How to Make Cryptocurrencies Greener

A Brief Summary

Cryptocurrencies are big business, but many of them carry a heavy carbon footprint. EU policymakers are determined to tackle climate change and reduce companies' carbon emissions. Cryptocurrencies on their own don't release greenhouse gases into the atmosphere. It's the technology underpinning them, known as blockchain, that does. Cryptocurrency mining consumes more electricity than is used in a country the size of Austria or Portugal.

EU lawmakers are teeing up legislative remedies in an effort to get their carbon footprints under control. Representatives warn against rules that hamper the future potential of blockchain. MiCA is the Markets in Crypto-Assets regulation. The European Commission proposed MiCA last year to introduce consumer safeguards for people who buy digital financial assets. Lawmakers are hoping MiCA will set the global standard for digital assets, including their energy consumption.

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Cryptocurrencies are a huge industry. However, many of them have a large carbon footprint, putting them in the crosshairs of EU officials keen to combat climate change and decrease carbon emissions by businesses.

Bitcoin, the most valuable cryptocurrency, costs around $40,000 per unit, putting its market value at around $750 billion (at the time of publication). Ethereum is the second most valued cryptocurrency, with a market capitalization of roughly $270 billion. High prices have sparked a gold rush, and legislators are wary of sending contradictory messages.

"Policy consistency is required," said Eero Heinäluoma of the Finnish Social Democrats in the European Parliament, referring to Brussels' efforts to green the EU economy and reduce carbon emissions by 55 percent over the next nine years. "It's not very believable to legalise and promote crypto assets that are based on a technology that consumes more energy than some member states at the same time."

Cryptocurrencies do not emit greenhouse gases into the atmosphere on their own. It's the blockchain technology that underpins them that achieves it. Blockchain is a decentralized ledger that records bitcoin transactions as "blocks" of data that are nearly impossible to tamper with, making them extremely resistant to outside manipulation.

Many online IOUs, known as tokens, and stablecoins, which are digital assets tied to a government-issued currency or a basket of investments, use blockchain technology to keep track of transactions.

In the case of Bitcoin, one block is created every 10 minutes by specialized computers. The computers do this by solving difficult equations for which they are rewarded with a handful of pennies if they are correct. Proof of Work, or mining as it is more often known, is a type of block-building that ensures Bitcoin's scarcity. However, the computer power required to create these blocks can consume a significant amount of electricity, resulting in a significant carbon impact.

Bitcoin mining companies are prepared to pay astronomical electricity bills as long as Bitcoin maintains its high value among buyers. People who want to buy products with Bitcoin pay these businesses a charge for using a block, but this income pales in contrast to the money made by corporations selling the cryptocurrency they've mined.

"Fees account for 10% of miner income, while newly created Bitcoins account for 90%," said Alex de Vries, a self-described digiconomist who works for the Dutch central bank and has been a leading source of information for lawmakers on crypto's carbon footprint, which he believes will only worsen over time. "It's simple: As the price rises, miners make more money and spend more money on resources."

Bitcoin mining now consumes roughly 73 terawatt-hours per year, according to research from the University of Cambridge. That's more energy than a country the size of Austria or Portugal consumes. That is the issue that legislators will try to address. Cryptocurrency advocates, on the other hand, advise against restrictions that limit the future potential of blockchain, which has the ability to revolutionize financial recordkeeping and is still growing into less carbon-intensive incarnations.

Francesca Salierno, executive director of the Digital Currencies Governance Group, said, "The crypto-asset business has been focusing on its energy footprint for years." "This is one of the key factors behind the growth of new blockchains, such as Ethereum, which in mid-2021 had a carbon footprint less than half that of the Bitcoin blockchain."

Ethereum is planning to transition from its Proof of Work block-building system to a quasi-lottery structure that rewards persons or companies who hold significant quantities of Ether. This alternate incentive mechanism is known as Proof of Stake, and it does not necessitate the use of energy-intensive computers to do complex calculations. Rather, the more Ethers you have, the more likely you are to receive more. Sven Giegold, a German Green politician, has hailed Ethereum's change as an example of what can be accomplished by setting energy use criteria.

"If we merely talk about the environmental system," de Vries stated, "Proof of Stake solves the problem." "In a Proof of Stake system, the more your stake, the more likely you are to win. This can help you concentrate. Despite the assumption that these coins can be decentralized, there is always a finite number of players [who win in each system]."

Is MiCA capable of making a difference?

As the emissions from cryptocurrencies continue to rise, EU legislators are considering legislative solutions to bring their carbon footprints under control.

Heinäluoma of Finland is one of a small group of MEPs that have proposed green changes to a bill called the Markets in Crypto-Assets Regulation that is now making its way through the EU parliamentary process. After Facebook announced intentions to establish its own virtual currency, dubbed Diem, the European Commission recommended MiCA last year to strengthen consumer safeguards for those who buy digital financial assets. The bill is aimed towards token and stablecoin trade and has nothing to do with blockchain. It is, however, the first bill of its sort, and MPs hope that the final MiCA standards would establish a global standard for digital assets, including their energy use.

"The whole world is looking at MiCA," said German MEP Stefan Berger of the center-right European People's Party, who is shepherding MiCA through Parliament. "If we put some [green] principles in it, it would make a difference." As the file's rapporteur, he'll have to come up with concessions in September based on the modifications he's received. These proposals range from energy usage disclosure requirements to the Greens' recommendation of establishing minimum energy standards for crypto assets similar to those for household appliances. Any digital assets that do not meet those requirements will eventually be outlawed.

Berger is undecided on the ideal strategy, however he believes that mandating crypto-asset providers to specify how much energy they use to operate is a good idea. He stated, "We don't need new technology that squander energy."