The discussions on the ban of proof-of-work blockchains in the EU have come to an end for the time being with the decision of March 14, 2022. Under the keyword “Bitcoin ban” in the EU, the controversy was unfortunately shortened to the topic of cryptocurrencies and did not sufficiently expose the tokenization of digital and physical assets.
After sustained debate, EU parliamentarians on the Economic Affairs Committee decided against the regulation on proof-of-work blockchains and thus against the defacto “Bitcoin ban” within the Markets for Crypto Assets (MiCA) bill. MiCA, submitted to the European Commission in September 2020 and adopted by the European Council in November 2021, aims to “establish a regulatory framework for the cryptoasset market that supports innovation and harnesses the potential of cryptoassets in a way that preserves financial stability and protects investors.” Whether the initially averted ban on proof-of-work blockchains will stand depends largely on the voting process (trilogue) now beginning between the EU Commission, the EU Parliament and member states. Outcome open.
Why is the proof-of-work (PoW) concept attracting so much attention from European policymakers?
Many lawmakers and regulators in the EU have called for a ban on PoW mining as the crypto space grows and the impact of climate change becomes more visible. Due to the high power consumption of blockchains based on PoW technology, the initiators of the discussion want to limit the ever-increasing negative climate impact.
But are there more environmentally friendly alternatives in the crypto world? One such alternative is the modern Proof-of-Stake (PoS) consensus mechanism, which has been shown to be much more energy efficient. For many in the blockchain industry, this fact alone is the ultimate validation of the PoS general use case.
Banning PoW blockchains in the EU and the associated desire for PoW currencies like bitcoin or Ethereum to “dry up” would go nowhere. In a global platform economy, those who want to invest in cryptocurrencies will make their purchases on platforms outside the EU, with the associated damage to Europe as a financial center and no positive impact on the environment.
Unfortunately, the discussion is currently too reduced to cryptocurrencies as a use case for blockchains. According to studies by Roland Berger, Finoa, WeOwn (2021), the share of tokenized assets will take about 40% of the digital assets market by 2025. It will make a significant environmental impact whether these tokenization projects use proof-of-work blockchains such as Ethtereum or the more modern and significantly more energy-efficient proof-of-stake blockchains. Environmentally sound and innovative regulation of the token economy would establish competitive advantages for financial innovation in Europe and ensure a sustainable environmental impact.
Sascha Ragtschaa, CEO of WeOwn, explains, “Blockchain technology offers tremendous opportunities, and the crypto community is actively seeking a solution to the energy issues associated with the use of cryptocurrencies. There is tremendous energy-saving potential associated with third-generation proof-of-stake blockchains. Conversely, the older proof-of-work networks have the highest market liquidity and thus the more developed ecosystem.
From our perspective, players will continue to trade PoW cryptocurrencies such as Bitcoin despite the previously discussed PoW ban. The field has evolved so massively in recent years that newly created restrictions or bans would drive the exodus of capital to less regulated markets. Mining processes, which are actively taking place in many countries within but especially outside the EU, cannot be restricted by EU bans.
In light of this, however, regulators in the EU could shift their focus to the issues they can directly influence. For example, how to get the market to tokenize assets on PoS blockchains than on PoW. Regardless of the outcome of future MiCA discussions, EU regulators should focus on aspects of the already thriving token economy.”
Full WeOwn’s Market insight can be found here.