EU Parliament Drops Crypto Mining Ban from MiCA Draft

Table of Contents

  • Introduction
  • What was in the proposed MiCA update about Proof-of-Work?
  • What does the new MiCA draft say about Proof-of-Work?
  • Next steps for the MiCA draft
  • The route forward for Proof-of-Work opponents
  • Conclusion

Introduction

The crypto community is breathing a collective sigh of relief after the European Union jettisoned a regulatory provision on 17 March 2022 that some had called a “de-facto Bitcoin ban.” The provision in question was a part of the EU’s long-awaited Markets in Crypto Assets (MiCA) framework, which one day will standardize licensing for crypto firms across the union. The rejected MiCA provision would have restricted the use of proof-of-work (PoW) cryptocurrencies such as Bitcoin due to objections over their energy usage.

The significance of the ban, had it gone into effect, would be hard to overstate. While newer cryptocurrencies tend to validate their nodes with a proof-of-stake (PoS) model – which Ethereum is currently moving towards – Bitcoin essentially has no practical path forward to make such a transition. The MiCA provision would have amounted to an outright ban on the oldest cryptocurrency and might well have made Europe a backwater for innovation in the digital-assets sector.

In this article, we’ll take a look at the proposal, what is likely to happen next, and whether proponents of the PoW ban still have any tricks left in their bag.

Source: Wikimedia Commons

What was in the proposed MiCA update about Proof-of-Work?

Right up until the Economic and Monetary Affairs Committee in the EU Parliament voted on March 14 to push forward with a new draft of the MiCA framework, a provision had been in the draft that would have limited proof-of-work mining in the EU. The provision in question would have subjected crypto to “minimum sustainability standards” regarding the consensus mechanisms used by blockchains, essentially forcing them to shift from proof-of-work. It would have applied to any crypto issued or traded in the EU, with exemptions for small-scale projects and a phased rollout for existing digital assets. The rejected provision was itself a watered-down version of an even harsher proposal.

Proof-of-Work vs Proof-of-Stake

Here’s a very simplistic and quick explainer of PoW vs PoS:

Proof-of-Work is the name for the consensus mechanism that uses hash power (computing power) to validate a blockchain’s transactions and issue new cryptocurrency rewards for “mining”. This requires vastly increasing computing power (and therefore electricity) as the network and its ledger grow in size and users and the mining algorithm grows exponentially in difficulty. Proof-of-work is employed by older cryptocurrencies, most notably Bitcoin and Ethereum, though the latter has plans to soon upgrade to the newer and more energy-efficient proof-of-stake (PoS) model through its Ethereum Merge later this year.

Proof-of-Stake on the other hand requires very little computing power, instead of relying on qualifying or selected users’ sizable contributions of smart contract-locked native assets that accrue rewards or interest (“staking”) to process transactions and provide network stability.

The Bitcoin developer community is notoriously resistant to change, as 2017’s Bitcoin Cash hard fork showed. While the Bitcoin Core protocol has been seen recent updates such as SegWit (2017) and 2021’s Taproot protocols, these took a couple of years each to push through. Proof-of-Work is another matter altogether, with most of Bitcoin’s most fervent support base believing the high energy consumption it elicits is a necessary evil to ensure that the blockchain remains fully decentralized and censorship-free. Therefore Bitcoin has no clear pathway to shifting to PoS, and the barely dodged provision likely would have led to a ban sometime in 2025 on the world’s largest cryptocurrency by market cap. While only a fraction of BTC mining is conducted in the EU now, the impact would have been felt, and could very well have set the stage for further stifling regulations.

What does the new MiCA draft say about Proof-of-Work?

The approved version of the draft will now require the European Commission, which puts forward legislation for the EU, to place any crypto mining practices that significantly impact climate change in the EU taxonomy by the beginning of 2025. This should be considered a much softer treatment of mining than what had been on the table. The EU taxonomy is merely a system that rates the sustainability of various investments and what they must achieve in order to earn a “green label.”

Next steps for the MiCA draft

Committee members voted 31-4 in support of the MiCA draft, with 23 members abstaining – a fairly decent showing in support of the proposal. The next step for the revised framework will be to move it into the “trilogues,” which are informal negotiations that occur between the EU Parliament, Commission, and Council. When they reach a consensus, which is likely to happen in a few months, the law will be enacted with a six-month transition period for businesses.

The route forward for Proof-of-Work opponents

The proponents of the PoW ban, if they were so inclined, would still be able to veto the fast-tracking of the framework into the trilogues. This strategy would require them to whip together one-tenth of the votes in the European Parliament and would take the issues to the plenary. While it’s unclear if the PoW opponents wish to pursue this more extreme route, they would have the votes necessary if they chose to. They are also able to pursue further anti-mining measures through other avenues, such as in the EU taxonomy process as well as regulations on data centers.

Conclusion

The reaction to the MiCA draft moving forward without the proof-of-work mining ban has been positive, but many stress caution for what still lies ahead. Jake Chervinsky, head of policy at the Blockchain Association, tweeted that had the opponents of proof-of-work won, they would have come after proof-of-stake next, calling it a divide and conquer strategy.

Digiconomist founder Alex de Vries explained that the issue was likely to rear its head again, as there is currently no serious plan from within the crypto industry to do anything about the energy usage of Bitcoin.

Were the controversial provision to have made it into the MiCA draft, the ground could have been laid for a swift exit of many crypto firms from the EU, something already happening due to the inability of VASPs to comply with regulations such as the FATF Travel Rule and the host of anti-money laundering directives (e.g. AMLD5 and 6). With the U.S. and President Biden now taking a more conciliatory stance towards crypto regulation, intent on fostering and not killing innovation, the defeated proposal is a bullish win for Bitcoin and the crypto industry at large.

Source: Wikimedia Commons

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