EU vote on Bitcoin mining: What it means for the industry

Proof-of-work (PoW) crypto mining will not be prohibited in the European Union, at least not this year. That was the outcome of last week’s widely awaited European Parliament committee decision (EP).

An ad hoc alliance of social democrats and Greens proposed a last-minute amendment that would have imposed a de facto prohibition on proof-of-work mining — the sort of consensus processes employed by native cryptocurrencies such as Bitcoin (BTC) and Ether (ETH). The crypto community may breathe easier now, but others are concerned that the industry’s issue with energy-intensive consensus procedures will persist.

“My immediate response to the Economic and Monetary Affairs committee voting result was a sigh of relief,” said Joshua Ellul, head of the Centre for Distributed Ledger Technologies and senior professor at the University of Malta.

“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.”

Ellul, on the other hand, feels that despite last week’s victory, the community should not be complacent. Miners who support PoW blockchain projects should “invest in renewable energy sources,” not just in preparation of future regulatory steps, but also to reduce their carbon impact.

The committee decision was part of the European Union’s continuing Markets in Cryptocurrency Assets (MiCA) process, which aims to harmonise, clarify, and regulate Europe’s cryptocurrency markets.

“The de facto PoW-ban modification would not have made its way into the final MiCA agreement,” Patrick Hansen, head of strategy at crypto business Unstoppable Finance. However, this does not imply that energy waste and carbon impact are no longer challenges. Hansen continued, saying:

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

Proof-of-work wake-up call?

“This is wonderful news for the crypto industry,” Yu Xiong, professor of business analytics and head of the University of Surrey’s Center for Innovation and Commercialization, said of the EP committee decision. It is just another indication that cryptocurrencies and blockchain technology are becoming more broadly embraced by the general people, but it has also “certainly issued a caution to those mining operations that employ PoW.” Prepare for change since no one can foresee if such a vote would 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 gives other projects that employ PoW time to implement their own transformation to lower energy use and carbon impact.

Xiong, like many others in the crypto field, thinks that intelligent regulation — such as what MiCA presumably provides — will be a net positive for the crypto economy. Alternatively, as European People’s Party spokesman Markus Ferber recently stated:

“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-to-24 decision to reject the proposal was met with some scepticism in the crypto community. “The MiCA scenario is worse for crypto than anything in the United States,” said Blockchain Association policy head Jake Chervinsky, who described the change as “a excuse for a Bitcoin prohibition.” Meanwhile, CoinShares CEO Jean-Marie Mognetti called the proposed restriction on PoW protocols as “more than simply terrible news,” but rather “a foolish, uninspired idea that does not represent the reality and future of the industry.”

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

In addition to the amendment squabble, the ECON committee requested that the European Commission include bitcoin mining operations in the EU taxonomy – a categorization system — for sustainable activities by January 1, 2025. The EU would next decide whether or not cryptocurrency mining could be regarded as a “sustainable” activity. If the crypto industry is regarded unsustainable, European institutional investors and others may be tempted to give it a wider berth.

“The taxonomy has a big impact on where corporations, investors, and governments [may] spend their money and subsidies,” Hansen recently said. And, as additional environmental regulations are passed, that impact will get even stronger. Meanwhile, he said that Proof-of-work crypto mining is extremely likely to be classified as “unsustainable” by the taxonomy.

However, this is still some time in the future and may be restricted in scope. “I don’t believe that the inclusion to the sustainability taxonomy beginning in 2025 will have a significant influence on crypto uptake,” Hansen proclaimed. “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 anyhow.”

More crucially, Hansen continued, it would just effect mining businesses, rather than “the whole crypto sector, like the alternative amendment that was voted against.”

The inclusion of crypto mining in the EU classification is “logical,” according to Xiong. It will put greater pressure on miners to switch to more environmentally friendly options, and he predicts that by 2025, fewer networks would utilise Proof-of-work consensus procedures. “Eventually, only PoS will be used by blockchain apps,” Xiong predicts.

According to Ellul, the 2025 date provides some breathing space. “I hope it spurs the use of more renewable energy sources.” He said that one issue with the PoW-energy argument is that it is very polarised: “One side is that ‘no matter what the cost, PoW should stay,’ while the other is that Proof-of-work will kill us all.”

He proposed that a less-heated intermediate position be beneficial.

A climate crisis looms

Were there any takeaways from this recent regulatory squabble? One lesson, according to Xiong, is that crypto and blockchain developers should “only embrace environment-friendly crypto,” since any carbon emissions-related activity in this sector “will be easily picked up by onlookers.”

Indeed, Eero Heinäluoma, a member of the European Parliament who supported the anti-PoW proposal, said that “the carbon footprint of a single bitcoin transaction equals a transatlantic return journey from London to New York.” This is 1.5 million times the amount of energy used by a VISA transaction. If we do not reduce this large carbon footprint by placing crypto-currencies on a more sustainable route, our efforts to address the climate problem and increase our energy independence may be futile.”

These analogies, however, do not persuade everyone in the crypto world. 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 acknowledged that the energy crisis cannot be considered in isolation. “In today’s society, almost everything of usefulness takes energy, and many other activities are power-hungry as well.” One example: Ireland’s power provider expects that by 2028, data centres would use 30% of the country’s energy.

Overall, the European Parliament committee decision “did not result in restricting technology this time, but it does raise doubts about the future.” Meanwhile, Hansen said that even if the committee vote had failed, the mining prohibition would very certainly have been removed from the MiCA law later, when the three important EU organisations — Parliament, Council, and Commission — reconcile their legislative texts in the EU’s unique “trilogue” procedure. Nonetheless, a loss in the ECON committee would have been embarrassing, according to Hansen: