The EU Votes Against Banning Bitcoin, But Are Proof-of-Work’s Days Numbered?

Understandably, the wider cryptocurrency community has heralded this vote as a victory for crypto, taking it to mean that the EU has more or less approved Bitcoin, despite its growing energy consumption. However, while crypto has certainly won a battle, it hasn’t won the war, and it’s more than possible that other legislative attempts will be made by the EU to restrict proof-of-work — and Bitcoin — in one way or another in the coming years.

And with US President Joe Biden recently issuing an executive order that calls for an investigation into the impact of cryptocurrencies on climate change, Bitcoin’s days as either a proof-of-work or widely used crypto-asset could be numbered.

EU Parliament Steps Back from the Brink of Proof-of-Work and Bitcoin Ban

What happened in the European Parliament is that members of the European Parliament’s Committee on Economic and Monetary Affairs voted against a draft of the Markets in Crypto Assets (MiCA) bill that included requirements for cryptocurrencies to meet sustainability standards.

Here’s what was written in the text:

“Crypto-assets shall be subject to minimum environmental sustainability standards with respect to their consensus mechanism used for validating transactions, before being issued, offered or admitted to trading in the Union.”

The section of the draft also declared that cryptocurrencies that had already been launched prior to enforcement of MiCA would be required to “set up and maintain a phased rollout plan to ensure compliance with such requirements.

While proof-of-work was never explicitly mentioned in the draft, most experts agreed that “minimum environmental sustainability standards” would exclude it. This would mean that either Bitcoin (and other PoW coins) would be banned in the EU, or that it would have to transition to a proof-of-stake consensus mechanism. Of course, most Bitcoin maximalists would probably argue that a PoS fork of Bitcoin is not really Bitcoin, so the regulations would end up amounting to a de-facto ban.

Indeed, this was how experts, such as crypto-focused lawyer Jake Chervinsky, were describing the draft legislation. Chervinsky even predicted that “if they manage to ban PoW, they’ll come for PoS next, & every other sybil resistance mechanism after that,” implying that the EU and other authorities do not want “non-state money to exist.”

Source: Twitter

But as apocalyptic as the draft seemed for the industry, it was voted down in its PoW-banning form, by a count of 30 against and 23 for. Needless to say, this vote was celebrated by many within the industry and wider community.

Source: Twitter

You’ve Had the Good News, But Now the Bad News

Instead of accepting the draft that would have set sustainability standards for cryptocurrencies, EU lawmakers accepted a revised version that included an amendment, proposed by German MEP Stefan Berger.

“By 1 January 2025, the Commission shall present to the European Parliament and to the Council, as appropriate, a legislative proposal […] with a view to including in the EU sustainable finance taxonomy any crypto-asset mining activities that contribute substantially to climate change mitigation and adaptation,” the Berger amendment reads.

In other words, the amendment kicks the can down the road. It removes a contentious section of MiCA so that the latter can be passed in the EU Parliament (which it has now done). Meanwhile, it delegates to another set of regulations the question of how to tackle crypto’s impact on the climate.

As noted in quote above, the EU’s sustainable finance taxonomy is now being tasked with ruling on the status of proof-of-work cryptocurrencies such as Bitcoin. This taxonomy is intended to classify investment vehicles (i.e. stocks and other assets) according to how sustainable they — or the activities underlying them — are. The idea of this is to encourage investors to move towards greener investments over time.

Assuming that the taxonomy labels Bitcoin as not a sustainable investment, this would deter EU investment funds and institutions from buying BTC. It wouldn’t amount to a ban, but it would potentially limit the size of BTC’s market, and possibly prevent it from being widely adopted.

Some might argue that this isn’t a particularly bad outcome: people already know that Bitcoin doesn’t have a spotlessly clean reputation as far as the environment is concerned, and that hasn’t stopped BTC from becoming and remaining the biggest cryptocurrency by market cap. However, commentators — including Unstoppable Finance’s head of strategy Patrick Hansen — have also pointed out that cryptocurrency mining could also end up being addressed in the EU’s upcoming regulations on data centers.

These regulations will set data centers — including mining centers — limits on carbon emissions, including financial penalties if centers exceed limits. Again, this won’t obviously amount to a ban on Bitcoin and other proof-of-work cryptocurrencies, but it could make mining Bitcoin more expensive than it needs to be, something which could impact the cryptocurrency and its network in various insidious ways.

Will USA Tackle Bitcon’s Energy Consumption?

It’s also worth making the point that, while the EU hasn’t (for now) sought to tackle proof-of-work mining in any strict way, other major nations and areas are gearing up for their own responses.

Most notably, US President Joe Biden signed an executive order last week calling for a comprehensive governmental review of the impacts of cryptocurrencies in various areas, as well as for relevant policy recommendations. One area the resulting investigations will examine will be the climate, with potentially serious implications for Bitcoin.

As Section 4 (vii) of the order states, various agencies have 180 days to investigate “the potential for these technologies [i.e. cryptocurrencies] to impede or advance efforts to tackle climate change at home and abroad; and the impacts these technologies have on the environment […] The report should also address the effect of cryptocurrencies’ consensus mechanisms on energy usage, including research into potential mitigating measures and alternative mechanisms of consensus and the design tradeoffs those may entail.”

As the paragraph makes clear, the United States government is preparing itself to regulate cryptocurrencies in terms of their environmental impacts. It may even end up calling for “alternative mechanisms of consensus,” potentially paving the way for restrictions on Bitcoin and other proof-of-work cryptocurrencies.

So where does this leave Bitcoin? While its community and network are unlikely to begin calling for a transition to proof-of-stake anytime soon (or ever), there’s a possibility that the direction of travel for governments and regulators is towards encouraging proof-of-stake, and somehow discouraging, disincentivizing or even delegitimizing proof-of-work.

We may not see the full consequences of such a move for several more months or years, but with China cracking down on Bitcoin and crypto largely because of energy- and environment-related concerns, it’s not out of the question that other nations and areas could also limit the original cryptocurrency. And even without outright bans, the market could end up with a situation where PoS cryptocurrencies are given the space to develop and grow, and where PoW alternatives are hampered.