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From Bitcoin Mining To ATMs, Illinois Is Positioning Itself As A Center For The Booming Cryptocurrency Industry

Robert Channick Chicago Tribune

WWR Article Summary (tl;dr) As Robert Channick reports, "The Chicago area is already home to an eclectic and growing list of cryptocurrency businesses that have staked their turf in the digital gold rush."

Chicago

City of the big shoulders, hog butcher for the world, Chicago is looking to add another title for the digital age: cryptocurrency finance center.

From one of the Midwest’s largest cryptocurrency mining facilities to a Chicago-based Bitcoin ATM operator, Illinois is becoming fertile ground for the fast-growing digital asset industry, which has developed from an arcane concept into a booming investment in a little over a decade.

With little regulation and no backing other than the faith of its fervent believers, cryptocurrency has turned into digital gold for early adopters, despite wild market fluctuations and no shortage of naysayers. Led by Bitcoin, cryptocurrency now has a market cap north of $1 trillion.

Billionaire investor Warren Buffett has been among the most vocal Bitcoin critics, saying it has no unique value and calling it a “delusion.”

“The real expert, the final arbiter of what’s happening, is the market itself,” said David Carman, a fintech consultant and board member at Global DCA, a Chicago-based cryptocurrency industry association. “People can pass judgment on Bitcoin all they want, but when you have a market that has reached over a $1 trillion, this is way beyond proof of concept.”

Launched in 2009 by anonymous computer developers, Bitcoin is a decentralized peer-to-peer payment network. While there is no central bank, the encrypted digital transactions are verified by blockchain technology, a type of database that forms a permanent ledger of all transactions across the shared computer network.

Bitcoin is the most valuable cryptocurrency, with a market cap of about $627 billion, according to CoinMarketCap, a price-tracking website for cryptoassets. The price of a bitcoin went from about $600 five years ago to more than $60,000 before a May 12 tweet by Tesla CEO Elon Musk about the industry’s large carbon footprint precipitated a nearly 50% price tumble. The price has since recovered to about $33,000 per bitcoin.

Other major cryptocurrencies include Ethereum and Dogecoin, which was started in 2013 by a pair of software engineers as a joke. Early investors have gotten the last laugh however, with Dogecoin’s market cap hovering at about $30 billion, according to CoinMarketCap.

The total cryptocurrency market cap topped $2 trillion for the first time this spring before the May sell-off cut the industry valuation nearly in half.

Major banks are starting to warm up to cryptocurrencies. In May, Jane Fraser, CEO at New York-based megabank Citi, told the Economic Club of Chicago that cryptocurrencies are going to be “part of the menu” going forward, but warned to “not forget the power of the guardrails.”

With valuations growing, Illinois legislators are weighing a bill that would create a special purpose depository trust for digital assets, providing a regulatory framework for banks and other custodial institutions to hold cryptocurrency accounts for clients. The proposal, which unanimously passed the House in April, did not make it through the Senate before summer recess, and will likely be taken up in the fall.

If it passes, the bill would make Illinois the second state behind Wyoming to allow special trusts to hold cryptocurrency. In 2020, cryptocurrency exchange Kraken became the first digital assets company in the U.S. to be chartered as a bank under Wyoming law.

In addition to encouraging digital asset banks and exchanges to locate in Illinois, the proposed legislation could help build a broader ecosystem, turning Chicago into the cryptocurrency financial center of the U.S., according to its backers.

“It’s not only just about the charter itself, but it’s also the signal to businesses who are dealing in this space that we will create a stable regulatory environment,” said Rep. Margaret Croke, D-Chicago, the bill’s chief sponsor. “This is the one time we could beat New York in financial services or in an emerging industry.”

The Chicago area is already home to an eclectic and growing list of cryptocurrency businesses that have staked their turf in the digital gold rush.

Cryptocurrency Mining Bitcoin mining harnesses banks of computers called mining rigs to come up with the random alphanumeric sequences needed to mint new coins. The protocol calls for a maximum of 21 million bitcoins. Currently, there are about 18.7 million bitcoins in circulation.

It is projected to take more than a century before the last bitcoin is mined. The mining process requires huge amounts of electricity. The Cambridge Bitcoin Electricity Consumption Index pegs the energy consumed annually by the Bitcoin network at 96.63 terawatt hours of electricity — more than the amount consumed in a year in the Philippines or Kazakhstan, for example.

Sangha Systems, a New York-based company, launched one of the Midwest’s largest cryptocurrency mining facilities in fall 2019 at a former steel mill in Hennepin, Ill., about 100 miles southwest of Chicago. It is planning to convert it to solar power to address growing concerns that the industry is creating a huge carbon footprint.

“It’s absolutely true that cryptocurrency mining uses an amount of electricity that is unprecedented,” said Spencer Marr, 33, president and co-founder of Sangha Systems. “I look at the demand for electricity that mining represents as effectively a subsidy for the build-out of renewable energy supply.”

The 873-acre steel mill closed in 2009 and much of the 1.35 million-square-foot complex was demolished in 2017. Sangha leases 50 acres, including a privately owned substation and a building housing the mining operation. The 25,000-square-foot facility, which formerly served as a boiler house for the steel mill, is about one-third filled with servers making the complex calculations that mine and mint bitcoins.

The substation has the capacity to deliver 82 megawatts of electricity. The cryptocurrency mining facility is currently using about seven megawatts, or about half of the electricity used by the entire steel mill at full operation. It is enough electricity to power about 5,000 homes each day, Marr said.

Marr, whose background is in renewable energy, said he hopes to break ground on the solar array by the fall, and begin harvesting sunlight for the cryptomining facility next year. To make the conversion to solar power cost efficient, Sangha will be looking for renewable energy incentives from the state.

As interest in cryptocurrency grows, Marr hopes to expand the capacity of the mining facility and the solar array needed to power it. That will require building a bigger facility to house the computers and leasing more land at the former steel mill site for the solar panels.

“Ultimately it would be a massive sea of solar panels,” Marr said.

Bitcoin ATMs Founded in 2015, CoinFlip is a Chicago-based Bitcoin ATM operator with more than 2,500 machines across 47 states, including more than 100 in Chicago and the suburbs. Many of the machines are at gas stations, convenience stores and restaurants — the same places you might find traditional bank ATMs.

The Bitcoin ATMs, however, are much more of an investment tool than a quick way to get cash.

CoinFlip primarily changes cash into bitcoin, selling over $5 million in digital assets per day. The average transaction is several hundred dollars, buying a fractional amount of the $38,000 bitcoin, which is then placed in the customer’s digital wallet or a custodial account.

“Basically every transaction is always fractional amounts of bitcoin,” said Deerfield native Ben Weiss, 26, CEO of CoinFlip. “No one’s buying a full bitcoin. No one’s putting in $40,000 of cash into the machine.”

The maximum ATM transaction is $16,000. Less than 5% of transactions turn bitcoin into cash, Weiss said.

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