The Breakdown - The EU’s Near Miss on a Proof-of-Work Ban

Starting point is 00:00:00 My point is that fundamentally, the key thing that any environmental consideration of Bitcoin or proof of work is going to rest on is not whether other things consume more energy. It's whether the energy that Bitcoin does consume in the first place is worth it. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.io, Arculus, and FTX. and produced and distributed by CoinDesk. What's going on, guys? It is Monday, March 14th, and today we are discussing the EU's potential proof of work ban. What was in the legislation and what happened in voting today.

Starting point is 00:00:47 First, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to get deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.com. slash breakdown pod. Finally, a disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX. So there were two big things that everyone was talking about in the crypto industry this weekend. The first was that Yuga Labs, the creators of the Bored Ape Yacht Club, had purchased Cryptopunks. I think there are a lot of really interesting things to explore there, and we might get into it later this week. But I'm going to focus today's show on the second thing that

Starting point is 00:01:28 everyone was talking about, which was a classic last-minute insertion of dangerous language into legislation that was scheduled to be voted upon very soon. The legislation in question was the Markets in Crypto Assets Directive, or MECA. This is a directive that has been in the European Parliament in progress since 2019. And up until recently, there was an anti-proof of work provision in the bill that had caused much consternation. A February 21st draft of Mika that was seen by the block had this language in it. It is therefore urgent to highlight the need for consensus mechanisms to deploy more environmentally friendly solutions and call the commission to identify those consensus mechanisms that could

Starting point is 00:02:07 pose a threat to the environment having regard to energy consumption, carbon emissions, depletion of real resources, electronic waste, and the specific incentive structures. Unsustainable consensus mechanisms should only be applied on a small scale. Now, on February 25th, the vote was delayed on MECA and those provisions were stripped. However, over the weekend, the industry discovered a new version V9 that brought back something similar. Crypto assets shall be subject to minimum environmental sustainability standards with respect to their consensus mechanism used for validating transactions before being issued, offered, or admitted to trading in the union. The European Commission, which is the EU's executive branch, would then be required to set, quote,

Starting point is 00:02:47 minimum environmental sustainability standards for consensus mechanisms used for validating crypto asset transactions. Crypto assets that are issued, offered, or admitted to trading in the union shall set up and maintain a phased rollout plan to ensure compliance with such requirements. Now, there was a carve-out for small-scale exemptions, but no clarity on what small-scale actually meant. So, why were people concerned about this? Well, effectively, it seems like a soft ban on proof-of-work cryptos, i.e. Bitcoin and Ethereum.

Starting point is 00:03:15 And note, this wasn't a ban on mining, but a ban on trading, so a ban on what an exchange could list, for example. So let's get to some explanations and reactions, because the meat of this is going to come from the discourse on Twitter this weekend. Patrick or Patty Hansen, the head of strategy and biz dev for Unstoppable Defi, who tweets about crypto-defi policy and Europe wrote last week, Bad news for Bitcoin and cryptocurrency in the EU. The POW ban has basically made its way back into the draft of the European Parliament that will be voted on in the committee on Monday. I just read the latest draft, a quick update. Four days ago, Dr. Stephanberger tweeted that his new

Starting point is 00:03:50 compromise dropped any ban slash addressing of proof of work. Now, just before the vote, a last-minute draft brings back the ban. This is totally unexpected. The wording of the POW ban has changed, but the effect is essentially the same. Crypto assets that are deemed unsustainable will be prohibited from being issued, offered, or admitted to trading. Existing cryptocurrencies shall set up and maintain a phased rollout plan to ensure compliance with such requirements, end quote. Since there is no way Bitcoin can and will implement a rollout plan of proof of work, it would affect Bitcoin as well. The implementation of this article would kill the competitiveness of EU crypto businesses and drive plenty of capital talent and companies out of the EU. The risk of this

Starting point is 00:04:28 insane proposition going through is higher than ever. Now, Patty also gave important context on what happens from here, saying, reminder, this is not the final vote on the regulation. Even if the Econ committee votes in favor, it is unlikely that the amendment will find its way into the final agreement that becomes law. But the EU commission and the council would in all likelihood squash it in the upcoming trilog negotiations. But you never know. The macro environment, Ukraine, inflation, etc., changes rapidly, and energy prices, usage, etc., might soon become policy topic number one. No one expected this amendment to make it even this far in the EU Parliament. The mere message or symbol of the EU Parliament calling for a POW ban would already be detrimental to the industry and have

Starting point is 00:05:09 negative consequences on investments, the attraction of talent, businesses, etc. Now, this was the line that also came from Pierre Persen, who's a French MP and who is formerly President Macron's deputy. He writes, Mika regulation will be voted on next Monday. As it stands, it definitely condemns the future of crypto assets in Europe. By banning Bitcoin and ether, by complicating the use of NFT and Defi, the European Parliament is mortgaging our monetary and financial sovereignty. Mika is a significant break with the principle of technological neutrality. Mika prohibits the issuance or offering for exchange of crypto assets that rely on proof-of-work

Starting point is 00:05:41 protocols. This leads to a deadly regulation that excludes Bitcoin and ether from Europe. If each of us must defend a more ecological and virtuous society, banning proof of work is a simplistic and caricatural view. Moreover, it amounts to ban an activity, mining, that does not exist on European territory. The issue is not the energy consumption of Bitcoin, but the origin of this energy. It would be more relevant to ban mining from fossil energies and promote players who turn surplus renewable energy to improve the probability of these means of production. Mika also refers to NFTs. Only The NFTs that are not listed on an exchange are considered outside of the scope of crypto assets. An NFT representation of a sword in a video game will therefore be governed in the same way as an asset by a market authority.

Starting point is 00:06:21 The European Union is condemning the development of our companies by imposing a regulation that is disconnected from their activity. NFT is a technological standard. It is the underlying that should be the object of regulation. Have we regulated TCPIP? Whether it is DFI 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. MEPs have taken a hard line on crypto assets, thinking they are protecting citizens. In reality, this version is mortifying for our competitiveness, while at the same time, President Biden has signed an act calling for the U.S. to fully embrace this new ecosystem.

Starting point is 00:06:59 Once again, we are going against history. Once again, we are leaving opportunities to others while boasting of having good regulation. If this text passes as it stands, we will pay the price in terms of our competitiveness and the interest of European citizens. It's not just politicians, but companies like France's Ledger that have been loud about this. Ledger put out a statement that said, stand for financial freedom. Quote, on Monday, March 14th, the European Parliament Econ Committee will vote on Mika, the comprehensive crypto-regulatory proposal for Europe. At the last possible moment, certain parties offered amendments to Mika that would ban proof-of-work consensus protocols

Starting point is 00:07:31 such as Bitcoin, Ethereum, and other popular blockchains and crypto assets in Europe, issuing an ultimatum to the rest of parliament. Accept our Bitcoin ban or we will oppose the entire Mika package. Individuals and organizations should be free to choose the technology most appropriate to their needs. Policymakers should neither impose nor discriminate in favor of a particular technology. This is deeply concerning and would have serious consequences for Europe. Ledger's statement also added the U.S. competitive piece that Pierre-Person had mentioned as well, saying, Europe's loss will be the United States gain, and through Mika, Europe will permanently see the leadership and control of

Starting point is 00:08:04 Web 3 to the U.S. just as it did with Web 2, which remains dominated by a handful of U.S. tech giants. John Whelan, the managing director of crypto at Santander, agrees, saying that will be a colossal strategic mistake for the EU. We missed Web 2 and we want to put our heads in the sand for Web 3 because we like our largest companies to make handbags and chocolate. Nexo is the go-to platform for all things crypto. Invest in the hottest coins out there and start earning risk-free interest of up to 20% APR, paid out daily. Need cash ASAP but don't want to sell? Use your crypto as collateral and receive a credit line at premium rates.

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Starting point is 00:09:50 One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCS, you pay no gas fees. Download the FTCS app today and use referral code breakdown to support the show. You get a sense of what the European crypto community might be thinking about this, but what about some of our normal regulatory commentators here in the U.S.? Well, on December 1st, Jake Trevinsky, the head of policy at the Blockchain Association, said, I fear we've been underestimating the potential impact of MECA on the crypto industry globally.

Starting point is 00:10:24 In the U.S., it feels like we've buried our heads in the sand, thinking it isn't our problem and hoping it doesn't affect us. If GDPR is any example, that may be a big miscalculation. He updated that over the weekend, saying the Mika situation is worse for crypto than anything in the USA. Tomorrow, the European Parliament votes on environmental sustainability standards that look like a pretext for a Bitcoin ban. If it passes, it can be undone in the next phase of the EU process, but it's very bad. He followed that up. Make no mistake. If they manage to ban proof of work, they'll come for proof of stake next, and every other civil-resistant mechanism after that.

Starting point is 00:10:59 This isn't just about environmental impact. It's about the right of non-state money to exist. Their strategy is divide and conquer. Let's not fall for it. Another really interesting set of thoughts came from someone who has been deep in conversation with these leaders, in the form of David Marcus, who is the former head of Libra at Facebook. He tweets, with this move, if it passes, Europe would single-handedly cut its chances to be relevant in an industry that will create enormous opportunities and jobs in the next decades.

Starting point is 00:11:26 Crypto talent will leave and build elsewhere. This is incredibly short-sighted. When that tweet got a lot of attention, he followed it up with this thread. A small thread about how the EU keeps falling behind when it has all the talent and resources to be a leading region in the world. In the early days of Libra, I had fascinating conversations with senior leaders at the European Central Bank. The short version of it was that Europe resented the fact that the vast majority of transactions were settled on U.S. payment networks. In their minds, the U.S. leveraged its reserve currency and payments network to overreach with unilateral sanctions impacting EU member states.

Starting point is 00:11:58 This became particularly vivid when the Trump administration backed out of the Iran nuclear deal. Many European energy companies were in the middle of massively profitable deals with the Iranian regime. Sanctions crushed these. That's when the EU tried to set up a clearinghouse in Stex to bypass U.S. sanctions and continue to pursue its business dealings with Iran. That move failed. The original version of Libra envisaged a stable coin backed by a basket of currencies, including the euro. The EU could have co-opted this opportunity, but instead started on its own current path with a euro-wide, suspensive consultation, Mika. That move was not about protecting consumers. It was a protectionist move to prevent another U.S.-led network to thrive in Europe. But let's examine what happened since then. With China's

Starting point is 00:12:39 crackdown on crypto mining, the U.S. is now in the lead of Bitcoin mining. Meanwhile, U.S.D. denominated that stable coins are growing at a rapid rate, nearly 200 billion now versus 38 billion a year ago. Where's Europe in this? Not in the mix. Protectionism in the age of a massively connected world defeats the very markets one tries to protect. EU, if you want to be relevant, if you want European companies to be in the lead, you need to retain, nurture, and attract talent and innovation. Historically, the way most European countries tried to stimulate innovation is through advantageous government grants and subsidies. This is not the way. Favorable regulation and policies will enable global competitiveness. More restrictions and short-sighted policies will almost inevitably

Starting point is 00:13:18 produce the opposite outcome and make Europe fall even farther behind. Web3 and crypto are going to redefine the internet as we know it. Europe still has a chance to be a relevant player alongside the U.S. Trying to ban things without understanding them fully, either as a protectionist move or to virtue signal for political reasons around ESG issues will have catastrophic consequences for Europe. Meanwhile, this attitude will create an enormous opportunity for the U.S. to reinforce its lead in a massive industry in the making. Last week, President Biden's crypto executive order outlined the importance of finding the right regulatory balance for the U.S. to remain in the lead. A decade from now, history won't be kind with people in regions that not only didn't jump on the opportunity to lead in this new era of

Starting point is 00:13:57 innovation, but got in the way of it while not fixing anything in the process. Now, of course, some of you are thinking to yourself, David Marcus, whose project got basically pushed out of existence by regulators who said, uh-uh, may be an unreliable narrator for this particular issue. However, he did have those conversations, so I thought it was worth sharing. Now, one more, slightly more optimistic take going into today's vote from Lorenzo Volecki. He wrote, this doesn't look like a ban to me. If approved, it basically says proof of work miners have to respect specific emission standards, same as for the car industry, for instance. Imposing environmental standards on cars doesn't mean banning cars. The draft also says that small-scale mining operations will be exempt from these standards. This is a

Starting point is 00:14:37 less realistic and more problematic point, as proof of work is presently operating mainly by larger mining farms, but it's still not a ban. The commission will decide what small scale means within six months after the approval of the directive, tailoring regulations based on energy consumption, use of real resources, CO2 emissions, e-waste, and specificities of incentive design. Finally, on January 1st, 2025, the commission will propose including, quote, any crypto asset mining activities that contribute sustainably to climate change mitigation or adaption in the EU's sustainable finance taxonomy. This last provision means we have almost three years to establish and show off proof of work's electricity demand response and grid balancing superpowers. Promoting these applications,

Starting point is 00:15:14 Bitcoin Proof-of-work can flip old narratives and reveal itself for the all-around sustainability enabler it is. Maybe I'm being naive, but while it's necessary to keep explaining and pushing Bitcoin energy-based reality, I'd say it's not time yet to set our hair on fire over this non-ban. I just hope the EU doesn't shoot itself in the foot by creating a hostile environment for proof of work. So what actually happened today? Well, just as I was preparing this, we got an update again from Patrick Hansen. He writes, Breaking, the Econ Committee of the EU Parliament just voted against the de facto proof of work ban. 32 against, 24 in favor. Big relief in political success for the Bitcoin and Crypto

Starting point is 00:15:52 community in the EU. We will share a breakdown of the vote and what's next here in this thread. A majority of MEPs from the EPP, ECR, renew, and ID voted against it, while a minority of MEPs from Greens, Socialists, and Democrats, and GUE mainly voted in favor. Instead, this alternative amendment from Stefan Berger was supported. Article 2A. By January 1st, 2025, the Commission shall present to the European Parliament and to the Council as appropriate a legislative proposal to amend Regulation 202852 in accordance with Article 10 of that regulation, with a view to including in the EU sustainable finance taxonomy, any crypto asset mining activities that contribute substantially to climate change mitigation and adaptation. What does this mean for proof of work? Mining will in all

Starting point is 00:16:35 likelihood no longer be addressed within this MECA regulation, but added to the EU's sustainable finance taxonomy. MECA regulates financial instruments and financial service providers. It makes way more sense to address any concerns around the sustainability of mining technology separately. The MECA draft will be negotiated in the so-called trilogues between the EU Commission, Parliament, and Council. After their final agreement, a couple of months, the law will enter into force. However, companies will have a six-month transition period to comply with the requirements. Any chances left for that proof-of-work ban? The groups that lost the vote have one last option. They could veto a fast-track procedure of

Starting point is 00:17:10 Mika going through the trilogues and bring the discussion to the plenary of the parliament. They need one-tenth of the votes of the EP to do so, which they have. That would bring the discussion around proof of work into the high-level policy arena. As we can't predict how that would play out, it should be prevented. Even if it doesn't change the vote on proof of work, it would unnecessarily delay the regulation for at least a couple of months. And even outside of this Mika regulation, the discussion around proof of work regulation is far from over. It will come back in the context of the sustainability taxonomy or in the upcoming data center regulation. So there is loads of work left in the month and years ahead, but today is a big political

Starting point is 00:17:43 success for crypto in the EU. So obviously very good news there, and I just have a few follow-ups as we close out. First, just because it got beaten this time doesn't mean that this isn't going to come up again. Now is the time to be engaging positively positively with regulators and legislators everywhere about crypto writ large and Bitcoin and proof of work specifically. Second, if you had any questions about whether the macro and geopolitics matter, well, here you go. We're not just dealing with the sanctions conversation here when it comes to crypto regulation. We're also dealing with a very acute energy shortage question. Remember, Russia supplied 40% of the European Union's natural gas.

Starting point is 00:18:27 That is a huge loss while this conflict continues to go on, and that's going to change. change the way people think about energy usage in every dimension. Third, ESG issues are not going away as something that Bitcoin and crypto have to contend with. But fourth, I believe there's a question of the efficacy of our arguments. There were so, so many people on Twitter responding to this, basically saying, this is BS if you're not banning tumble dryers too. But of course, with that argument loses, even if it's philosophically correct in some way, the argument hasn't established the fundamental thing here, which is that Bitcoin and proof of work are a worthwhile use of energy in the first place. Yes, we can talk ad nauseum about other things that use energy,

Starting point is 00:19:10 but people know on some intuitive level why those things are valuable. People use tumble-triars in their day-to-day lives, right? You may think Christmas lights are a god-awful use of resources, but if you come from my big, stupid, lit-up trees in my front yard, well, that's why we have the Second Amendment here in the good old US of A. I kid, I kid, but seriously, the point is that people understand the value these things have because they experience that value. Now let's take proof of work in Bitcoin. Most people have barely heard of it, let alone understand it. They certainly don't understand enough to know what the potential difference might be between different consensus mechanisms. My, I guess, heretical view is that it's not unreasonable for Bitcoiners

Starting point is 00:19:51 to engage with policymakers to explain this. Now, for sure, some do. And for those folks, I'm super repreciative. But there are a hell of a lot of people who would rather quote Satoshi's, if you don't get it, I don't have time to explain it to you, instead of actually engaging in the political process. And yeah, yeah, you can say all you want, that you can't ban Bitcoin, you can only ban your citizens from the Bitcoin network. And while I agree with that statement, should we condemn entire populations to being banned from the Bitcoin network by their governments because we're not willing to engage with regulators? Now, of course, there are many people who are just combative and who don't have any interest in any sort of good faith discussion

Starting point is 00:20:31 about these issues. And I'm not saying we have to bend over backwards to get to those folks. My point is that fundamentally, the key thing that any environmental consideration of Bitcoin or proof of work is going to rest on is not whether other things consume more energy. It's whether the energy that Bitcoin does consume in the first place is worth it. In August of 2010, there was a discussion on Bitcoin talk called Bitcoin My, mining is thermodynamically perverse. Sotoshi responded saying, It's the same situation as gold and gold mining. The marginal cost of gold mining tends to stay near the price of gold. Gold mining is a waste, but that waste is far less than the utility

Starting point is 00:21:09 of having gold available as a medium of exchange. I think the case will be the same for Bitcoin. The utility of the exchanges made possible by Bitcoin will far exceed the cost of the electricity used. Therefore not having Bitcoin would be the net waste. Proof of work has the nice property that it can be relayed through untrusted middleman. We don't have to worry about a chain of custody of communication. It doesn't matter who tells you a longest chain, the proof of work speaks for itself. That got this response from the original poster. Thanks very much for your reply. I agree with your analysis, and this threat has actually changed my mind as to my initial concern. After more careful study of the design of the Bitcoin network and trying to understand the exact

Starting point is 00:21:46 manner in which Bitcoin attempts to create value from the computational work invested, I am now inclined to think that Bitcoin is in fact high-efficient rather than inefficient. My thinking now is that Bitcoin does not, in fact, waste computational work at all. Instead, it works hard to deliver the most value possible from that computational work. Something like a government-issued fiat currency may not have any obvious energy burden beyond its printing, but in fact, maintaining the value of a fiat currency requires a substantial investment in maintaining police enforcement, a legal system, and national defense. In comparison to the energy cost of hiring police officers to enforce economic honesty, the energy cost of investing CPU cycles and guaranteeing that honesty mathematically seems

Starting point is 00:22:21 very small. Now, I think there are problems with just comparing it to the existing fiat system as well, but the point is that the creator of Bitcoin didn't think it was below him to reframe the argument, not as whether it wastes energy or not, but about whether the value of what that energy enables is worth it. And that, I think, is what all of these discussions, or so many of these discussions at least tend to miss. For now, it was a good day for this industry, instead of what could have been a very bad one. I want to say thanks again to my sponsors, nexo.io, Arculus and FTS. and thanks to you guys for listening. Until tomorrow, be safe and take care of each other.

Starting point is 00:22:56 Peace. Hey, breakdown listeners, come join CoinDesk's Consensus 2020, the festival for the decentralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web 3, and the Metaverse, and is designed for crypto newbies, investors, entrepreneurs, developers, and creators. Don't miss speakers like Kathy Wood, SBF, CZ, Punk 6529, and Joe Lubin to name just a few. Use code breakdown to get 15% off your pass at coindesk.com slash consensus 2022.

The Breakdown - The EU’s Near Miss on a Proof-of-Work Ban

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