A new European Central Bank report has questioned whether climate risk is priced into crypto assets such as Bitcoin.
The European Central Bank is bearish on Bitcoin.
A new ECB research article assessing the climate risks associated with crypto assets has come down hard on blockchains that use Proof-of-Work consensus algorithms—primarily Bitcoin. Published Jul. 12, the report compares energy-intensive Proof-of-Work algorithms to fossil fuel cars while likening Proof-of-Stake, which uses an estimated 99% less energy than Proof-of-Work, to electric vehicles.
“Public authorities have the choice of incentivising the crypto version of the electric vehicle (Proof-of-Stake and its various blockchain consensus mechanisms) or to restrict or ban the crypto version of the fossil fuel car (Proof-of-Work blockchain consensus mechanisms),” the article states.
To highlight concerns over Proof-of-Work energy consumption, the report also references previous data claiming that the yearly electricity consumption of Bitcoin and Ethereum is in line with that of individual countries, such as Spain, the Netherlands, or Austria. Additionally, the ECB argues that the current carbon footprint for Bitcoin and Ethereum as of May 2022 negates target greenhouse gas emission savings for most euro area countries.
While Ethereum, the current second-largest cryptocurrency by market capitalization, plans to switch from Proof-of-Work to the more energy-efficient Proof-of-Stake consensus algorithm by the end of 2022, it is unlikely that Bitcoin will follow suit anytime soon.
The article argues that due to the European Union’s existing carbon reduction targets, it is “highly unlikely” that EU authorities will take a hands-off approach to regulating Proof-of-Work crypto assets like Bitcoin. According to the ECB, policy actions, such as disclosure requirements, a carbon tax on crypto transactions or holdings, and outright bans on mining are “probable.” Such actions would likely hurt the adoption of Proof-of-Work algorithms and represent a concerted political effort to push greener Proof-of-Stake cryptocurrencies over their energy-intensive counterparts.
The report concludes that EU authorities will likely not go forward with plans to restrict the use of fossil fuel cars by the planned date of 2035 without also taking action against Proof-of-Work cryptocurrencies. In line with the Markets in Crypto-assets (MiCA) Regulation currently under consideration in the European Parliament, 2025 is now the target date for punitive measures targeting Proof-of-Work crypto assets.
The recent report is not the first time EU authorities have considered bans targeting Proof-of-Work blockchains such as Bitcoin. In April, a report published by Netzpolitik revealed that officials considered a ban on Bitcoin trading to curb its use and thus reduce its energy consumption.
Although the ECB’s research article is speculative and does not include direct input from legislators, it indicates how EU authorities currently think about the different kinds of blockchain technology. Reports such as these could also influence decision-making within the EU Parliament going forward.
Disclosure: At the time of writing this piece, the author owned ETH and several other cryptocurrencies.
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