It is universally acknowledged that Bitcoin has the same carbon footprint as Bitcoin. [insert small-to-medium sized European country here]. Now the European Parliament is trying to encourage cryptocurrencies like Bitcoin to work in a more sustainable way as part of a broader plan to regulate the EU’s cryptocurrency market. The UK and US have also said they are closely examining energy usage related to cryptocurrencies.
The meeting of ESG and fintech
Bitcoin is the best-known example of a proof-of-work consensus mechanism. This involves computers competing to solve complex mathematical puzzles to add transactions to the blockchain. This consensus mechanism, called mining, requires about 707 kWh of electricity per Bitcoin transaction, which is often (though not necessarily) generated from fossil fuels, according to the European Parliament.
In response, the European Parliament proposed including sustainability requirements in the EU’s draft Markets in Cryptocurrency Assets Regulation (MiCAR). Offers include:
One. ESG updates in the EU classification regulations To address cryptocurrency mining activities
2. demanding white paper Crypto assets that use proof-of-work to include an independent assessment of the asset’s energy consumption potential
three. support Sustainability Disclosure Available to cryptocurrency, cryptocurrency service providers and issuers.
classification regulations
Taxonomy regulations set criteria for determining whether an economic activity is “environmentally sustainable.” An activity is environmentally sustainable if it contributes substantially to the specific environmental goals set by the taxonomy regulations and meets a number of other conditions. Technical screening criteria determine whether a particular activity contributes to relevant environmental goals and “does not cause significant harm” to other environmental goals.
The European Parliament proposed that the Commission should include cryptocurrency mining in the economic activities contributing to climate change mitigation in the taxonomy by January 1, 2025. As a result, technical review criteria will be drawn up explaining what a green consensus mechanism is. It looks like. Other forms of consensus mechanisms are considered non-compliant from a taxonomic perspective, which may impact investor demand for cryptocurrency assets.
white paper
MiCAR requires the EU to attach a white paper to cryptocurrency proposals. The whitepaper must contain specific information, including a detailed description of the rights and obligations attached to the cryptocurrency.
According to the European Parliament, the paper should also share information on the sustainability of cryptocurrencies, including whether the underlying ledger has been maintained in compliance with the taxonomy and an independent assessment of the energy consumption potential of the cryptocurrency with evidence. . -A working model is used.
Sustainability Disclosure
MiCAR will also impose various behavioral obligations on cryptocurrency service providers. Services related to cryptoassets include storage, trading, exchange, brokerage, promotion and advice. These providers must act honestly, fairly and professionally in the best interests of their customers and provide information that is fair, clear and not misleading.
The European Parliament plans to add sustainability disclosures to these requirements in MiCAR. Under the plan, cryptocurrency service providers will be required to publish information related to the environmental and climate-related impacts of each cryptocurrency they serve. This should be placed prominently on your website. Again, this is expected to explain whether the relevant cryptocurrency complies with the taxonomy.
Overall, these proposals do not amount to a ban on proof-of-work mechanisms. However, greater transparency on ESG factors will aim to steer investment decisions away from “brown” cryptocurrencies and towards “green” cryptocurrencies.
Beyond the EU
The EU is not alone in exploring this topic. For example, after pledging to regulate some stablecoins, the UK is preparing to set out plans for regulating other forms of cryptocurrencies in a consultation document later this year. The government is already aware of the problem of increasing energy consumption by certain crypto assets and has said it will align its approach with environmental targets, including the UK’s net zero target. President Biden’s Executive Order on Responsible Development of Digital Assets also requests reports from various U.S. federal agencies that should address the effectiveness of consensus mechanisms on energy use.
next stage
The final content of MiCAR will be negotiated between the European Parliament, Commission and Council. These negotiations, known as the trilogy, are expected to take several months. Neither the Commission nor the Commission included sustainability-related requirements in the draft MiCAR, so it is unclear whether the European Parliament’s proposal will become law. The text is expected to be completed in the fall of 2022.
For more information about the Taxonomy Regulation and how it interacts with other aspects of the EU’s sustainable finance package, read our Survival Guide.