What does it mean for the industry?

by Lillian Wagner
What does it mean for the industry?

Proof-of-work (PoW) crypto mining won’t be banned in the European Union — not this year at least. That’s the conclusion from last week’s closely watched committee vote in the European Parliament (EP). 

A last-minute amendment presented by an ad hoc coalition of social democrats and Greens would have established a de facto ban on proof-of-work mining — the type of consensus mechanisms used by native cryptocurrencies like Bitcoin (BTC) and Ether (ETH) — has been decisively rejected. The crypto community can breathe easily, but some still worry that the industry’s problem with its energy-intensive consensus protocols remains. 

“My first reaction to the Economic and Monetary Affairs committee vote outcome was a sigh of relief,” Joshua Ellul, director at the Centre for Distributed Ledger Technologies and senior lecturer at the University of Malta, told Cointelegraph, adding:

“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.”

But, Ellul also believes that the community should not rest easy with last week’s win. Miners who support PoW blockchain projects should be “investigating renewable energy sources,” not only in anticipation of other possible regulatory actions but also to minimize their carbon footprint. 

The committee vote was part of the European Union’s ongoing Markets in Cryptocurrency Assets (MiCA) process designed to bring harmonization, clarity and regulation to Europe’s cryptocurrency markets. 

“In all likelihood, the de-facto PoW-ban amendment would not have found its way into the final MiCA agreement,” Patrick Hansen, head of strategy at crypto firm Unstoppable Finance, told Cointelegraph. But, that doesn’t mean that energy profligacy and carbon footprint are dead issues. Hansen added:

“The macro-environment — Ukraine, inflation, etc. — is changing rapidly, and energy consumption reduction might soon become an absolute policy priority.”

A wake-up call?

“This is good news for the crypto sector,” Yu Xiong, professor of business analytics and director of the Center for Innovation and Commercialization at the University of Surrey, told Cointelegraph, regarding the EP committee vote. It is another sign that cryptocurrencies and blockchain technology are being widely accepted by the public, but also “definitely provided a warning to those mining activities that use PoW. Prepare for transformation because nobody can predict if there will be another such vote in future.”

Ethereum will “hopefully” successfully transition to a more eco-friendly proof-of-stake (PoS) consensus mechanism later this year, he added. Otherwise, the vote provides time for other projects that use PoW to undertake their own transformation to reduce energy consumption and their carbon footprint.

Like some others active in the crypto space, Xiong believes that enlightened regulation — of the sort MiCA presumably offers — will be an overall plus for the crypto industry. Or, as European People’s Party spokesperson Markus Ferber put it recently: 

“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.” 

All said, the 32 to 24 vote to reject the amendment was preceded by a certain amount of trepidation in the crypto community. “The MiCA situation is worse for crypto than anything in the USA,” noted Blockchain Association policy chief Jake Chervinsky, who said the amendment looked “like a pretext for a Bitcoin ban.” Meanwhile, Jean-Marie Mognetti, CEO of CoinShares, described the bid to ban PoW protocols as “more than just bad news” but rather “a thoughtless, uninspired proposal that does not reflect the realities and the future of the industry.”

Soon to be part of Europe’s sustainable “taxonomy”

Separate from the amendment tussle, the ECON committee also asked the European Commission to include cryptocurrency mining activities in its EU taxonomy — a classification system — for sustainable activities by January 1, 2025. The EU would then determine whether crypto mining could be classified as a “sustainable” activity. If deemed non-sustainable, European institutional investors and others might be inclined to give the crypto sector a wider berth. 

“The taxonomy has a huge influence over where companies, investors and states [can] invest their money and subsidies,” explained Hansen recently. And, as more environmental laws pass, the more that influence will grow. Meanwhile, he added that PoW crypto mining could very likely be listed as “unsustainable” under the taxonomy. 

But, this is still some time in the future and might be of limited scope. “I don’t think that the addition to the sustainability taxonomy from 2025 onwards will have a big impact on crypto adoption,” Hansen told Cointelegraph. “Depending on how it is defined, it might make investments in mining companies more difficult in the future, but we are still years away from that and mining is not an important economic activity in the EU anyway.”

More importantly, Hansen added, it will affect only the mining companies and “not the entire crypto industry as for the alternative amendment that was voted against.”

Xiong described crypto mining’s inclusion in the EU taxonomy as “reasonable.” It will put more pressure on miners to transition to more eco-friendly alternatives and he anticipates that fewer networks will use PoW consensus mechanisms come 2025. “Eventually, only PoS will be adopted by blockchain applications,” predicted Xiong.

Ellul said that the 2025 deadline offers some breathing room. “I hope that it encourages more renewable energy sources.” One problem with the PoW-energy debate, he added, is that it is highly polarized: “One extreme is that ‘no matter what the cost, PoW should remain,’ while the other is that PoW is going to kill us all.”

A less-heated middle position might be useful, he suggested.

A climate crisis looms

Were any lessons learned in this latest regulatory skirmish? According to Xiong, one lesson is that crypto and blockchain developers must “only embrace environment-friendly crypto” because any carbon emissions-related activities in this sector “will be quickly picked up by watchers.”

Indeed, Eero Heinäluoma, a European Parliament member and a backer of the anti-PoW amendment, said that “The carbon footprint of a single bitcoin transaction equals a transatlantic return flight from London to New York. This is 1.5 million times the energy used up by a VISA transaction. If we don’t curtail this massive carbon footprint by putting crypto-currencies on a more sustainable path, our efforts to combat the climate crisis and boost our energy independence risk being in vain.”

However, not all in the crypto community are swayed by these sorts of comparisons. Mognetti noted

“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.”

Source: Twitter

Ellul agreed that the energy issue can’t be viewed in isolation. “Most everything of utility in the modern world requires energy and many other activities are power-hungry, too.” One example: Ireland’s power operator estimates that by 2028, 30% of Ireland’s electricity will be consumed by the country’s data centers.

Overall, the European Parliament committee vote “did not result in stifling technology this time, but indeed it raises questions about the future,” Ellul told Cointelegraph. Meanwhile, Hansen added that even if the committee vote had been lost, the mining ban would surely have been dropped from the MiCA bill later when the three key EU entities — Parliament, Council and Commission — reconcile their legislative texts in the EU’s unique “trilogue” process. Still, a defeat in the ECON committee would have looked bad, said Hansen: 

“The mere symbol of the EU Parliament calling for a PoW ban would have had a very detrimental effect on the market.”