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background

This blog post is a response to ESMA's second consultation paper.

The European Securities and Markets Authority (ESMA) has put forth a set of proposed regulations, referred to as the Markets in Crypto-Assets (MiCA), targeting the environmental impacts of crypto-assets, among other targets.

The essence of ESMA's concern lies in the consensus mechanisms utilised for validating transactions in crypto-assets, which, according to their assessment, might have significant adverse impacts on climate and other environmental factors. These concerns are legitimate in the larger context of global push towards more sustainable and environmentally friendly practices.

This proposal casts a wide net, targeting all crypto-assets, regardless of their consensus mechanism. However, it's worth noting that Proof of Work (PoW) mechanisms, like that used by Bitcoin, are particularly energy-intensive.

critique

In my view, this paints a rather myopic picture. Of the myriad of crypto-assets available, only Bitcoin consumes energy at a scale that dwarfs the rest. Making it mandatory for issuers and crypto-asset service providers (CASPs) to report on all crypto-asset’s environmental footprint is counterproductive because Bitcoin is the only one that consumes energy that is worth examining.

Then, it seems, that when we take Bitcoin out and we are left with insignificant PoW crypto-assets aiming to be the “next Bitcoin”, which are waning out (in terms of btc valuation), and other crypto-assets with different consensus mechanisms. As such, CASPs (e.g. exchanges) and issuers face excessive administrative burden that ESMA says they want to avoid.

As an environmentally-conscious individual, I find myself conflicted. On one hand, I appreciate the merits of environmental conservation. For example, I actively volunteer to promote a more sustainable lifestyle. As such, the idea of a sustainable label for a crypto-asset resonates with me.

On the other hand, the overarching theme of ESMA's proposal is going to inadvertently stigmatise Bitcoin.

It is an undeniable fact that Bitcoin's energy consumption is colossal, at times equating to the energy usage of entire countries.

While Bitcoin's PoW is energy-intensive, other crypto-assets leverage different, less power-hungry consensus mechanisms such as Proof of Stake. And PoW coins, outside of Bitcoin, aren't consuming energy at an alarming rate, and their appeal is waning.

And herein lies the crux: When Bitcoin is singled out by this proposal, its advantages are overshadowed by the “environmental cost” narrative. This makes this more than just a technical debate; it's shaping social opinions.

The stigma is already working: Many of my friends dismiss Bitcoin without delving deeper into its essence and potential. I wonder how much more damage can be done with this newly proposed regulation. I must admit: It is quite a sly strategy to let the issuers and CASPs label Bitcoin as an “environment killer”.

On a related note, perhaps the European Banking Authority should make it mandatory for banks to start reporting how much funding of military-industrial complex and environmental and socio-political oppression and destruction the current paradigm of endless money printing has created?

As someone who values environmental conservation, the intention behind ESMA's MiCA regulation resonates with me. However, the proposed approach appears to be somewhat skewed, potentially leading to stigmatisation of Bitcoin.

suggestions

Here are some of my suggestions in order of importance:

1. comprehensive energy consumption analysis of crypto-assets

Before implementing any requirements for CASPs to disclose energy costs, it's crucial to conduct thorough research on the energy usage trends of different PoW crypto-assets by the CASPs, issuers and/or independent research groups.

Indeed, this is ESMA’s goal: They want the issuers and CASPs—de facto responsible parties within the field—to analyse this. Makes sense.

Then, in general, this analysis aims to determine whether the energy consumption of these assets is increasing or decreasing. Understanding these trends is essential to evaluate the overall impact of PoW mechanisms in the distributed ledger technology sector. This approach will provide a clearer picture of whether Bitcoin will be the sole significant energy consumer among crypto-assets in the future, or if other crypto-assets also might contribute substantially to energy usage.

Then, I see two scenarios.

In the first scenario, if Bitcoin is trending to be the primary energy consumer, then ESMA's strategy may need re-evaluation to avoid inadvertently stigmatising Bitcoin.

Personally, I can't see why this wouldn't be the case. For the foreseeable future, Bitcoin is going to be the largest energy consumer. Then, what is the point in casting a wide net affecting all crypto-assets if Bitcoin is the only crypto-asset that consumes energy dwarfing the rest? The only reason I can conjure is the fact that ESMA can't make CASPs to report on only Bitcoin's environmental footprint without making it seem an obvious case of discrimination.

In the second scenario, if a significant number of crypto-assets utilising non-PoW consensus mechanisms are deemed to contribute to rising energy costs, then the focus should also include assessing the relevance of disclosing energy costs for those mechanisms, while considering their generally lower environmental footprint.

But are non-PoW energy costs significant enough in the first place to warrant CASPs to display an “energy label”?

2. differential reporting requirements

ESMA should recognise the significant variation in energy consumption among crypto-assets. ESMA should set thresholds based on market cap and some type of usage metric, so that only assets that break specific adoption levels need to report in detail. This way, issuers with smaller crypto-assets aren't burdened with unnecessary reporting requirements.

3. educate the public

Launch educational campaigns explaining the complexities of energy consumption in the crypto-asset field. By doing so, ESMA can help prevent the public from developing a one-sided perspective that disproportionately criticises Bitcoin.

4. incentivize greener mining

Instead of just focusing on disclosure requirements, provide incentives for crypto mining operations that transition to greener energy sources. This could be financial incentives that are known to work under such similar contexts and conditions.