The commotion within the crypto industry was huge when the Green Party, the Social Democrats and the Left-Wing Party of the European Parliament last week proposed a last minute change to the Markets in Crypto Assets regulation (MiCA), which, if adopted, could have resulted in a de facto ban of the commercial handling of Bitcoin and also – with regards to its current technical state – Ethereum. The proposal was rejected by a narrow margin, meaning that this danger to the crypto industry is warded off for now. Subject of the proposed change was a regulation according to which crypto assets in the EU could only be issued, offered or authorized for trading, if their consensus mechanism would fulfill minimum requirements regarding ecological sustainability which the EU commission would have had to define. Since the Proof-of-Work consensus mechanism is the least ecological sustainable consensus mechanism, it would probably not have fulfilled the to-be-determined minimum requirements. Especially the dominating cryptocurrency Bitcoin, which uses the PoW consensus mechanism for the validation of transactions in its network, would probably have faced its demise in Europe.
What Would Be the Consequences of a PoW Ban in Europe?
The political ambition to ecologically improve the consensus mechanisms of cryptocurrencies is surely a legitimate and in light of the ongoing and escalating, global climate crisis a welcomed one. It nonetheless seems very questionable, if a ban could and should be the way to do so. From an economical perspective, a ban of Ether and Bitcoin which combine account for more than 60% of the market capitalization of the crypto market would have been the deathblow to the European crypto market, because almost no business model in the crypto industry can exist without the utilization respectively the offering of Bitcoin or Ether. Crypto exchanges that do not offer the trading of Bitcoins would be of no interest to users in the current market situation. Tokenization projects also generally run on protocols associated with the Ethereum blockchain and therefore on a PoW based network. This ban would have hit already issued security tokens which run on the Ethereum blockchain hard. The trading of these tokens would have become impossible in Europe and a transfer of the trading to areas outside the European Union would have probably been impossible without a complete remodeling of the mandatory prospectuses which are required under regulatory law. The trading in Europe would only have continued to be possible if the tokens in question would have migrated to a different technical infrastructure which fulfilled the ecological minimum requirements. Both approaches would have been associated with considerable costs for the issuers which in the end the investors would have had to bear.
Would a PoW Ban in the EU Been Legally Possible?
Since the Treaty of Lisbon took effect in 2009, the European Charta of Fundamental Rights guarantees the European fundamental rights with which European primary law must be compatible. Also the MiCA regulation as an EU regulation being directly applicable to all Europeans must adhere to the standards set out in the European Charta of Fundamental Rights. Protected by the European fundamental rights is the occupational freedom as well as the entrepreneurial freedom of the citizens of the European Union. A PoW ban in the EU would exclude European crypto service providers from more than 60% of the current crypto market, even though MiCA is intended to provide a suitable and effective regulatory framework for exactly that market. The ban would directly and massively threaten already existing projects and business models in their existence. Especially critical would have been the fact that the proposed amendments for MiCA regarding the PoW ban according to their wording would have delegated the actual ban from the regulation itself to the level of the technical standards concerning MiCA which in turn are going to be determined by the EU commission without any legislative process. The EU Charta of Fundamental Rights would therefore have provided good arguments for a seised court to overturn the PoW ban in the EU. It would have been an interesting legal discussion to see, whether the abovementioned arguments could outweigh the environmental protection that is also imposed by the European Charta of Fundamental Rights.
Attorney Lutz Auffenberg, LL.M. (London)