A victory in the European Parliament, but would mining regulations need to alter as a result? “Eventually, blockchain apps will embrace solely PoS.”
Cryptocurrency mining based on proof-of-work (PoW) will not be prohibited in the European Union – at least not this year. That is the conclusion drawn from last week’s widely observed European Parliament committee vote (EP).
A last-minute amendment proposed by an ad hoc coalition of social democrats and Greens would have effectively prohibited proof-of-work mining — the type of consensus process employed by native cryptocurrencies such as Bitcoin (BTC) and Ether (ETH). While the crypto community can now breathe easier, some remain concerned that the industry’s issue with energy-intensive consensus techniques will persist.
“My initial reaction to the Economic and Monetary Affairs committee’s decision was relief,” Joshua Ellul, director of the Centre for Distributed Ledger Technologies and senior lecturer at the University of Malta, told.
“It is definitely a sign that crypto and distributed ledger technology is no longer a niche bringing together technologists, investors, hobbyists and idealists — it is a technology that is here to stay.”
However, Ellul believes that the community should not be complacent following last week’s victory. Miners that support proof-of-work blockchain projects should be “investigating renewable energy sources,” not only to prepare for future regulatory acts, but also to reduce their carbon footprint.
The committee vote was conducted as part of the European Union’s continuing Markets in Cryptocurrency Assets (MiCA) process, which aims to harmonise, clarify, and regulate Europe’s cryptocurrency markets.
“It is highly improbable that the de facto PoW-ban modification would have made it into the final MiCA agreement,” Patrick Hansen, head of strategy at cryptocurrency firm Unstoppable Finance, told. However, this does not mean that energy waste and carbon impact are non-issues. Hansen continued:
“The macro-environment — Ukraine, inflation, etc. — is changing rapidly, and energy consumption reduction might soon become an absolute policy priority.”
Is this a wake-up call?
“This is positive news for the cryptocurrency sector,” Yu Xiong, professor of business analytics and director of the University of Surrey’s Center for Innovation and Commercialization, told the EP committee vote. This is another indication that cryptocurrencies and blockchain technology are gaining widespread public acceptance, but it also “certainly served as a caution to those mining activities that utilise PoW.” Prepare for transition, as nobody can tell whether such a vote will occur again in the future.”
Later this year, Ethereum will “hopefully” effectively switch to a more environmentally friendly proof-of-stake (PoS) consensus method, he noted. Otherwise, the vote buys time for other projects that rely on PoW to reform themselves in order to lower their energy usage and carbon footprint.
As with several others in the crypto field, Xiong feels that intelligent regulation — such as MiCA presumably provides — will benefit the crypto business as a whole. Alternatively, as European People’s Party spokesperson Markus Ferber recently put it:
“The markets for crypto assets have been like the Wild West for too long and need a European sheriff […] The new rules for crypto currencies will fill the existing regulatory vacuum by putting in place a clear framework to protect investors and ensure market integrity.”
Overall, the 32-24 vote to reject the amendment was anticipated by some concern in the cryptocurrency community. “The MiCA issue is worse for crypto than anything in the United States,” Blockchain Association policy director Jake Chervinsky observed, adding that the change appeared to be “a excuse for a Bitcoin ban.” Meanwhile, CoinShares CEO Jean-Marie Mognetti described the proposal to restrict PoW protocols as “more than just bad news,” but rather “a foolish, uninspired proposal that fails to reflect the industry’s realities and prospects.”
Soon to become a part of Europe’s long-term “taxonomy”
Separate from the debate over amendments, the ECON committee requested that the European Commission include bitcoin mining operations in the EU taxonomy – a classification system — for sustainable activities by January 1, 2025. The EU would next decide if crypto mining is a “sustainable” activity. If deemed unsustainable, institutional investors in Europe and elsewhere may be tempted to give the cryptocurrency sector a wider berth.
“The taxonomy has a significant impact on where businesses, investors, and states can invest their money and subsidies,” Hansen recently said. And as more environmental laws are enacted, that effect will only increase. Meanwhile, he emphasized that proof-of-work cryptocurrency mining is extremely likely to be classified as “unsustainable” under the taxonomy.
However, this is still some time away and may have a limited reach. “I don’t believe that adding sustainability to the taxonomy in 2025 would have a significant impact on crypto uptake,” Hansen told. “Depending on how it is defined, it may make future investments in mining businesses more difficult, but we are still years away from that, and mining is not a significant economic activity in the EU.”
Furthermore, Hansen continued, it will effect only mining businesses and “not the entire crypto industry, as the alternative amendment that was defeated would have done.”
Xiong praised the inclusion of crypto mining in the EU taxonomy as “logical.” It will increase the pressure on miners to adopt more environmentally friendly options, and he believes that by 2025, fewer networks will utilize PoW consensus procedures. “Ultimately, only Proof of Stake will be used by blockchain applications,” Xiong stated.
According to Ellul, the 2025 date provides some breathing room. “I hope it promotes the use of alternative energy sources.” One issue with the PoW-energy argument, he continued, is that it is highly polarized: “On one side, ‘PoW should remain regardless of the cost,’ while on the other, ‘PoW is going to kill us all.”
A less-heated middle position, he advised, would be beneficial.
A climatic emergency looms
Were there any takeaways from this recent regulatory skirmish? According to Xiong, one lesson is that cryptocurrency and blockchain developers should “only embrace environmentally friendly crypto,” since any carbon emissions-related activity in this sector “will be rapidly picked up by watchers.”
Indeed, Eero Heinäluoma, a member of the European Parliament and a supporter of the anti-PoW proposal, stated that “the carbon footprint of a single bitcoin transaction is equivalent to the carbon footprint of a transatlantic return journey from London to New York.” This is 1.5 million times more energy than a VISA transaction consumes. If we do not take steps to reduce this large carbon footprint by transitioning crypto-currencies to a more sustainable model, our efforts to battle climate change and increase our energy independence would be in vain.”
However, not everyone in the cryptocurrency world is convinced by these analogies. Mognetti observed:
“At an annualized emissions rate of 41 million tons CO2, the global Bitcoin mining industry has a small environmental footprint relative to the aviation industry, marine transport sector, air conditioners, electric fans, data centers, and tumble dryers.”
Ellul concurred that the energy debate cannot be regarded in a vacuum. “Almost everything useful in the modern world consumes energy, and many other activities do as well.” One example: Ireland’s power utility anticipates that data centers would consume 30% of the country’s electricity by 2028.
Overall, Ellul told, the European Parliament committee vote “did not result in restricting technology this time, but it does raise doubts about the future.” Meanwhile, Hansen added that even if the committee vote failed, the mining prohibition would almost certainly have been removed from the MiCA bill later, when the EU’s three major legislative bodies — the Parliament, the Council, and the Commission — reconcile their legislative texts through the EU’s unique “trilogue” process. Nonetheless, Hansen stated that a defeat in the ECON committee would have looked bad:
“The mere symbol of the EU Parliament calling for a PoW ban would have had a very detrimental effect on the market.”
Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.