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How the EU banned bitcoin … and then didn’t

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I’m not sure if anyone noticed but yesterday was the day that Europe voted not to ban bitcoin.

It’s been bubbling for a while, as the EU developed a new Markets in Crypto Assets (MiCA) framework to protect EU citizens who invest in such assets.

In many ways, it’s a good thing as, once a cryptocurrency firm is licenced in one EU state, that license would become “passportable” under MiCA, meaning that the firm could set up in another EU nation without having to obtain approval or additional licenses from the local government.

Sounds good?

Yes, except that hidden in the text was a possible ban on any cryptocurrencies based upon Proof-of-Work (PoW). The law would establish a ban on creating, selling or trading crypto assets within the EU if they use “environmentally unsustainable consensus mechanisms” by 2025.

That effectively would have meant that bitcoin is banned in Europe, as it is based upon PoW. Ethereum will have issues too, but is moving to Proof-of-Stake (PoS) later this year. What’s the difference?

PoW cryptos have to be mined but PoS coins don’t. The key here is that if you don’t need to mine, you don’t need to expend compute power, you save energy and so it’s greener. In other words, PoS is energy efficient and PoW is not.

Proof-of-work is the algorithm that secures many cryptocurrencies, including Bitcoin and Ethereum. Most digital currencies have a central entity or leader keeping track of every user and how much money they have. But there’s no such leader in charge of cryptocurrencies like Bitcoin. Proof-of-work is needed to make the online currency work without a company or government running the show.

From Investopedia:

  • Proof of work (PoW) is a decentralized consensus mechanism that requires members of a network to expend effort solving an arbitrary mathematical puzzle to prevent anybody from gaming the system.
  • Proof of work is used widely in cryptocurrency mining, for validating transactions and mining new tokens.
  • Due to proof of work, Bitcoin and other cryptocurrency transactions can be processed peer-to-peer in a secure manner without the need for a trusted third party.
  • Proof of work at scale requires huge amounts of energy, which only increases as more miners join the network.
  • Proof of Stake (PoS) was one of several novel consensus mechanisms created as an alternative to proof of work.
  • With proof-of-stake (PoS), cryptocurrency owners validate block transactions based on the number of coins a validator stakes.
  • Proof-of-stake (PoS) was created as an alternative to Proof-of-work (PoW), the original consensus mechanism used to validate a blockchain and add new blocks.
  • Proof-of-stake (PoS) is seen as less risky in terms of the potential for an attack on the network, as it structures compensation in a way that makes an attack less advantageous.

The major issue here is energy usage. If you need to prove the work was done to solve an algorithm, you have to use a lot of computer power. That’s the non-stop issue discussed about bitcoin.

When bitcoin was launched, you would need just a few seconds of household electricity to mine one coin; today, you need a room full of specialised machines, each costing thousands of dollars and using huge amounts of electricity, because bitcoin mining has become more and more costly, difficult and specialised, based upon PoW.

So, the new EU regulation on Friday stated that all crypto assets will be subject to the EU’s “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.”

What does that mean?

It basically means all PoW coins are banned, including bitcoin, in the European Union. For me, that’s interesting as I have yet to find any government anywhere that could ban bitcoin, but we shall see.

But then as the bill went to the vote, they removed the offending paragraph once more. As Capital.com reports:

The European Parliament will vote on EUs cryprocurrency asset regulation without a controversial proposal to outlaw all Proof-of-Work(PoW) cryptocurrencies, following a widespread backlash. 

The Parliament's Committee on Economic and Monetary Affairs (ECON) was set to vote whether to outlaw mining, purchase and trading of PoW cryptocurrencies due to environmental demands of PoW technology. But as the majority of main virtual coins, including bitcoin, ethereum, run on PoW consensus, such a ban would have far-reaching consequences and become the subject of market-wide criticism.

However, as of Monday morning, the proposal document Markets in crypto-assets regulation (MiCA) shows that the paragraph 61 (9c) was crossed. It read: “The proposal includes an Crypto-asset providers shall not provide services related in any way, shape, or form to crypto-assets that do not meet the environmental sustainability criteria in accordance with Article 3a.”

“In particular, they shall not facilitate the purchase or trading of such crypto-assets and shall not offer custody services for such crypto-assets.”

ECON had previously scrapped the clause, but then it re-appeared to the document before being crossed out again.

You can read the final bill here, and the vote last night went through with the relevant text related to PoW removed, although there is a new amendment that adds cryptocurrency mining to the EU sustainable finance taxonomy.

It’s also not the end of the story as that was just the EU Parliamentary vote. Now that Parliament has decided on the draft, it will move on to a trilogue, which is a formal round of negotiations between the European Commission, Council and Parliament. That can then drag on for months and years and, at any time, could send MiCA back to the drawing board to be redrafted.

Dontcha love polyticks?

Postnote:

If you hadn't noticed, Joe Biden is in bitcoin's corner, signing an Executive Order last month to say Go Bitcoin.

President Biden’s recent executive order regarding the responsible development of digital assets helped lift the price of Bitcoin, Ethereum, and other cryptocurrencies. According to Ari Redford, Head of Legal and Government Affairs at TRM Labs: “The executive order is really a call for coordination—playing quarterback to ensure that regulators are working together to feed into a clear and consistent framework for crypto regulation rather than engage in disparate work streams” ... in January and February 2022, more money was transferred from banks to crypto platforms like Coinbase than to Amazon, Walmart, and Target combined. (Source: Fiserv study of ACH transactions)

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Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...

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