EU's Crypto Energy Labelling - Good for Ethereum, Bad for Bitcoin

The European Union is introducing an energy efficiency label for blockchain networks. The goal will be to support the growing electricity consumption in the region. The European Commission is planning to engage international partners in creating a grading mechanism that will encourage the use of environmental-friendly blockchain systems.

Europe to have an energy label for blockchains

The European Commission is planning to bring energy efficiency into the blockchain sector. The region plans to promote environmentally-friendly crypto systems, such as those relying on proof-of-stake mechanisms.

A draft proposal on the matter says that the EU will also mandate countries to assess the energy consumption of miners. The EU is currently looking into how it can manage energy consumption as demand is anticipated to increase during winter amid the lack of Russian gas.

The executive arm of the EU has also added that the growing use of crypto assets has increased their energy demands. Therefore, the commission is tapping into cryptocurrencies and other blockchain technologies to ensure that only the most efficient versions of the technology are used.

The Bitcoin network uses a proof-of-work consensus. The consensus has been criticized for not being more energy efficient than the proof-of-stake consensus. The Ethereum blockchain switched from a proof-of-work to a proof-of-stake consensus last month, and the switch reportedly lowered the blockchain’s energy consumption by 99%.

The EU accounts for around 10% of the PoW crypto mining that happens globally. Nevertheless, banning this mechanism could be bad for the blockchain sector. In the past, the EU has considered banning PoW mining, but it later settled for requiring disclosures on the environmental effects of the assets listed by crypto asset service providers.

The labeling system encourages blockchain networks to switch to more energy-efficient networks, like the Ethereum network. However, the Bitcoin community has been hesitant to make this transition. This hesitance can be seen in the uproar caused by Ripple’s co-founder Chris Larsen when he proposed Bitcoin’s migration to an energy-efficient system.

The EU is also planning to release a report assessing the crypto industry’s climate effects by 2025. It is also urging member states to end tax breaks for cryptocurrency miners. When there are energy shortages, the EU also recommends that countries be ready to halt crypto mining.

In Iran, the government has had a contentious relationship with cryptocurrency miners. The government closed all Bitcoin mining sites for several months before reopening them last month because of high energy demands.

Crypto mining attracts regulatory attention

Crypto mining activities have grown significantly over the past year, attracting regulatory attention. The EU is not the only region interested in the sector because the United States is also turning regulatory attention to the sector.

The Senator of Massachusetts, Elizabeth Warren, and other lawmakers in the country published a letter airing concerns on the growth of the crypto mining industry in Texas and the effects that these activities could have on climate change and the stability of the energy grid.

The EU plans to enact the Markets in Crypto Asset Regulation (MiCA) legislation by the end of 2023. This legislation will mandate crypto players to disclose their effects on the environment and climate.

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