In September, it was announced that the European Commission (EC) would undergo a year-long study into the sustainability of digital assets. The EC’s financial services directorate issued a tender for the project, aiming to develop methodology and sustainability standards for mitigating the environmental impact of digital assets.
“There is evidence that crypto-assets can cause significant harm on the climate and environment and generate negative economic and social externalities, depending on the consensus mechanism used to validate transactions,” read the tender brief. “The preparatory action intends to develop a methodology to measure the climate and environmental impact of the consensus mechanisms used by crypto-assets and assess the feasibility of establishing environmental sustainability standards for crypto-assets with a view to the adoption of future legislative action in the area of crypto-asset financial regulation.”
The EU passed the Markets in Crypto Assets (MiCA) regulation in April, which did not directly address sustainability issues after six member states voted down a proposal to limit the use of digital assets engaged in proof-of-work (PoW) processes.
Now, some in the digital asset industry are becoming concerned that the EC methodology, at the conclusion of its tender, may involve banning such energy-intensive processes.
The pro-BTC argument
On December 4, Daniel Batten, co-founder of CH4 Capital and self-described “Cleantech Investor,” took to X (formerly Twitter) to warn that the European Commission is going down a road that could lead to an effective EU ban on block reward mining and “far-reaching consequences for the entire global Bitcoin community.”
“The EC is developing a methodology to calculate and mitigate the environmental impact of Bitcoin. It includes a proposal to measure all crypto-assets resource consumption ‘per transaction,’ and only evaluates the negative impact of Bitcoin using a suite of suite of reports that have been financially backed by Central Banks and Ripple Corporation,” said Batten, who also called the methodology in question “draconian and unscientific.”
Batten’s company, CH4 Capital, claims its mission is to “accelerate humanity’s response to removing methane from our atmosphere;” the firm’s website also quotes the United Nations Environmental Programme (UNEP) as saying that methane mitigation is “our strongest lever to reduce climate change.”
Perhaps surprisingly, considering the furor around the energy usage and environmental impact of block reward mining, Batten also believes that “in the majority of cases,” BTC mining is the best way to reduce methane emissions.
In his X post, he suggested the EC has ignored both the science and a change in the Bitcoin ESG narrative this year, demonstrating that the Commission’s intentions “have nothing to do with sustainability, and everything to do with protecting intrenched interests who could be disrupted by Bitcoin”—in other words, those such as the central banks and Ripple Corporation.
Ripple network transactions rely on a consensus protocol to validate account balances and transactions on the system, an alternative to PoW that is often designed to be more energy-efficient and environmentally friendly; it does, however, have drawbacks as well, such as concerns about security, centralization, and dependency on certain validators.
But it’s the categorization of PoW and BTC as being less environmentally friendly that Bretton objects to, and he warned that if the EC wins, BTC will be officially labeled “an environmentally harmful asset that undermines sustainability goals for the EU.”
This might seem a bit of a leap of logic, as the EC and European Parliament have yet to make any official statement or comment on the idea of banning BTC and other PoW mining operations in the EU—and a provision to MiCA along these lines was already voted down. However, the concern for BTC advocates arises from how the policymakers talk about the area and the sources of information they use to make informed policy decisions.
EU’s May report
Some of the cynicism from industry figures, particularly in the BTC space, comes from a May study titled “Remaining regulatory challenges in digital finance and cryptoassets after MiCA,” which stated that when it comes to blockchains operating in the EU, “the arguments in favour of a permissive approach conflict, to some extent, with the sustainability objective.”
The EC’s sustainability methodology also draws from the report.
“The EU implementing legislation so far has emphasized environmental concerns, with reduction of greenhouse gas (GHG) emissions as the core agenda,” said the study, produced by the Policy Department for Economic, Scientific, and Quality of Life Policies.
“There is, in fact, a tension between the energy-intensive set-up of some types of DLT [distributed ledger technology] and the emphasis on energy savings and GHG reductions of EU politics. Design features of some DLTs raise energy issues,” said the study brief, which went on to single out BTC. “It is estimated that the Bitcoin Blockchain uses collectively as much energy as the Netherlands, a country with some 18 million people.”
The study particularly highlighted BTC for criticism both due to its size and prominence, but also its lack of a centralized governance mechanism, which could design and implement improvements that are more “energy efficient and inclusive”—however, this fact is debatable as there are plenty who would argue the BTC Core developers act very much as a centralized entity.
The EU report also quoted the Financial Stability Board (FSB), which described the PoW mining process as “unsustainable,” and with the EU’s commitments to addressing the climate crisis, anything deemed “unsustainable” is potentially on the chopping block.
Positive environmental externalities?
The aim of Batten’s post was to mobilize BTC supporters to write to the Open Dialogue Foundation (ODF), a human rights and rule of law advocacy group, arguing against the supposed, or feared, EU anti-PoW agenda. He didn’t specify what the requested drafts will be used for, but presumably, the ODF will compile the responses and then advocate in the hopes of affecting the EC methodology development.
The key talking points he wanted readers to hit included why and how BTC can be a net benefit to the environment, examples of how BTC mining can help meet the EU’s sustainability goals, highlighting that every technology initially has a carbon footprint, and using evidence to show that “emissions are not increasing and that there is a realistic chance Bitcoin can become the first industry to fully mitigate emissions without offsets.”
Bretton also encouraged those writing to the ODF to point out that a framework that only evaluates “negative externalities of a technology” is incomplete.
An example of a contrary “positive externality” that he gave was the argument that Bitcoin helps with water scarcity by accelerating the buildout of renewable-powered desalination—the process of removing salt and other impurities from seawater, making it suitable for human consumption and other purposes—and increasing the efficiency of desalination. There is some basis for this argument, but it’s worth noting that it’s based on the assumption bitcoin mining is increasing renewable energy infrastructure and development.
The goal of this writing campaign would be to provide the EC with enough competing evidence to refute reports critical of BTC and PoW, on which, according to Bretton, it is currently overwhelmingly reliant.
One such report is Greenpeace’s “Investing in Bitcoin’s Climate Pollution,” produced earlier in the year, which describes BTC as “a new roadblock to progress on addressing the climate crisis.”
“Tragically, the problem is only going to grow more severe if Bitcoin fails to evolve beyond proof-of-work,” said Greenpeace, who, like the EU and EC, highlighted the “energy-intensive” process as the main issue at hand.
If Bretton is right, and these are the kinds of words ringing in the ears of European Commission and Parliament policymakers, then it’s no surprise he and his kin might be expecting bad news from the tender process aimed at developing a methodology to mitigate the “Environmental Impact of Crypto-assets.”
However, it’s worth remembering that not all PoW consensus algorithms are created equal. It might be the case that BTC is not scalable and uses too much energy due to the computational requirements placed on miners, but this is not so for the original Bitcoin protocol, BSV.
BSV could redeem proof-of-work
A November 2021 study from MNP, the fifth-largest professional accountancy and business consulting firm in Canada, investigated the energy efficiency of Bitcoin-based blockchain technology and found that BSV blockchain is more energy-efficient than the other two blockchain protocols included in the comparison—BTC and BCH.
The MNP report, titled “The Search for a More Efficient Bitcoin,” revealed that scaling is crucial for improving the energy efficiency of a digital asset secured by PoW. It also found significant differences between the various Bitcoin protocols in this regard, specifically, the power consumption per transaction significantly decreases when network utilization is higher on PoW protocols with more permissive block sizes compared to those with more restrictive block sizes.
“So long as the size or number of transactions on the BSV network exceeds the limitation of the other protocols, BSV is the most efficient in this group,” the report concluded. It also found that the “arbitrary limitations of BTC and BCH may have a significant impact in consumption per transaction.”
In contrast, MNP found that “BSV is the most efficient blockchain network when compared to the other SHA-256 proof-of-work blockchains. With greater utilization and throughput, these reductions in consumption per transaction and increase in efficiency will only improve.”
These conclusions contradict the commonly held belief that PoW protocols are universally energy inefficient and thus unsustainable.
The BSV’ big block’ approach, compared to BTC’s ‘small blocks,’ is capable of many magnitudes more transactions due to more being included in every block, meaning the energy cost of mining per transaction declines the more transactions are processed in the block. This will only increase as time goes by, as scalability is key to the utility of the BSV blockchain.
In 2022, a gigantic BSV block of 3.65 GB was processed, and then in March this year, BSV ecosystem member mintBlue, the Blockchain-as-a-Service (BaaS) platform, processed 18GB of data over the course of a day at a minimal cost of $325, registering 91% of all transactions across all major blockchains. This was topped in August when, over the course of a 24-hour period, 128.691 million on-chain transactions were processed on BSV, proving that so-called scaling limits can be pushed and broken repeatedly.
“The BSV blockchain is the only blockchain which is capable of exponential scaling,” said BSV Blockchain Association, the organization that acts as custodian of the BSV blockchain, in a December 15 statement that also welcomed both the EU’s May study and the recent Tender notice focusing on the remaining regulatory challenges in digital finance.
“Striking a balance involves exploring and implementing energy-efficient solutions, transitioning towards renewable energy sources, and fostering innovation,” said Patrick Prinz, Public Affairs Director EU at BSV Blockchain Association. “It requires a nuanced approach that acknowledges the environmental impact while valuing the resilience and security that blockchain can provide.”
One such nuanced approach that the Association pointed to was presented in a recent white paper published by BSV ecosystem company SmartLedger.
Authored by Bryan Daugherty (Global Public Policy Director at BSV Association) and Gregory Ward (Chief Development Officer at SmartLedger), the white paper introduces a suite of equations designed to assess energy consumption, transactional throughput, and mining efficiency in blockchain networks.
“By amalgamating these metrics into an Adjusted Energy Consumption Rating, the authors provide an exhaustive and precise evaluation of a network’s operational efficiency and ecological impact,” said BSV Blockchain Association.
If Bretton’s letter-writing campaign manages to save PoW mining from being universally curtailed in the EU, perhaps a more nuanced approach to assessing the ecological impact of digital asset mining could be on the cards and potentially be more effective, whether such an approach would come to a different conclusion about whether to ban BTC mining is another question.
However, should the EC methodology go down this route, it could do worse than ditching an umbrella approach based on the consensus method in favor of one based on the energy efficiency of individual blockchains.
Watch: Think of Bitcoin mining as financial self-discipline
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