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Crypto regulation: EU MEP ‘pretty sure’ that proof-of-work rules will be tightened

By Daniela Ešnerová

10:52, 15 July 2022

All illustration of digital BTC coin.
The Proof of Work regulation ball now is in the European Commission’s court. – Photo: ShutterStock

The crypto industry was relieved when a proposal to ban energy-demanding Proof-of-Work (PoW) consensus, which would de-facto outlaw bitcoin (BTC), did not make it on to the agenda of EU crypto asset regulation.

But it remains the final text meaning PoW cryptocurrencies are not safe in the EU.

One of the pro-ban MEPs, Eero Heinäluoma, told Capital.com he is “pretty sure” the PoW will be further regulated. 

Echoing Heinäluoma's sentiment, the European Central Bank (ECB) now believes it is “highly unlikely” that EU authorities would not take further action around PoW crypto-assets, as the bloc looks to curb carbon emissions, it said in a recent paper published.

Are PoW cryptocurrency activities set to be further curtailed in the EU?

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Ban, overturned

PoW is a decentralized consensus mechanism, which requires network members to solve a mathematical puzzle to validate transactions and mine new tokens.

The process requires massive computational power, and generates carbon emissions.

Mining BTC, whose blockchain is underpinned by PoW, takes up roughly as much energy as the Netherlands, 2.6 times more than Portugal and 8.7 times more than Croatia. (See Capital.com's data journalism here, where you can examine which countries consume more energy than Bitcoin.) 

That is why some environmentally-minded MEPs moved to propose a de-facto ban on PoW.

PoW shockwave

The draft sent shockwaves among crypto users, many of whom galvanised to lobby their MEP representatives. The clause was outvoted by 24 in favour to 32 against votes in March, when the European Parliament’s Committee on Economic and Monetary Affairs (ECON) voted on Markets in Crypto-Assets (MICA). 

While the ban didn't make it to final legislation, published last month, MICA includes disclosure requirements.

“Actors in the crypto-assets market will be required to declare information on their environmental and climate footprint,” it states.

The final text of MICA also states the European Commission (EC) was tasked with a report on “the environmental impact of crypto-assets” and “the introduction of mandatory minimum sustainability standards for consensus mechanisms, including the proof-of-work.”

Now Eero Heinäluoma, MEP, who c-oordinated votes of MEPs from the Social & Democrat (S&D) faction of the European Parliament, tells Capital.com, that he believes that the PoW will be regulated further in the wake of the EC report finding.

“I am pretty sure this is a question of time: a change has set in, it does not make any sense to continue to make use of consensus mechanisms based on a system that consumes more energy than quite many member states,” he says. 

Heated discussions

When asked if he is satisfied with the final outcome, Heinäluoma says it is “an important step forward”.

“We believe the European Commission should have addressed this problem in the first place in its original proposal, in particular given its sustainable credentials this European Commission is praised for. 

However, he says as the European Commission failed to tackle the issue in its proposal, several political groups brought the problem forward in the European Parliament negotiations.

“The legislation recognises the problem, imposes strict reporting requirements and a strongly worded review clause,” he said. 

And ECB seems to agree with Heinäluoma: “It is highly unlikely that EU authorities will restrict or ban fossil fuel cars by 2035 (as currently foreseen) but refrain from taking action for assets whose current yearly carbon emissions are enough to negate most euro area countries’ past and target GHG emission savings.

ETH/USD

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Short position overnight fee 0.0137%
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DOGE/USD

0.13 Price
-1.940% 1D Chg, %
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Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.0012872

BTC/USD

66,965.10 Price
-0.710% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 106.00

XRP/USD

0.59 Price
-2.080% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.01168

“Indeed, the latest discussions on MiCA in the European Parliament highlight the debate over the issue, with 2025 now the target date for potential measures,” the report ‘Mining the environment – is climate risk priced into crypto-assets?’ states.

New York PoW phasing-out efforts

The EU is not alone in its efforts to curb PoW's environmental impact.

In May, New York State senators passed a bill that seeks to ban giving out permits to BTC miners that use non-renewable energy, and renewing permits to existing miners that are not using clean energy. The bill then moved to The New York State governor.

 New York City mayor, Eric Adams, who ran his election campaign last fall on a platform of making NYC the center of the cryptocurrency industry, reportedly plans to ask the governor to veto the bill.

Industry efforts to get clean

Meanwhile, the industry itself has been making strides to move to get more clean.

Ethereum blockchain - a host to the second biggest cryptocurrency, ETH - is in the process of moving from PoW to a Proof-of-Stake (PoS) mechanism, a process known as The Merge.

The Merge was set to finalize earlier this year, but was delayed, with the migration date now set for 19 September, 2022.

ETH/USD

And Polygon network, which hosts the 17th biggest cryptocurrency by market capitalization, MATIC, and more recently 50 former-Terra projects, recently pledged to become carbon negative.

“We always prided ourselves on having PoS. PoS is, as you know, much, much more  environmentally friendly than PoW,” said Polygon's co-founder Mihailo Bjelic speaking at Polygon's Green Blockchain Summit.

“But when we did calculations it still wasn't enough.” 

Two months after its pledge, Polygon fullfilled its aim after retiring 104,794 tonnes of gas emissions, ofsfetting Polygon's total emissions which equate to 90,654 tonnes CO2e, according to analysis by KlimaDAO.

Meanwhile, Vitalik Buterin, one of the co-founders of Ethereum - the blockchain currently in process of migration to PoS - called for carbon pricing as a better way to go when solving crypto's energy problem: “The government picking and choosing which specific applications are an okay use of electricity or not is a bad idea.

“Better to just implement carbon pricing, and use some of the revenues to compensate low-income users,” Buterin wrote in a tweet last month.

MATIC/USD

Bitcoin 'will never transition to PoS'

As the industry is moving towards cleaner energy, there's one elephant in the room.

While cryptocurrencies using the PoW mechanism can make the move to PoS, Bitcoin - due to its decentralized nature - doesn't have a CEO who would rule the migration. Moreover, the mechanism is core to this very decentralized nature, as analyst at Arcane Research, Jaran Mellerud, points out.

Bitcoin is the only major proof-of-work blockchain except for Ethereum. I'm 100% sure that Bitcoin will never transition to proof-of-stake to meet some arbitrary sustainability standards. 

Proof-of-work is a fundamental component of Bitcoin, and it will be impossible to persuade the majority of node operators to accept the necessary code changes,” he says.

Mellerud notes that Ethereum was able to do so because it is much more centralized than Bitcoin: “They have a core team, the Ethereum Foundation, that can do what they want”.

“In addition, the transition process would be very messy, and there exists a lot of uncertainty as to whether the transition would be successful. Ethereum has tried to transition to proof-of-stake for several years and has constantly been delayed.”

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Bitcoin / USD
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MATIC/USD
MATIC/USD
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-0.00625 -1.160%
ETH/USD
Ethereum / USD
3502.80 USD
-25.44 -0.720%

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