Jurado, M., Ledger, A., The Looming Threat of China: An Analysis of Chinese Influence on Bitcoin.
https://blockchain.princeton.edu/papers/2018-10-ben-kaiser.pdf (From January 2015 to January 2018, Chinese
pools grew from accounting for 42% of the total Bitcoin network hash power to 77%).
79
Sidney Leng, The Chinese bitcoin mining machine sellers immune to the cryptocurrency crackdown, South China
Morning Post, (Feb. 3, 2018), https://www.scmp.com/news/china/economy/article/2131838/chinese-bitcoin-mining-
machine-sellers-immune-cryptocurrency
80
Morgan E. Peck, Why the Biggest Bitcoin Mines Are in China, IEEE Spectrum, (Oct. 4, 2017),
https://spectrum.ieee.org/computing/networks/why-the-biggest-bitcoin-mines-are-in-china
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When the price of Bitcoin dropped precipitously in 2018, by as much as 80%, a significant
number of Bitcoin miners in China essentially abandoned their ASIC equipment or sold them at
steep discounts or as scrap metal.81 This means that it is significantly more affordable for
Chinese miners to acquire ASIC computer by comparison to the price to be paid by U.S. miners.
B. Proof of Stake Protocols Do Not Require a Race to the Finish
The crucial difference between the PoW and PoS is that there is no competition amongst the
members of the PoS network to solve mathematical equations, and therefore the amount of
energy that the network members expend on solving the mathematical equation and publishing a
new block is significantly less. There are few definitional differences between PoS and PoW.
For example, PoS does not have miners, rather PoS has validators or block creators.
Generally, the PoS protocols utilize an algorithm to select the block producer utilizing a variable
random function. The odds on a particular validator being awarded the right to solve the
mathematical puzzle increase based upon the volume of tokens “staked” or “pledged” in that
protocol. To stake or pledge a token to a PoS protocol means that the token owner cannot
remove that token for a period of time, (e.g. 1 month), from the network.
In a typical transaction, a sender wishes to send information (or tokens) across the network to a
prospective recipient. The protocol selects a block producer (based upon a random variable
function) to solve the mathematical equation. Upon solving the equation, the block producer
publishes the new block to the network. The other members of the network who have also
staked tokens (validators) then determine whether that newly produced block should be added to
the blockchain. If the validators agree that the block should be added the following staking
rewards are issued:
● a reward to the block creator, (or block producer); and
● a reward to the validators who had previously staked tokens.
The rewards are in-kind digital assets.
81
See e.g. Carlos Terenzi, ASIC Miners Dumped In China After Bitcoin’s Price Crash, Crypto News,
https://usethebitcoin.com/asic-miners-dumped-in-china-after-bitcoins-price-crash/; Josiah Wilmoth, Bitcoin Miners
are Selling Old ASICs for Scrap Metal as Price Decline Hastens Obsolescence, (Nov. 23, 2018),
https://finance.yahoo.com/news/bitcoin-miners-selling-old-asics-231127577.html
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Other token holders on the network who did not stake any tokens do not receive a staking reward
because they neither broadcasted a new block nor did they validate that the new block should be
added to the blockchain.
Generally speaking, a PoS network’s supply increases as new native digital assets are created as
a reward each time a block of transactions are validated and the candidate block is added to the
blockchain. The newly created digital asset, together with any transaction fees (usually payable
in fractional increments of the digital assets) that the validator collects from the transacting
parties on the network, collectively known as rewards, acts as the primary incentive mechanism
to encourage participation in validating transactions on PoS networks. The staked tokens in turn
help secure the network and thus advance the attractiveness of the network’s functionality.
The staking requirement aligns the validator’s interests with the interests of the PoS network
insofar as the validator has “skin in the game” and is incentivized to maintain the integrity of the
network. Holders of digital assets may be motivated to stake their digital assets to avoid dilution
of his interest in the network due to inflation if other token holders participate and receive
staking rewards.
POSA believes that the incentive structure of PoS networks is more cost effective and stable
since a lower rate of reward is sufficient to incentivize validators. The validators can choose
whether to include certain transactions in a block but cannot change transaction details such as
the senders, recipients, or balances of digital assets involved.
Certain PoS protocols penalize malicious behavior such as engaging in double-spending82 or

negligent behavior such as failing to keep a node online with a condition known as slashing.
With slashing, the validators stand to lose a certain amount of their funds, typically their bond or
deposit. Providing this disincentive makes the network more secure as the would-be bad actor
would lose the amount that was staked.
POSA’s view is that American validators (or token holders) are more likely to operate in good
faith and, therefore, there will not be the same lack of trust among the U.S. network participants.
In some respects, we believe validators operating under the legal framework of the United States
and offering a service to token holders will be bound to terms of service, which in turn make
them more accountable to their customers (i.e., preventing slashing).
82
The “doubled-spend” problem is the risk that a digital asset could be spent on more than one occasion by the
holder of such digital asset. The design of stacking transaction logs in blocks on the blockchain is intended to
ensure that the ledger does not permit the double spending of any assets. If a validator deviates and validates a
block that allows a transacting party to double-spend its digital assets, such validator may lose its bonded tokens as a
penalty.
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C. Energy Usage
The PoW and PoS protocols consume vastly different amounts of energy. PoS does not require
validators to compete against each other in order to earn staking rewards. Rather, PoS protocols
typically randomly select participants to validate new blocks. For example, the virtual currency
Ethereum is currently developing the Casper protocol, a PoS algorithm, intended to replace
mining, which is a PoW protocol.83 Ethereum is aiming to reduce energy consumption by
transitioning its blockchain from PoW to PoS. On December 10, 2018, Buterin tweeted:
“Blockchains of the future with proof of stake and sharding will be thousands of
times more efficient, and so the efficiency sacrifices of putting things on a chain
will become more and more acceptable.”84
Clearly, the cost savings on electricity are a significant reason for the blockchain to utilize the
PoS protocols instead of the PoW protocols.
PoW was a requirement to make blockchains possible in 2009 when they were first
implemented. However, advancements in cryptography have added new ways to provide
randomness and game theory economics to the blockchain networks which provides security for
the blockchain. Today, given the alternative PoS based systems, PoS is a more responsible and
efficient protocol for the blockchain technology.
83
Christine Kim, Code For Ethereum’s Proof-of-Stake Blockchain to Be Finalized Next Month, Coindesk, (May 2,
2019) https://www.coindesk.com/code-for-ethereums-proof-of-stake-blockchain-to-be-finalized-next-month
84
Adrian Zmudzinski, Vitalik Buterin: Proof-of-Stake, Sharding to Make Blockchains ‘1,0000x’ More Efficient,
Cointelegraph, (Dec. 11, 2018) https://cointelegraph.com/news/vitalik-buterin-proof-of-stake-sharding-to-make-
blockchains-1-000x-more-efficient
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Source: https://medium.com/celohq/consensus-and-proof-of-stake-in-the-celo-protocol-3ff8eee331f6
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V. The United States Should Encourage Staking Activity and Innovation in the United
States
A. Foster an Economic Competitive Advantage
As shown in Part III, above, the applications for blockchain technology continue to develop into
markets and industries that were unforeseen when Bitcoin was first introduced in 2009. It is
analogous to the dawn of the internet and its myriad of applications and technologies that have
been born from the internet. Today’s smartphones have more than one million times more
memory than the Apollo spacecraft computer had in RAM. 85 The iPhone also has up to 512GB
of ROM memory which is 4,398,046,511,104 bits, which is more seven million times more than
that of the Apollo guidance computer.86
Technological innovations can come quickly and arise from unforeseeable circumstances.
Virtual currencies and the blockchain are a technological revolution. However, the PoW
protocol is bumping into one of its limitations: significant energy usage. These limitations
impose both economic costs and environmental costs.
The United States has an interest in fostering innovation in this country. It is estimated that
between that greater than three-quarters of all bitcoin mining through PoW protocols is
conducted in China. The United States has shown that it can offer incentives to allow for the
development of new technologies. For example, the Internet Tax Freedom Act (P.L. 105-277),
enacted in 1998, implemented a three-year moratorium preventing state and local governments
from taxing Internet access, or imposing multiple or discriminatory taxes on electronic
commerce. With the passage of the Trade Facilitation and Trade Enforcement Act of 2015 (P.L.
114-125), the moratorium on taxing Internet access was extended permanently.
The companies with the largest market capitalization are American, in part, because they were
given the freedom to grow without excessive interference or taxation by the United States. As of
May 2019, the following American companies have these market capitalizations87:
Microsoft Corporation: $987.74 billion
Apple: $974.74 billion

85
Is Your Cell Phone More Powerful Than NASA's Apollo Guidance Computer?, Science20 (July 5, 2019)
https://www.science20.com/the_conversation/is_your_cell_phone_more_powerful_than_nasas_apollo_guidance_computer-
239388
86
Is Your Cell Phone More Powerful Than NASA's Apollo Guidance Computer?, Science20 (July 5, 2019)
https://www.science20.com/the_conversation/is_your_cell_phone_more_powerful_than_nasas_apollo_guidance_computer-
239388
87
https://www.investopedia.com/articles/active-trading/111115/why-all-worlds-top-10-companies-are-american.asp
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Alphabet (Google): $822.96 billion
Amazon: $795.18 billion
The United States has the same opportunity with the PoS blockchain protocols as it did with
companies that were able to take advantage of the internet. In fact, we believe these blockchain
protocols can be significantly more valuable.
B. Protect U.S. National Security Interests
The non-partisan, Council on Foreign Relations, recently issued the Independent Task Force
Report No. 77, Innovation and National Security, Keeping Our Edge.88 The Task Force found
that China wants to dominate the industries of the future and in a decade will likely spend more
than any other country on research and development. The Task Force commended the White
House for confronting China on cyber espionage and intellectual property theft, it also found that
the administration was over-weaponizing trade policy, with long-term costs to U.S. innovation
capabilities. The Task Force concluded, that slowing China down is not as effective as
outpacing it. The best way to answer China’s challenge is to compete more effectively.
Countries that can harness the current wave of innovation, mitigate its potential disruptions, and
capitalize on its transformative power will gain economic and military advantages over potential
rivals.
The Council’s major findings included:
● The United States has led the world in innovation, research, and technology development
since World War II, but that leadership is now at risk.
● U.S. leadership in science and technology is at risk because of a decades- long stagnation
in federal support and funding for research and development. Private-sector investment
has risen, but it is not a substitute for federally funded R&D directed at national
economic, strategic, and social concerns.
● The Defense Department and the intelligence community will fall behind potential
adversaries if they do not rapidly access and deploy technologies developed in the private
sector.
88
https://www.cfr.org/report/keeping-our-edge/pdf/TFR_Innovation_Strategy.pdf
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● China is investing significant resources in developing new technologies, and after 2030 it
will likely be the world’s largest spender on research and development. Although
Beijing’s efforts to become a scientific power could help drive global growth and
prosperity, and both the United States and China have benefited from bilateral investment
and trade, Chinese theft of intellectual property (IP) and its market- manipulating
industrial policies threaten U.S. economic competitiveness and national security.
● China is closing the technological gap with the United States, and though it may not
match U.S. capabilities across the board, it will soon be one of the leading powers in
cutting edge technologies . . .
In its recommendations, the Counsel specifically suggested that the White House should
announce moonshot approaches to society-wide national security problems. This would support
innovation in foundational and general-purpose technologies, including AI and data science,
advanced battery storage, advanced semiconductors, genomics and synthetic biology, 5G,
quantum information systems, and robotics. Often, the U.S. policy default is to unleash the
private sector through deregulation and tax reform. The Counsel recognized that patchwork
regulations, high compliance costs, and regulatory complexity slow, for example, the
development and deployment of autonomous vehicles, blockchain and financial technology,
and commercial drones.
China currently conducts greater than 75% of the bitcoin mining in the world. The largest
concentration of miners are located in Sichuan China, estimated to be about 30 percent of the
total.89 In Sichuan, hydroelectric makes up 79.5% of the total electricity capacity while fossil
fuel makes 19.5% and it runs only during dry seasons. In wet seasons, Sichuan energy
production exceeds consumption.90 As 2017, electricity in Sichuan costs around $0.08 to
$0.09/kWh for commercial and industrial consumption.91 In contrast, rates in the Washington,
DC averaged 11.80/kWh.92
89
Willie Tan, Brief Overview of China’s Cryptocurrency Mining: Capital, Costs, Earnings, Cointelegraph (Aug. 16,
2017) https://cointelegraph.com/news/brief-overview-of-chinas-cryptocurrency-mining-capital-costs-earnings
90
91
92
https://www.eia.gov/electricity/state/
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Because of electricity and hardware costs, the United States is not competitive in the global
marketplace in PoW protocols. However, the United States has an opportunity to foster the PoS
protocols which do not require significant amounts of energy usage.
Currently, the Chinese have a well-established lead with regard to mining networks utilizing the
PoW protocols. The Chinese will continue to lead in this area because of the relatively cheap
cost of electricity and hardware.
The United States is unlikely to catch the Chinese given their competitive advantages already
available to Chinese miners. While cheap energy will continue to provide the Chinese with an
advantage, by encouraging PoS networks, the United States can seize the initiative for
developing the blockchain. In that regard, the future developments in the blockchain can be
shaped to more advantageous for American business, consumers and citizens.
C. Protect the Environment
Based upon the massive amount of energy used to mine cryptocurrencies there are some studies
that posit that there is a significant amount of carbon dioxide being emitted. Max J. Krause and
Thabet Tolaymat published Quantification of energy and carbon costs for mining
cryptocurrencies in Nature Sustainability, Vol. 1, pp. 711–718 (2018) and estimated that from
January 1, 2016 to June 30, 2018, mining Bitcoin, Ethereum, Litecoin and Monero consumed an
average of 17, 7, 7 and 14 Megajoules to generate one US dollar, respectively. Comparatively,
conventional mining of aluminum, copper, gold, platinum and rare earth oxides consumed 122,
4, 5, 7 and 9 Megajoules to generate one US dollar, respectively, indicating that (with the
exception of aluminum) crypto mining consumed more energy than mineral mining to produce
an equivalent market value.
A study by researchers at the Technical University of Munich and the Massachusetts Institute of
Technology examined how much power is consumed by computers mining Bitcoin. The authors
concluded that, in late 2018, the entire bitcoin network was responsible for 22-22.9 million tons
of carbon dioxide per year — similar to a large Western city or an entire developing country like
Sri Lanka. Total global emissions of the greenhouse gas from the burning of fossil fuels were
about 37 billion tons in 2018.93
The energy used in PoW protocols will only continue to increase as the blockchain applications
grow in both size and scope. Recognizing the significant amount of power used by PoW
93
Christian Stoll, Lena Klaaßen and Ulrich Gallersdörfer, The Carbon Footprint of Bitcoin,Joule, Vol. 3, Issue 7,
pp. 1647-1661 (June 12, 2019), https://www.cell.com/joule/fulltext/S2542-4351(19)30255-
7?_returnURL=https%3A%2F%2Flinkinghub.elsevier.com%2Fretrieve%2Fpii%2FS2542435119302557%3Fshowa
ll%3Dtrue
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protocols and the corresponding potential damage to the environment, alternatives are being
considered. In Energy Research & Social Science, John Truby, an associate professor of law and
director of the Center for Law & Development at Qatar University, said the Paris Agreement is
under threat due to the growing energy consumption of mining cryptocurrencies.94 Currently,
bitcoin uses a proof-of-work concept, where miners are rewarded by solving puzzles to validate a
transaction, which is heavily energy intensive.95 Another method of verifying and confirming
digital currency transactions is proof-of-stake. Under this protocol, the creator of a new block is
predetermined and is rewarded a transaction fee, not a block, which requires much less energy.96
It has been estimated that the energy used to complete one bitcoin transaction is 648.54 kWh
which is the equivalent to the power consumption of an average U.S. household over 21.92
days.97 For example, it has been estimated that one Bitcoin transaction in 2019 would have used
28.7 million kg of carbon dioxide which is the equivalent of driving over 700 miles in a
passenger car. In contrast, in order to solve PoS transaction, only 260,000 kg of carbon dioxide
was used which is the equivalent of driving a passenger car 1.73 feet.
The studies make clear that the PoW protocols use vast amounts of energy and other protocols,
such as PoS could provide the same functionality without the excessive energy usage. This
result should be intuitive: in PoS, one validator is selected at random to solve the mathematical
equation compared to a vast array of miners attempting to solve the same problem at the same
time in the PoW protocols. Thus, if the United States wishes to be at the forefront of developing
blockchain applications while at the same time not endangering the environment with excessive
energy usage the PoS protocols should be encouraged and supported.
94
John Truby, Decarbonizing Bitcoin: Law and policy choices for reducing the energy consumption of Blockchain
technologies and digital currencies, Energy Research & Social Science, Volume 44, pp. 399-410, (Oct. 2018); see
also Merlinda Andonia, Valentin Robu, et al., Blockchain technology in the energy sector: A systematic review of
challenges and opportunities, Renewable and Sustainable Energy Review, Vol. 100, pp. 143-174 (2019)
95
Aaron Handkin, Bitcoin mining poses threat to Paris climate-change accord, study finds, Marketwatch (Aug. 1,
2018) https://www.marketwatch.com/story/bitcoin-mining-poses-threat-to-paris-climate-change-accord-study-finds-
2018-08-01
96
Aaron Handkin, Bitcoin mining poses threat to Paris climate-change accord, study finds, Marketwatch (Aug. 1,
2018) https://www.marketwatch.com/story/bitcoin-mining-poses-threat-to-paris-climate-change-accord-study-finds-
2018-08-01
97
https://digiconomist.net/bitcoin-energy-consumption
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VI. Proposed Tax Treatment of Staking Rewards
A. Taxable on Disposition, Not on Receipt
POSA is advocating that the staking awards be provided with favorable tax treatment to
encourage PoS networks to locate, develop and innovate in the United States. The low cost of
energy and ASIC equipment provided PoW miners with a competitive advantage if the miners
were located outside of the United States. The United States now has the opportunity to provide
the PoS networks with this country’s own competitive advantage.
Because of the numerous applications for blockchain technology and the technological and
environmental benefits offered by PoS, compared to PoW, POSA is proposing that staking
rewards be taxed, but only upon disposition by the holder. Innovation is crucial to U.S. national
competitiveness and national security. Providing favorable tax treatment to staking rewards
would encourage investors, entrepreneurs, and highly skilled talent to further develop and exploit
the blockchain technology.
Validators in PoS network can obtain staking rewards in two primary ways. First, by
broadcasting the new block to the chain (after being randomly selected to do so). Second, by
validating the newly broadcast block to the chain. Those token holders who choose not to stake
their tokens do not receive any staking rewards.
Under Internal Revenue Code § 61, gross income is broadly defined to mean “all income from
whatever source derived . . . .” In March of 2014, the IRS announced that it would treat virtual
currencies, including Bitcoin, like “property” for tax purposes and that the general tax principles
applicable to property transactions apply to transactions using virtual currency.98 In its
Questions and Answers, the IRS advised that a taxpayer who receives virtual currency as
payment for goods or services must, in computing gross income, include the fair market value of
the virtual currency.
Additionally, the IRS further explained that the character of the gain or loss generally depends on
whether the virtual currency is a capital asset in the hands of the taxpayer. If a taxpayer holds
the virtual currency for more than one year, it qualifies as a long-term capital asset, and the
disposition of the property will implicate a preferential capital gains rate. Likewise, if the virtual
currency does not qualify as a long-term capital asset, it will implicate ordinary income tax rates.
The IRS also reasoned that the fair market value of virtual currency received for services
performed as an independent contractor, measured in U.S. dollars as of the date of receipt,
constitutes self-employment income and is subject to the self-employment tax. Additionally, if
98
IRS Notice 2014-21, Virtual Currency Guidance.
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January 10, 2020
Page 30
an employer were to pay virtual currency to an employee as remuneration for services then such
payment would constitute wages.
POSA proposes that in order to encourage the further development of the blockchain technology,
that the receipt of staking rewards in the form of a digital asset is not a taxable event. However,
the validator would take a basis of zero in the digital asset. This tax treatment has basis in
Treasury Regulations and in recent scholarship. Staking rewards should be considered created
property and the creator of those staking rewards should only realize gain upon disposition.
Treasury Regulation §1.61-4(a) provides that gross income for a farmer, i.e. a property creator,
“shall include in gross income [t]he amount of cash and the value of merchandise or other
property received during the taxable year from the sale of livestock and produce which he
raised.” For example, the farmer may have an accretion to wealth upon the harvest of crops or
upon the birth of livestock, he or she does not realize income until he or she disposes of or sells
the crops / livestock.
This tax treatment has also received support from the academic community. Abraham
Sutherland, Adjunct Professor at the University of Virginia has published a tour de force on the
taxation of block rewards.99 Professor Sutherland analogized staking rewards to crops, crop
shares and breeding stock because staking rewards should be considered created property. He
concludes that taxing staking rewards upon disposition is “the natural result treating those tokens
as created property – [which] eliminates the need for unwieldy accounting mechanisms and
promotes equal tax treatment to both validators and non-validators.”100 This work has been
described as “[t]he important contribution of this paper is addressing the issue of proper
valuation of the cryptocurrency.”101
Allowing for gain upon the disposition of the staking rewards does not make staking a tax-
exempt endeavor. Gain would simply be deferred until such time as the validator either sold or
exchanged that digital asset for something else. Thus, if the digital asset were exchanged for a
fiat currency, the gain would be taxed at that time. Likewise, if the digital asset were exchanged
for property other than another digital asset the gain would be taxed at that time.
The immediate taxation of the digital asset when the validator earns the staking reward may have
an adverse impact on the security of a PoS protocol. The security of the PoS protocols depends,
in part, on the number tokens staked in the network. If a validator (or block creator) is required
99
Abraham Sutherland, Crytocurrency Economics and the Taxation of Block Rewards, Part1 in 165 Tax Notes 749
(Nov. 4, 2019), Part 2 in 165 Tax Notes 953 (Nov. 11, 2019).
100
Id.
101
Christine Kim, Kim Reviews Sutherland's Cryptocurrency Economics And The Taxation Of Block Rewards,
(Dec. 6, 2019) https://taxprof.typepad.com/taxprof_blog/2019/12/weekly-ssrn-tax-article-review-and-roundup-kim-
reviews-sutherlands-cryptocurrency-economics-and-the-.html
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January 10, 2020
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to recognize gain on the staking reward the validator will need to take one of the following steps
to ensure that the income tax is paid:
1. Sell the recently rewarded digital assets;

2. Set aside, i.e. not stake a portion of the validator’s digital assets; or
3. Set aside other liquid assets to pay the tax.
Each of these options has adverse consequences.
First, because the security of the PoS protocol depends, in part, on the amount of staked digital
assets, by requiring the validator to sell those assets, the protocol becomes comparatively less
secure.
Second, if the tokenholder has set aside an amount of digital assets to cover tax liabilities, those
digital assets have not been staked. What is worse is that unstaked digital assets in a PoS protocol
are actually decreasing in value because many, if not all, of the other participants in the network
are staking their digital assets. The tokens that remain unstaked become comparatively worth
less because the staking tokenholders continue to receive staking rewards.
As the protocol continues to offer staking awards to the remainder of the network, the total
number of tokens increases, however, the individual responsible for paying tax on recently
earned tokens will be holding a comparatively smaller share of the tokens. So, despite having
received a staking award, the recipient’s share of the entire network may actually be decreasing.
Third, if the validator is required to set aside other liquid assets to pay tax then those liquid assets
have been utilized to invest in the PoS network. While many businesses must set aside a certain
amount of liquid assets to pay current expenses, this requirement creates a drag on the business
cash flow and business operations. If the United States wants to encourage the development of
the blockchain technology, it should allow the validators to invest as much as possible in the PoS
networks. Additionally, if the tax policy is such that tax should be paid constantly, at the high
rate, any rewards which the tokenholder sold on a free market would probably be bought by
other market participants and eventually validators, likely overseas. Which means that ownership
over new blockchain network will be forced to flow out of the United States greatly
disadvantaging the country's position in this emerging field.
Fourth, due to the infancy of the technology it is not unusual for digital assets to heavily fluctuate
in value, even in the course of a 12-month period. Taxing the value of the digital asset on receipt
could very easily result in a tax on illusory income. For example, if a digital asset is trading at
$100 on the date of receipt, the validator could pay at ordinary income tax rates of 35% or 37%.
If the value of the digital asset drops to $35 (or less) prior to the validator disposing of the digital
asset, the validator will have an income tax liability that exceeds the value of the asset when it is
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January 10, 2020
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eventually sold. This risk makes it likely that token holders will not stake their tokens in the
early days of these networks making the network and the technology less likely to grown and
developed.
Fifth, taxation of staking awards could cause a death spiral of the entire protocol.
Hypothetically, if 80% of a network has chosen to stake their tokens, those token holders will
receive staking awards. One token holder will receive an award for broadcasting a new block to
the blockchain and the remaining 80% of the stakers will receive a validation award. If each of
award recipients is required to pay tax on the staking award, those token holders could be
required to sell some of their tokens in order to obtain US dollars in order to remit funds to the
U.S. Treasury. As those tokens are sold to raise funds to pay taxes, invariably the price of the
tokens will decrease for two reasons: (i) the issuance of staking awards has increased the overall
supply of tokens and (ii) more token holders will be attempting to sell their tokens on the open
market. As more tokens flood the market, the price of the token will likely drop. As more token
holders earn staking awards, the more tokens will need to be sold to pay the taxes on those
earnings which will further depress the price of the tokens. It would simply be a matter of time
before the tokens were reduced to a de minimis value which would effectively cripple the PoS
protocols.
Lastly, by taxing the token holder upon the disposition (as opposed to acquisition) of the digital
asset, there is no additional danger to the PoS network because the validator has chosen not to
stake the assets, but rather to sell them.
Chief Justice John Marshall in McCulloch v. Maryland 17 US (4 Wheat.) 316, 431 (1819)
observed that the power to tax was the power to destroy. Here, the United States is presented
with a new frontier in technological development with the prospect for great advances.
Providing tax advantaged treatment of staking rewards is one way for the United States to
encourage the growth of blockchain technology in a responsible fashion within the United States
by utilizing the PoS protocols. The Internal Revenue Code is filled with provisions designed to
encourage (or discourage) certain activities, including:
● IRC § 41 – Research and Experimentation Tax Credit

● IRC § 163(h) – deductibility of home mortgage interest
● IRC § 1231 – favorable tax treatment for depreciable property used in a trade or business
● IRC § 1202 - partial exclusion for gain from certain small business stock
● IRC § 1400Z–2 - capital gains invested in opportunity zones
Each of these sections exist because, as a policy matter, the United States wanted to encourage a
particular activity, whether it was home ownership, research and developmentt activities,
opening a small business, or investing in lesser developed regions in the country.
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January 10, 2020
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VII. Conclusion
In a global marketplace, businesses and technologies can be developed anywhere. The United
States should take steps to ensure that nascent industries and technologies with significant
economic upside and potential are given the appropriate conditions to flourish in the United
States.

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MEMORANDUM

date: January 10, 2020

POSA’s goal is to increase adoption of PoS networks by:

(iii) demonstrating the far-flung applications of the blockchain and/or distributed

(iv) highlighting the comparatively miniscule energy consumption utilized by PoS

(v) promoting participation in PoS networks by their stakeholders.

● To provide a description of the various ways in which the blockchain, or distributed

II. Economic Growth Because of Blockchain

According to the Bureau of Labor Statistics’ Occupational Outlook Handbook, “[e]mployment of

III. Blockchain / Distributed Ledger Technology

A. Payment Processing and Money Transfers

Cross-border payments supported by blockchain provide significant advantages to businesses

C. Monitor Supply Chains

The blockchain offers the following to supply chain participants:

● access to real-time, immutable, validated information about the status of any

● reducing error and waste in processing transactions and mistakes in freight

D. Data Sharing / Data Protection

• User Verification: Beyond being used to detect any manipulation of data,

• Distributed Denial of Service Avoidance: Blockchain's distributed nature could

E. Real Estate Tracking

2. Electronic Medical Records

3. Automated Health Insurance

H. Tracking Prescription Drugs

K. Data Security and Portability

We have identified a number of current applications for the blockchain technology.

IV. Proof of Stake and Proof of Work Protocols

B. Proof of Stake Protocols Do Not Require a Race to the Finish

● a reward to the block creator, (or block producer); and

● a reward to the validators who had previously staked tokens.

The rewards are in-kind digital assets.

Certain PoS protocols penalize malicious behavior such as engaging in double-spending82 or

A. Foster an Economic Competitive Advantage

Microsoft Corporation: $987.74 billion

Apple: $974.74 billion

Alphabet (Google): $822.96 billion

Amazon: $795.18 billion

B. Protect U.S. National Security Interests

The Council’s major findings included:

C. Protect the Environment

VI. Proposed Tax Treatment of Staking Rewards

A. Taxable on Disposition, Not on Receipt

1. Sell the recently rewarded digital assets;

Each of these options has adverse consequences.

● IRC § 41 – Research and Experimentation Tax Credit

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