17.03.2022 Finance Luxembourg

Behind the scenes: E.U. Crypto regulation on the move, "Bitcoin Ban" abandoned

On Monday, March 14, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) opened voting on adopting ‘Markets in Crypto Assets (MiCA)’, the EU’s legislation governing digital assets. 

A last-minute addition to the bill created turmoil in the crypto-business community. The amended version of MiCA required that all currency providers submit detailed proposals about how they would comply with environmental sustainability standards, outlawing any operations with the cryptocurrencies that rely on the proof-of-work (PoW) protocol, including major players like Bitcoin and Ethereum. Ultimately, the proof-of-work ban did not find a majority vote, with 32 Members of the European Parliament against and 24 in favour.

MiCA was adopted minus the amendment that would have effectively banned proof-of-work-based cryptocurrencies. The bill will continue its journey through the E.U. institutions, aiming to harmonise the cryptocurrency laws, allowing companies to access cross border Europe.

To deep dive into the impacts of MiCA, the knock-on effect of Monday’s vote and the prospects of the industry, we asked a few questions to Arnab Naskar, Co-Founder and Business Lead at STOKR.

Let’s start with the Hot News, Arnab. Yesterday, Monday, March 14, Europe finally rejected the proposal limiting PoW cryptos such as Bitcoin after fighting during the weekend. Indeed, many stakeholders within the industry have stood up against this measure, including you. Could you explain in detail what the amendment was about? And what was at stake?

Arnab Naskar: The additional amendment of the MiCA bill, highly debated at the European Parliament on Monday 14, and fortunately disregarded, would have de-facto banned transactions and mining of cryptocurrencies like Bitcoin or Ethereum using proof-of-work or PoW systems. It was a political statement. You need to understand that Bitcoin and other cryptocurrencies are using proof-of-work to verify the data on the blockchain. Indeed, Bitcoin miners must execute a proof of work covering all of the data included in a new block for network members to accept it. This process consumes quite a lot of computational power. The underlying argument behind this controversial amendment was that PoW systems, by consuming a significant amount of energy, negatively impact the environment. This view is a miscomprehension of the crypto industry, its realities, and its following developments. A ban or a heavy-handed regulation could harm the European market and the crypto-industry. That is why we witnessed such an engagement from the crypto community over the weekend.

As part of the discussion yesterday, Europe rejected a proposal limiting PoW cryptos such as Bitcoin. Nevertheless, by January 1 2025, the European Commission would present a new proposal “to include in the E.U. sustainable finance taxonomy any crypto-asset mining activities that contribute substantially to climate change mitigation and adaptation”. What does it mean for the industry?

Arnab Naskar: This certainly means that the issue of Bitcoin mining and its ban may return and haunt us back. The political divisions remain in regulating crypto’s environmental impact, and the late amendment proved it that Greens & S&D are not willing to stand down. If not through MiCA, it will be under other legislation. Bitcoin’s energy consumption is attributed to Bitcoin mining, using a proof-of-work (PoW) mechanism. That is true. But contrary to the mainstream belief, the impact of bitcoin on the environment is far less dramatic than what we can read or hear. The global Bitcoin mining industry has a small environmental footprint relative to the aviation industry, the electric fans, or the Data Centres. Globally, the western jurisdictions have a much higher penetration of renewables in their generation mix, reducing the carbon impact of the Bitcoin mining network. Implementing an european ban would have the opposite effect on limiting carbon emissions from Bitcoin mining. Indeed, it would drive miners further into the jurisdictions where fossil fuels are heavily subsidised, thereby increasing emissions.
Creating the shift where crypto-asset mining activities are not considered as polluting activities will require time, education, and advocacy commitment. The industry has a role in explaining and demystifying the impact of crypto for the benefit of all. As industry players, we will need to monitor the legal evolution closely. Industry associations such as ADAN, founded in January 2020, could be a great support to convey the message of the Industry. ADAN’s vocation is to “promote crypto-assets and blockchain technologies in Europe in the service of a new free and open economy and to federate the industry members to foster its development by ensuring that its significant societal challenges are met.”
As a footnote, I would recommend to read the very insightful twitter thread of Jean-Marie Mognetti, Co-Founder & CEO of CoinSharesCo https://twitter.com/jmmognetti/status/1503047004032753669

After the vote, Stefan Berger, the lead MEP, said Monday, March 14: “By adopting the MiCA report, 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 crypto-assets. Many countries worldwide will now take a close look at MiCA.” Would you say that Europe, by adopting MiCA, definitely became the clear leader in crypto worldwide?

Arnab Naskar: MiCA is the very first European-level legislation on cryptocurrency. Its adoption will provide a set of rules that regulate cryptocurrencies across the European Member States, including requirements about the issuance of digital assets, the authorisation of crypto-asset service providers, and consumer protection rules. MiCA, being a regulation, will harmonise the cryptocurrency laws, allowing companies to access cross border Europe, which is very positive. As stated by Stefan Berger, “MiCA has the potential to serve as a global role model”. Of course, the immediate next step for MiCA is to enter into a discussion between the E.U. Parliament, Commission and Council, where each institution will defend its position on the legislation. Nevertheless, with the U.K. moving on a separate regulatory path because of Brexit and the U.S. being stringent on the regulations regarding cryptos, it is not an understatement to say that Europe has a clear leadership role in the crypto world to play.

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