If recent headlines are to be taken at face value, the European Union (EU) could be on its way to banning crypto mining because of energy concerns.
The call for a ban on crypto mining across the EU’s 27 member nations is mainly coming from regulators in Sweden, who are concerned about renewable energy being used to mine cryptocurrencies like bitcoin instead of being channeled for public use. Politicians in Germany, Spain and Norway are supporting the call.
On Thursday, EU Parliament member Stefan Berger, who is responsible for the upcoming regulatory package for controlling crypto assets in the union, called a potential ban on crypto mining a death sentence for bitcoin in the EU.
Proof-of-work mining, the energy-intensive process used to mint popular cryptocurrencies like bitcoin and ether, has come under heavy scrutiny globally after comparisons were made between electricity use in creating bitcoin to energy consumption in some sovereign nations last year. The New York Times reported in September that the bitcoin mining industry uses more electricity annually than Finland, a nation of around 5.5 million people.
Months before that report, in May, China, which had dominated the crypto mining sector, moved to outlaw mining in the country. In the months following China’s ban, miners scattered across the globe looking for cheap electricity and a friendlier regulatory environment. By August, the U.S. had lapped up the lion’s share of the global mining market followed by Kazakhstan and Russia.
Sweden’s proposal, however, has left the European crypto community perplexed. Crypto advocates argue that, for a variety of reasons including soaring energy prices in the region, China’s ban has not led to a significant pickup in mining in the EU.
According to data from the Cambridge Center for Alternative Finance, Sweden’s average monthly bitcoin hashrate (the computing power used per second when mining) rose 0.84% percentage points between May and August 2021 following China’s ban. For comparison, the U.S. hashrate picked up by 17.7% percentage points. Eric Wall, a Swedish software engineer and chief investment officer at Arcane Assets, said no major mining companies have set up in Sweden, and there is no evidence that a large part of Sweden’s renewable energy production is getting sucked up by mining.
Meanwhile, August’s largest amount of hashrate in the EU (still under 5%) was recorded in Ireland and Germany, but that, too, comes with a caveat. The Cambridge research team states on the website that there is little evidence of large mining operations in either country justifying the figures. The hashrate is “likely significantly inflated” thanks to virtual private networks (VPN) and other methods used to redirect IP addresses.
Dmitrijs Litkins, founder of the European Crypto Mining Association, said he is not worried about a crypto ban in the region because there might be nothing to ban.
“It’s almost dead in Europe,” Litkins said in an email to CoinDesk.
Mining difficulty and the energy crunch
As the chaos following China’s ban settled and mining picked up again, so, too, did mining difficulty.
Mining difficulty adjusts automatically based on the amount of computational power or hashrate required to keep the time it takes to mine a block or group of transactions at around 10 minutes. The higher the hashrate, or energy provided, the higher the difficulty.
In January 2022, bitcoin mining difficulty was at an all-time high. Litkins, who is based in Latvia, says this puts EU countries that have been struggling with rising energy prices at a disadvantage when it comes to mining.
“Mining without having an electricity source of 0.03-0.04 euros per kilowatt-hour is useless for investors, and getting this price is impossible from standard electricity supply sources,” Litkins said.
Whit Gibbs, founder and CEO of bitcoin mining service provider Compass Mining, is also based in Latvia. He said his household electricity bills have skyrocketed. According to local reports, electricity prices in Latvia are almost five times higher than in December 2020.
Latvia is not the only country feeling the crunch. In December, Bloomberg reported that short-term electricity bills across EU nations reached record-breaking heights in 2021, soaring over 200% in countries including Germany and France. In the Nordic region, energy costs rose around 470% from the previous year. Sweden was no exception.
“This increase in the scarcity of power is, of course, driving up the costs. Because of this, a lot of mainland Europe are hyper-vigilant at how they're going to continue to power people's homes,” Gibbs said. “I think that's what's bringing this ban on proof-of-work mining into the conversation now.”
Wall says access to cheap energy is key to staying competitive in bitcoin mining.
“Otherwise, you're going to be mining bitcoins that are worth less than what you paid for it,” Wall said.
According to both Wall and Litkins, the only way it would make sense to mine bitcoin in the EU is by having access to a renewable energy source.
Litkins took it a step further.
“Crypto mining will be possible only after the investor will arrange or build his own independent cheap electricity supply,” he said, adding that the easiest and the most efficient way, for now, is to build a solar power plant.
This is the point of contention: Regulators are concerned renewable energy could be diverted to bitcoin mining.
Indra Overland, a research professor and head of the energy program at the Norwegian Institute of International Affairs, says that although he doesn’t think there is significant mining activity in the EU, he understands Sweden’s desire to put a stop to it.
“I am afraid I agree with the Swedish standpoint. Even if cryptocurrencies use renewable energy where it is abundant, they are competing against other users who could also be attracted to those pockets of cheap renewables,” Overland said in an email to CoinDesk.
The energy transition to renewables requires a reorganization of multiple sectors, he said. He added that this is already happening, and in the coming years many energy-intensive industries will move to locations where there is abundant clean energy.
“Clogging up those locations with cryptocurrency mining will slow down this process,” Overland said.
For example, if there is an excess of hydropower in a location, a cryptocurrency miner may set up shop in that location, Overland explained. If someone else, such as an aluminum smelter, wants to tap into that energy it will then have to offer more money for it than the crypto miner is paying to get access.
Francesco Bruschi, a professor of engineering and member of the Blockchain and Distributed Ledger Observatory at the Polytechnic University of Milan, doesn’t think mining is a significant enough threat to the consumption of renewable energy.
“Miners are looking for the cheapest energy sources, and if renewables are cheaper mining may be part of the demand,” Bruschi said in an email to CoinDesk.
Wall said there have not been any major mining companies setting up in Sweden. He also has not seen any sign that a large part of the country’s renewable energy sources is actually being diverted to mining.
Talk of a mining ban in the EU started in November when two Swedish regulators published an open letter calling for a halt to proof-of-work mining in the EU because of energy concerns. They called crypto assets a threat to the climate transition.
“Sweden needs the renewable energy targeted by crypto-asset producers for the climate transition of our essential services, and increased use by miners threatens our ability to meet the Paris Agreement,” the letter said, referring to the international treaty on climate change.
The ESMA official calling for the ban was Erik Thedéen, director general at the Swedish Financial Supervisory Authority, Finansinspektionen (FI), who was recently appointed ESMA vice chair. Thedéen co-authored the letter from Swedish regulators in November along with Björn Risinger, director general at the Swedish Environmental Protection Agency.
A spokesperson for ESMA told CoinDesk that the comments made by Thedéen were in his capacity as the head of Sweden's FI. ESMA also declined to comment on the use of renewable energy for crypto mining, stating it does not have a position on the issue.
Things aren’t so rosy in the new mining hotspots either. On Jan. 24, Kazakh authorities completely cut off the energy supply to crypto miners in the country for the remainder of the month, citing the national grid’s struggles to meet household demand during winter. Meanwhile, U.S. lawmakers are pressing mining companies to detail their electricity use, climate impact and expansion plans.
As for Sweden, the FI says it hopes to contribute to highlighting the increasing environmental impact of cryptocurrency mining worldwide.
“We are especially keen that policy-makers and politicians realize that the path of renewable [energy] is inappropriate given the global shortage of energy in general and renewable energy specifically. Proof-of-work should instead be banned in favor of more energy-efficient blockchain technologies,” Klas Malmen, innovation coordinator at the FI, said in an email to CoinDesk.
In his comments from January, Thedéen said a better option could be proof-of-stake mining, a system where owners of a particular currency stake their wealth as an incentive to uphold the network; it is expected to use far less energy. Although Ethereum is planning to migrate to proof-of-stake mining this year, it isn’t currently in use.
Meanwhile, Wall is confused as to why his country’s financial regulator is suddenly getting involved in energy decisions.
“That's not the role of the financial regulator,” Wall said.
In 2020, the FI received an assignment from the Swedish government to contribute to developing the financial sector in a sustainable way, Malmen said of the FI’s involvement.
“Given that crypto assets based on [proof-of-work] are the by far most energy-intensive activities in the financial sector, we believe it is of great importance that we act to reduce its climate impact,” Malmen said.
After the open letter in November, Wall tweeted a segment from Sweden’s state-owned national broadcaster SVT in which one of Sweden’s largest state-owned energy producers, Vattenfall, says cryptocurrency mining can be useful as a buffer to help regulate energy flow when the supply of energy fluctuates.
According to Lucia Fuselli, a renewable energy specialist, engineer and fellow at the World Energy Council, there are many ways in which energy can act as a buffer, but she mainly views a buffer as a form of storage. Excess energy produced during periods of weak demand can be utilized when there is high demand, Fuselli said.
“I'm not quite sure whether crypto mining would be kind of at the same level or could be utilized as a buffer. ... There needs to be a system agreed by a wider number of states,” Fuselli said.
For this to work in the EU’s 27 states, there needs to be a standardized system and a clear set of rules agreed by all, she added.
“I don't see that level of unity at present, at least in the EU,” Fuselli said.
Vattenfall declined to comment for this article.
A global issue
According to Gibbs, in the short term, we will see quite a bit of positioning where various regulatory bodies, member states and individuals in the EU.
“We'll see people start to put forward data on both sides of the aisle, those in favor of and those against, to back their claims as to why proof-of-work mining should or shouldn't be banned,” Gibbs said.
Wall hopes that when Sweden tries to take up its proposal with the EU, it would lead to a compilation of qualified feedback on the subject.
“The EU will be a bit more slow paced,” Wall said.
Gibbs agreed, adding he doesn’t see a sweeping ban on mining in the EU anytime soon. Litkins doesn’t see anything changing, adding that stable, profitable mining will only be available to those that own a renewable power source.
Wall argues that a ban on proof-of-work mining in the EU might end up being the “worst thing” for the environment globally. According to Wall, if countries that have the capacity to produce renewable energy in excess ban proof-of-work mining, it won’t make bitcoin go away, but only make it more lucrative for other nations to pick up on the demand. These other nations, Wall said, might not have access to the most sustainable sources of energy.
Wall pointed to Iran where a highly pollutive type of oil was being burned to produce energy between 2018 and 2019, with some devastating environmental consequences. Last year, a report found Iran was using proceeds from bitcoin mining to evade U.S. sanctions.
“You can maybe think of ways to tax it or subsidize it. But if you ban it, it’s just going to move it around,” Wall said.
Bruschi said this argument may have a point as miners began relocating to other countries following China’s ban.
“I think this is a weak argument. It is like saying: If we don’t make it – weapons, drugs, child pornography, crypto mining, whatever – somebody else will, so we might as well do it,” Overland said. “Norway uses this argument a lot about its oil, claiming that it is cleaner than other oil and that it is better if oil is produced by a democracy than authoritarian countries. From a climate perspective, this argument makes little sense.”
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