The EU decided not to back a proposal drafted with the intent to limit use of cryptocurrency assets which rely on the heavy usage of electricity via proof-of-work mechanisms.
Cryptocurrencies such as bitcoin narrowly escaped the new regulation at the session held in the European Parliament yesterday (14 March) as MEPs voted to scrap a provision that would have banned, in effect, proof-of-work crypto assets on sustainability grounds.
The economic and monetary affairs committee voted 30 to 23 in favor of dropping a provision that would have made it nearly impossible for crypto assets such as bitcoin and Ethereum to be traded in the EU because of their reliance on a proof-of-work mechanism.
This is an energy-intensive consensus mechanism that is used by the two major cryptocurrencies to authorise transactions, add them to the blockchain and create new tokens. Many EU lawmakers have been calling to ban or limit the use of such assets as part of an attempt to regulate the nascent market.
The provision was part of the Markets in Crypto Assets (MiCA) framework, which aims to establish a package to regulate crypto assets in the EU – something the US is also working on.
After MEPs agreed on draft rules yesterday, MiCA will now go to the European Commission and member states for debate. Instead of a limit on proof-of-work crypto assets, the draft focuses on protecting consumers against market manipulation, preventing financial crime and money laundering, and making crypto mining more sustainable.
Innovation-Friendly Crypto Regulation
A ban or limit on proof-of-work processes has long been debated in the EU as the popularity of crypto continues to rise.
Crypto’s environmental impact is a cause for concern due to the amount of power cryptocurrency mining uses around the world. Bitcoin mining consumes around 91 terawatt-hours of electricity annually, which is more electricity than all of Finland, according to a New York Times analysis last year.
Some regulators in Europe have raised concerns that renewable energy will be channeled to sustain crypto mining instead of more wide-ranging national use.
After a number of rewrites, the proof-of-work provision was added in over the weekend, just ahead of the European Parliament’s vote.
Some proponents of crypto, such as Circle co-founder and CEO Jeremy Allaire, raised an alarm that the provision would be impractical and detrimental to the crypto market in the EU.
The provision, while not an outright ban on bitcoin and Ethereum, would have required them to transition to more sustainable consensus mechanisms such as a proof-of-stake process. While Ethereum has looked at making that transition, it may be much harder for the more popular bitcoin.
At issue was an amendment in the EU’s bill for markets in crypto assets (MiCA), pushed by the Greens and S&D, that would ultimately phase the so-called Proof-of-Work (PoW) system out of the block — unless operating on a small scale.
MEP Stefan Berger said that by adopting the MiCA framework, the European Parliament has “paved the way for an innovation-friendly crypto regulation that can set standards worldwide”.
“The regulation being created is pioneering in terms of innovation, consumer protection, legal certainty and the establishment of reliable supervisory structures in the field of crypto assets. Many countries around the world will now take a close look at MiCA,” he said.
Backers of Bitcoin feared the rules would make it impossible for the world’s biggest cryptocurrency to operate in the EU. The initiative comes amid widespread concerns among regulators and environmentalists that the energy needed to power the computers that run PoW will undermine the EU’s battle against climate change. Plugging these computers into renewables, meanwhile, could also push up energy prices.
Left-leaning MEPs had hoped to avoid this by phasing carbon-intensive blockchains out of the growing market. But the other side of the aisle argued the initiative would hurt innovation and only push the crypto market into other jurisdictions — rather than dealing with the problem.
A total of 30 MEPs rejected the phase-out measure, according to a voting register obtained by POLITICO, while 23 lawmakers voted in favor. Six abstained from the vote in the Parliament’s committee on economic and monetary affairs (ECON).
A majority of MEPs instead supported a separate initiative that would require the European Commission to add more environmentally friendly blockchain technologies to the EU taxonomy — a list that informs investors of what the EU considers green.
Larger Negotions Begin
Negotiations with EU governments in the Council can now begin after Stefan Berger, the conservative German MEP shepherding the bill through Parliament, also received enough backing within ECON to begin so-called trilogue talks without going to plenary.
Shifting crypto on into taxonomy debate, meanwhile, will ensure the debate on PoW’s high energy-usage is guaranteed — without banning Bitcoin, according to Berger.
But the Greens and S&D have accused the taxonomy compromise of being too soft and take issue with the fact that Berger had originally agreed to the phase-out plan before changing tack.
“We are disappointed that the rapporteur did not keep his word, breached previous broadly accepted agreements and gave up, given external pressures, to defend the interests of a part of the crypto industry,” Green MEP Ernest Urtasun said in an emailed statement.
“With the energy crisis the EU is experiencing and the negative prospects, we simply cannot turn a blind eye,” the Spaniard continued, comparing Bitcoin’s entire carbon footprint to that of Greece. “We will continue to push for this issue to be addressed, either during the negotiations with the Council in the trilogue stage or with the creation of new ad hoc rules.”