Limiting Proof-of-Work Crypto Back on the Table as EU Parliament Prepares Virtual Currencies Vote

A provision looking to force proof-of-work cryptocurrencies like bitcoin to switch to the more environmentally friendly proof-of-stake consensus mechanism is in a draft of MiCA up for a parliamentary vote on Monday.

AccessTimeIconMar 12, 2022 at 4:35 p.m. UTC
Updated May 11, 2023 at 6:23 p.m. UTC

The latest draft of the European Union's (EU) proposed legislative framework for governing virtual currencies, Markets in Crypto Assets (MiCA), still contains a provision that could limit the use of proof-of-work cryptocurrencies.

Proof-of-work is the energy-intensive consensus mechanism that underlies popular cryptocurrencies like bitcoin (BTC) and ether (ETH). The computing process has come under heavy scrutiny from lawmakers in the EU over energy concerns.

A previous draft of the MiCA framework contained a strongly worded provision that proposed a prohibition of crypto services that rely on environmentally unsustainable consensus mechanisms starting in January 2025. But the provision was later scrapped following industry backlash.

The EU parliamentarian in charge of the MiCA legislative framework, Stefan Berger, said at the time that the paragraph in question had been removed, but that a final decision had not yet been made.

One version of the new draft, reviewed by CoinDesk, has a similar provision though significantly toned down from the original. It says that crypto assets "shall be subject to 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."

If a proof-of-work consensus mechanism is operating on a small scale, it is exempt from having to meet sustainability standards, according to the provision. What qualifies as a small-scale operation has yet to be determined.

It also says that energy-intensive crypto assets that are already in use in the EU before the legislation comes into effect, will have to "set up and maintain a phased rollout plan to ensure compliance with such requirements" as specified in another part of the framework.

Another version of the measure, also seen by CoinDesk, would soften the language even further. However, it's believed the stronger version has a lot of support among parliamentarians.

Although there are plans to move Ethereum from proof-of-work to a less energy-consuming consensus mechanism called proof-of-stake, it is unclear how bitcoin, the largest global cryptocurrency by volume traded, could transition from proof-of-work. So while there's been a huge push as of late to use renewable energy in bitcoin mining, the industry is still very much dependent on traditional energy sources, thus making the cryptocurrency potentially vulnerable under the stronger proposal.

The crypto community has been swift to react, with some calling on citizens in the EU to contact their parliamentarians to oppose the measure.

Ledger, a crypto hardware wallet provider, issued a statement saying:

Individuals and organizations should be free to choose the technology most appropriate to their needs. Policymakers should neither impose nor discriminate in favor of a particular technology. This is deeply concerning and would have serious consequences for Europe.

Pierre Person, a legislator in Paris and member of the Law Commission, condemned the newly added language in an extensive Twitter thread. In it, he addressed the impact that such regulation would have on European competitiveness in the growing crypto ecosystem.

The EU parliament is set to vote on the latest MiCA draft on March 14.

UPDATE (March 3, 16:13 UTC): Adds information about alternative version.

UPDATE (March 3, 18:23 UTC): Adds statements from Ledger and Pierre Person.


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Sandali Handagama

Sandali Handagama is CoinDesk's deputy managing editor for policy and regulations, EMEA. She does not own any crypto.