EU targets Bitcoin with cryptocurrency energy efficiency labels
October 20, 2022This isn’t the first time the bloc has examined cracking down on Bitcoin mining, and it comes amid a growing push from regulators to examine the industry’s carbon footprint.
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The European Union will develop an energy efficiency label for electricity-intensive cryptocurrencies, such as Bitcoin, in an effort to bring the industry in line with the bloc’s efforts to decarbonize its economy, according to a report by Bloomberg.
According to a draft proposal seen by Bloomberg, the European Commission will create a grading measure to encourage the use of more environmentally friendly mining systems, such as proof of stake (PoS), the system that Ethereum now uses post-Merge.
“Just as their use has grown significantly, the energy consumption of cryptocurrencies has more,” the EU’s executive arm said in the draft action plan. “In harnessing the use of cryptocurrencies and other blockchain technologies in energy markets and trading, care must be taken to use only the most energy-efficient versions of the technology.”
Bitcoin is energy intensive because it relies on a consensus model called proof of work (PoW) in which miners race to solve complex algorithms to verify transactions on the blockchain in exchange for a percentage of a Bitcoin.
The labeling system included in the proposed legislation is intended to encourage other cryptocurrencies to move towards the less energy intensive PoS system. The draft legislation will also encourage member states to end tax breaks for crypto miners and require countries to stop mining activity in the event of a power shortage.
Bitcoin fell along with most other top 10 cryptocurrencies by market capitalization in response to the news, dropping 1.9% in the previous 24 hours to US$19,219 as of 2:30 p.m. in Hong Kong.
While the 27-member bloc only comprises roughly 10% of the global Bitcoin hashrate, any move to crack down on the practice in the region would have significant implications for the mining industry.
The bloc had previously considered banning the mining of cryptocurrencies that rely on PoW entirely as part of the Markets in Crypto Assets legislation earlier this year, but removed language relating to the ban at the last minute.
A report issued in response to an executive order signed by U.S. President Joe Biden found that the cryptocurrency industry’s carbon footprint does not align with America’s goals to decarbonize. The report, issued by the White House Office of Science and Technology, said the industry should consult with relevant agencies to reduce emissions or it could face regulatory action to curtail the industry’s output.
Bitcoin’s exact energy requirements are a point of contention. A report by digital asset investment house CoinShares in January found Bitcoin mining accounted for less than 0.08% of global emissions.
Looking at the relative impact of the industry tells a different story, as another report from data aggregation site Statista this year found that 1 Bitcoin transaction required 2,188.59 kilowatt hours of energy in April 2022, while 100,000 Visa transactions required just 148.63 kilowatt hours.
Advocates argue much of the energy that powers Bitcoin mining is sourced from renewable sources; however, the same CoinShares report found that 59% of the industry’s energy was created through coal and gas, 11% from nuclear energy and the majority of the remainder through renewables such as solar and wind.