Could the EU just ban Proof of Work?

This article is first on the Fin Law Blog published.

The excitement in the European crypto industry was huge when the Greens, the Social Democrats and the Left in the European Parliament tabled a short-term amendment to the Markets in Crypto Assets Regulation (MiCA) last week, which would include a de facto ban on commercial dealings with Bitcoin and, according to the current State of the art could also have resulted in Ethereum. The application was rejected with a narrow majority, so that the danger seems to have been averted for the time being.

The subject of the proposed amendment was a regulation according to which crypto assets could only have been issued, offered or admitted to trading in the EU if their consensus mechanism met minimum ecological sustainability standards that should have been set by the EU Commission. Since the Proof of Work (PoW) consensus mechanism is the least environmentally sustainable consensus mechanism, it would probably not have been able to meet the minimum standards to be set. In particular, the dominant cryptocurrency Bitcoin, which uses the PoW consensus mechanism to validate transactions in the network, would then have been on the brink of collapse in Europe.

What would have been the consequences of a PoW ban in Europe?

The political plan to ecologically improve the consensus mechanisms of cryptocurrencies is certainly a legitimate one and, in view of the worsening global climate crisis, also to be welcomed in principle. However, it is more than questionable whether a ban can be the right means to achieve the goal. From an economic point of view, a ban on Bitcoin and Ether, which together account for more than 60% of the crypto market capital, would have been a deathblow for the European crypto market, since hardly any business model in the crypto industry can do without offering or using Bitcoin or Ether. Crypto exchanges that do not offer Bitcoin trading would not be interesting for users in the current market situation.

Tokenization projects also mostly run via protocols on the Ethereum blockchain and thus on a PoW-based network. The ban would have hit security tokens that have already been issued that work via the Ethereum blockchain particularly hard. Trading in such tokens would no longer have been possible in Europe and a shift in trading to areas outside the European Union would hardly have been possible without a complete redesign of the investor prospectuses required by sales law. Trading in Europe would only have been possible if the token had migrated to another technical infrastructure that met the minimum ecological standards. In both cases, the issuers would have incurred considerable costs, which ultimately would have had to be borne by the investors.

Would a PoW ban have been legally possible at all?

Since the Treaty of Lisbon came into force in 2009, the European Charter of Fundamental Rights has provided a binding catalog of fundamental rights with which European primary law must be compatible. As an EU regulation with direct legal effect on all Europeans, the MiCA must also meet the standards of the EU Charter of Fundamental Rights. In this respect, the freedom of occupation and the entrepreneurial freedom of citizens in the European Union are also protected. A PoW ban in the EU would have excluded the crypto service providers, who are supposed to receive an appropriate and effective regulatory framework through the MiCA, from more than 60% of the current crypto market.

The ban would have directly interfered with existing projects and business models and threatened their very existence. The proposed amendment to the PoW ban would also have been particularly critical because, according to its wording, the actual ban would not have been achieved through the regulation itself, but at the level of the technical standards for MiCA, which are set by the EU Commission alone without a legislative process would have been determined. The EU Charter of Fundamental Rights would therefore certainly have offered arguments to overturn an indirect PoW ban in the EU with the help of the courts. Whether they would have been sufficient to outweigh the environmental protection to be ensured by politics according to the EU Charter of Fundamental Rights should have been decided in an exciting legal discussion.