Bitcoin and its supporters in Europe breathe a heavy sigh of relief this week.
In a huge win for the community, the European Parliament’s Economic and Monetary Affairs Committee voted, on Monday, against a controversial provision as part of the proposed Markets in Crypto Assets (MiCA) regulation.
The provision, added to the MiCA draft last week, aimed at limiting the use of Proof-of-Work (PoW) cryptos, like Bitcoin and Ether, because of their allegedly high energy consumption. However, the proposal was met with heavy backlash from crypto advocates worldwide before it was put to vote.
What is MiCA?
In an attempt to bring out uniform cryptocurrency regulations, the European Union (EU)—the 27-nation political and economic entity—has been working on creating a comprehensive legislative framework to govern digital currencies. The outcome of these efforts is the Markets in Crypto Assets (MiCA) regulation.
MiCA was first proposed in 2018 to fill in the regulatory vacuum at an EU level.
On 24 September 2020, the European Commission (EC), the executive branch of the European Union, adopted a Digital Finance Strategy to promote the continent’s FinTech sector. And the broad strategy included introducing legislative proposals on crypto assets, namely MiCA.
The 168-page MiCA document describes MiCA’s aim as follows: “to harmonize the European framework for the issuance and trading of various types of crypto tokens as part of Europe’s Digital Finance Strategy.”
It provides a framework for regulating crypto-assets and their service providers in the EU. The goal is to have a single licensing regime across all member states by 2024.
Last Minute Turmoil: Monday’s Vote
Earlier, in November 2021, the EU started focusing on the energy consumption of Bitcoin and Ethereum after an open letter from Swedish regulators requesting a bloc-wide ban on crypto mining.
However, the proposed ban’s provisions were rescinded shortly after, following strong pushback from crypto innovators and advocates. The detractors had argued that a ban was unnecessary and would offset Europe’s competitiveness drastically in global finance and technology.
Then suddenly, just before Monday’s vote by the Committee, a Proof-of-Work (PoW) ban made its way back into the regulatory draft, creating confusion. Much to the delight of Europe’s crypto community, though, the provision was subsequently voted out by a wafer-thin majority of seven votes (30–23 with six abstentions).
What a PoW ban would have done?
It may be helpful to reflect on what a PoW ban would have translated into. Proof of Work is a consensus mechanism used in mining cryptocurrencies, particularly Bitcoin and Ethereum.
The proposed PoW ban would have meant two things:
- For future crypto: Crypto-assets that are deemed unsustainable would no longer be issued, offered, or admitted to trading.
- And for existing crypto: A phase-out plan would be set up to shift the consensus mechanisms of cryptos from PoW to other less energy-intensive mechanisms like Proof of Stake (PoS).
A day before the ban suggestion was shelved, Pierre Person, a French legislator and a member of the Law Commission, condemned the above provisions in a strongly worded Twitter thread. His words can help us understand the implications better. He explained that MiCA’s new addition virtually meant a ban on the two largest cryptocurrencies—Bitcoin and Ether—constituting nearly 60% of the total market capitalization. This would complicate the use of both Non-Fungible Tokens (NFTs) and Decentralized Finance (DeFi).
He reasoned that in the guise of protecting citizens, the PoW ban provisions would “mortify” EU’s competitiveness at a time when US President Joe Biden has signed orders to embrace the emerging technology.
“Whether it is DeFi or NFT, these technologies are still in the early stage of development. It is the future use cases that we will have to regulate, not the technology. Parliament is transposing old world financial regulation to a structurally different new technology,” he added.
Bitcoin more vulnerable than Ethereum
Both Bitcoin and Ethereum currently use a proof-of-work consensus mechanism. A ban may have spared Ethereum, though, because it is already planning to migrate from PoW to a less energy-consuming mechanism called proof-of-stake.
However, such a transition is rather unlikely for Bitcoin in the near future given the costs.
Furthermore, Bitcoin supporters argue that the PoW consensus mechanism is at the core of the process of ensuring complete decentralization.
“The issue is not the energy consumption of Bitcoin, but the origin of this energy,” Person noted.
The Future of Crypto in the EU
The move to drop the PoW ban provision from MiCA legislative framework was celebrated as a victory by the community.
“First stage win at #MiCA in Committee! By accepting my proposal, members have paved the way for future-oriented crypto regulation. It is now a matter of accepting the report as a whole in the final vote & sending out a strong signal for innovation,” Stefan Berger, EU parliamentarian in charge of the legislative framework, tweeted.
While talking about MiCA’s impact on the European economy, Eva Kaili, a member of the European Parliament since 2014, says, “We have 27 different member states with different legal and tax systems that are not harmonized. So we are trying to adopt a unique approach to policy making with this file.”
At present, EU countries have to issue their own regulatory requirements for crypto assets. However, under MiCA, a single overarching legislative framework would apply to all member states.
And such a passportable licensing policy could mark the beginning of innovators flocking to Europe to reap the benefits that come with a larger unified market.
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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