Regulation and the coming of age of Europe’s crypto markets | Article
Sustainability and crypto carbon footprint
Bitcoin, in particular its “proof-of-work” mechanism to achieve consensus on the transactions to add to the blockchain (the process of mining), is energy-intensive. This in itself is hardly disputed. Yet there are many more nuances to this debate. Issues include the carbon footprint of the specific energy source used and the extent to which crypto electricity demand substitutes for other demand or whether otherwise wasted energy is used. A more normative question is whether bitcoin offering an independent, globally available, decentralised and censorship-resistant transaction ledger justifies its electricity use. And how does crypto energy use compare to data centre energy use for storage and distribution of social media, games and funny cat videos?
Several crypto protocols have limited energy use, but this typically comes at the cost of less decentralisation
While several crypto protocols have limited energy use by, for example, relying on alternative “proof-of-stake” consensus mechanisms, these alternatives typically come at the cost of more limited decentralisation. The community governing bitcoin’s codebase is likely to take a conservative stance, not pioneering alternative consensus mechanisms that compromise on decentralisation.
The discussion about crypto electricity consumption has probably been the most controversial aspect of crypto regulation in the European Parliament. An amendment to bar crypto assets based on environmentally unsustainable consensus mechanisms from trading in the EU did not make it, though it may reappear in further negotiations. Such a prohibition to trade energy-intensive cryptocurrencies would effectively boil down to a bitcoin ban, which would be a blow to the EU’s crypto sector. Bitcoin’s dominant position in the crypto-sphere may be eroding as other cryptocurrencies (stablecoins in particular) gain ground in “decentralised finance”, but bitcoin still functions as the reserve currency of crypto. A ban would push bitcoin-related activity to service providers outside of the EU, and hence out of sight of EU supervisors. A bitcoin ban would thus undermine the foundations of MiCAR.
A less controversial approach would be for cryptocurrency consensus mechanisms to be included in the EU taxonomy for sustainable activities. One way would be for some consensus mechanisms to be earmarked as positively contributing to climate change mitigation. This would provide some positive incentives for energy-conscious cryptocurrencies. It would not significantly hinder, let alone ban, energy-hungry ones.
A more intrusive approach would be for consensus mechanisms like bitcoins proof-of-work to be earmarked as unsustainable. Importantly, this first requires the inclusion of unsustainable activities in the EU taxonomy, which currently only identifies sustainable ones. If indeed proof-of-work would be qualified as “significantly harmful” to environmental sustainability, this would make it less attractive for financial institutions and other businesses to hold bitcoin. It would lower the sustainability score of their assets which they will need to disclose. While these disclosure requirements may not immediately deter dedicated crypto companies, they would provide a disincentive for more traditional financial institutions, in terms of reputation, but also in terms of funding costs.
