The European Union has rejected a proposed rule that would have banned cryptocurrency Bitcoin across the bloc but has drafted new rules to protect consumers and make mining more sustainable.
On Monday, the European Parliament’s Committee on Economic and Monetary Affairs voted on the Framework for Markets in Crypto Assets (MiCA), the European Union’s digital asset management legislation.
A last-minute addition was made to the bill over the weekend, which aims to reduce the use of cryptocurrencies that are powered by an energy-intensive process called Proof of Work (PoW). But the parliamentary committee rejected it on Monday.
The crypto assets are neither issued nor guaranteed by a central bank or public authority, and therefore are currently outside the scope of EU legislation. The European Parliament argues that this could cause “risks to consumer protection and financial stability” and could lead to market manipulation and financial crime.
There is also widespread concern about the sustainability of cryptocurrencies as the energy consumption of Bitcoin equals that of entire small countries, according to some studies.
What did the European Union vote for?
Members of the European Parliament have voted in favor of a unified legal framework for crypto assets in the European Union. This includes consumer protection measures and safeguards against market manipulation and financial crime.
To reduce the carbon footprint of cryptocurrencies, MEPs have asked the European Commission to include crypto-asset mining in the EU’s classification (a rating system) for sustainable activities by 2025.
The draft rules received 31 votes in favour, 4 against, with 23 abstentions. Formal negotiations on the draft general framework between the European Commission, the Council and Parliament will now begin.
“With the adoption of the MiCA report, the European Parliament paved the way for the regulation of innovation-friendly cryptography that can set standards worldwide,” said Stefan Berger of the European People’s Party.
What is proof of work and how harmful is it to the environment?
Both Bitcoin and Ethereum use PoW, which is the mechanism used to confirm transactions and add new blocks to the chain.
All participants in the PoW blockchain network are competing simultaneously to solve a cryptographic algorithm. The algorithm is designed to become more difficult to solve as more computers try to solve it, which means a huge amount of computational power and therefore energy is expended to validate each block in the blockchain.
Several countries such as China have banned crypto mining due to its massive energy consumption, as the country battled blackouts last year.
Despite the crackdown in China, which has been the number one destination for crypto miners, a recent study shows that Bitcoin mining is actually getting dirtier and emitting the same amount of carbon dioxide per year as a country the size of Greece.
Several EU parliamentarians have been pushing to ban PoW crypto in favor of more sustainable energy. However, they also raised concerns that a shift to renewable energy could mean that energy is preferred for cryptocurrency mining rather than general use.
Another option could be to go with the Proof of Stake model, which is greener because it allocates coins randomly to users, who put out coins as collateral.
The draft proposal to limit Proof of Work has received a backlash from the crypto community.
“Individuals and organizations should be free to choose the technology best suited to their needs,” said a statement from cryptocurrency wallet provider Ledger.
Policy makers should not impose or discriminate in favor of a particular technology. This is very worrying and will have dire consequences for Europe.”