The EU Parliament wants an EU-wide Bitcoin ban. We explain: Why? What would the ban be like, when would it come into effect? And what would be the consequences? A spoiler: there is a lot of hot air in it.
In the course of the negotiations on the so-called MiCA guidelines, the Committee on Economic and Monetary Affairs (ECON) at the European Parliament , which is also responsible for cryptocurrencies, is demanding that the EU ban crypto services that are based on “environmentally unsustainable consensus mechanisms”. So on Proof of Work (PoW) like Bitcoin.
MiCA for innovation and legal certainty
With the MiCA guidelines (Regulation on Markets in Crypto-Assets), the EU wants to comprehensively regulate crypto assets.
So far, European regulatory provisions have applied. However, national regulations continue to differ significantly when it comes to issues such as money laundering, crypto custody or crypto tokens. The MiCA guidelines are intended to harmonize these rules across the EU and thus create legal certainty and promote innovation in the area of blockchain and distributed ledger technology (DLT).
The EU Parliament is currently negotiating the MiCA guidelines. The ECON Committee on Proposals, whose 120 members presumably represent the distribution of the parliamentary groups in the EU Parliament, has now drawn up proposals for this.
“Very likely” that the ban will go through
In the EU Parliament, the Social Democrats, Greens and Left have only 257 of 705 seats. Nevertheless, they were apparently able to prevail in the negotiations. At their request, the clause is to be included in the MiCA guidelines that crypto services are prohibited on the basis of “environmentally unsustainable consensus mechanisms”.
As I understand it, this primarily means creating consensus through Proof of Work (PoW). So through mining. It would mean that exchanges, payment processors or wallets in the EU would no longer be allowed to work with Bitcoin and Ethereum (as is).
Stefan Berger, Christian Democrat member of ECON, told BTC-Echo it was “very likely” that Parliament would agree to the proposal. Christian Democrats, right-wing conservatives and liberals have “vehemently” opposed the ban. However, Social Democrats, Greens and Left probably broke the resistance by threatening to withhold their approval of MiCA.
Parliament will vote on the draft on Monday 28 February. After that, Parliament, Commission and Member States will negotiate the draft, after which the Commission will evaluate it. A decision on the MiCA guidelines is expected in 2022, but a ban would not come into force until January 1, 2025.
BTC-Echo has neatly compiled the political negotiations and the first reactions of German politicians, including Frank Schäffler from the FDP. We are trying to classify and interpret the legislative project here.
1. Is resistance to a ban to be expected?
Yes, but not a pronounced one. Unlike in the USA, Bitcoin only plays a minor role for politicians in the EU and the member states. In Germany, for example, Frank Schaffler from the FDP has been the only visible politician to advocate for Bitcoin since 2013 .
However, there is hope that his party will press its coalition partners to crack down on the law. Even the party base of the Greens decided against such a ban before the Bundestag elections . Skepticism is also to be expected from the EU Commission. This rejected a Bitcoin ban in October 2020. In the interplay of the EU institutions, it often takes a more level-headed stance on cryptocurrencies than Parliament.
With few world-class crypto companies in the EU, little lobbying is to be expected. This distinguishes Brussels from Washington, where such ban plans would long since have sparked a lobbying storm. However, a Bitcoin ban would likely be legally vulnerable, which could prevent or delay its passage.
2. When would a ban take effect?
Not soon. The law is expected to be voted on in 2022. The expected subsequent negotiations with the Commission and the member states could significantly delay the adoption. If the ban goes through, it would come into effect on January 1, 2025 at the earliest.
But this is only half the battle for EU laws. After that, it still has to become national law, which often takes even longer. As early as 2016, the EU included Bitcoin in the update of the money laundering regulations. It took until the end of 2019 for this to be widely implemented in Germany . And Germany was one of the fastest EU countries.
Effectively, the Bitcoin ban would probably not come into force before 2028 or 2029. Presumably there would still be loopholes well into the 2030s, and presumably companies and their customers would be given a generous grace period depending on the country. Until all of this is done, the balance of power in the EU could shift in such a way that the law is quashed.
3. How broadly would the crypto industry be affected?
The effect would be manageable. According to a Chainalysis report, Europe is the world region with the highest crypto activity .
Most of the trading of bitcoin against euro takes place outside of the EU: in the UK, Switzerland, the US, the United Arab Emirates, Hong Kong and the Cayman Islands. The EU has already been left behind as a crypto location. A PoW ban would cement this state of affairs.
Trading platforms would have two options: They could migrate, which is overdue from a regulatory arbitrage standpoint. Or they could delist PoW coins like Bitcoin, further losing their global competitiveness. As of today, coins like Cardano, Binance Smart Chain, Ripple, IOTA, and so on remain: Bitcoin for the world, Shitcoins for the EU.
The two globally most relevant crypto companies, the hardware manufacturers Ledger and Trezor, have made the software for their wallets – or part of them – open source ( Ledger , Trezor ). This makes it easy to circumvent a bitcoin ban. Slush, the only relevant mining pool on EU territory, would have no choice but to emigrate.
4. What would it mean for crypto users and investors in the EU?
Relatively few. Most EU citizens already trade Bitcoin and other cryptocurrencies on international exchanges based outside the EU.
Those using EU trading platforms can use Euro to buy coins there whose consensus mechanisms are allowed by Parliament, such as XRP, and exchange them for bitcoins on other exchanges. So basically nothing changes. Consumer protection may deteriorate if EU citizens store their assets on trading platforms somewhere else instead of in the EU area.
So the envisaged ban is initially a toothless tiger. To bite, the EU would have to introduce some kind of “contact debt”: it would have to penalize banks and crypto service providers for allowing euro or crypto transactions on exchanges outside the EU that allow bitcoin trading. At least another 2-3 years will pass before this is decided and takes effect. So that would be around 2030.
5. To what extent does a PoW ban help the climate?
Rather little. The theoretical idea behind the law can be thought of as something like this: Bitcoin’s enormous power consumption derives from its value, and its value depends on EU companies providing Bitcoin services. If you forbid that, its value drops and with it the power consumption. This is plausible and logical in itself.
However, there are only a few companies in the EU that are globally significant for Bitcoin, and these are free to emigrate to a third country. Since EU citizens can continue to invest in Bitcoin, the impact of the ban on Bitcoin – and thus on the price and power consumption – will be manageable to negligible.
Even if the ban worked as desired, the goal would be questionable. The simple equation “Bitcoin = climate damage” falls far short of the mark. A recent study also shows that investing in Bitcoin has a lower carbon footprint than investing in the average S&P stock. Adding Bitcoin to the portfolio reduces the CO2 caused by the investment.
Actually, it’s obvious: Does it really help the climate if EU citizens don’t invest their money in Bitcoin, but in Volkswagen, Varta, BASF, Nestlé, to name just a few options? Or does it rather primarily help Volkswagen, Varta, BASF and Nestle?
6. What effect would the ban have on the EU economy and the EU states?
well If such a ban were to come into force, it would send a signal to citizens, markets and companies that is difficult to misunderstand: the EU is closer to China than the US when it comes to cryptocurrencies. It is a location hostile to innovation.
Almost 50 percent of US millennials with an income of more than $100,000 own cryptocurrencies. The German bitcoiners are mostly well educated and well paid, they often work as engineers or entrepreneurs. A Bitcoin ban would make the EU extremely unattractive among well-educated, tech-savvy and entrepreneurial people under 50. With it, the EU disqualifies itself as a tech and IT location. “Innovation” and “development” would not promote the MiCA guidelines in the EU, but in the countries to which bitcoiners are migrating.
Such a law would also have disadvantages for the EU states:
- First, they lose tax revenue. Because EU citizens only trade bitcoins on non-EU exchanges. As a result, taxes are levied against states through trading fees, and it becomes more difficult for the tax authorities to collect taxes on citizens’ trading profits.
- Secondly, it is becoming more difficult for the European penal system to determine when Bitcoin is involved because contacts such as exchanges are further away, and it is becoming virtually impossible to auction off confiscated Bitcoins, as recently the state of North Rhine-Westphalia did .
- Third, the EU is losing any say in shaping the blockchain revolution. No exchanges, no miners, no voice.
7. Why does the EU Parliament want such a law?
So we have a proposed law that would damage the economy, government and geopolitical importance of the EU without having any significant effects on Bitcoin and the CO2 emissions it generates.
Why are the MEPs proposing this? And why do they seem to insist so much? One can only speculate.
Is it from a lack of knowledge? That would be neither incomprehensible nor unforgivable. Because the committee brings together a variety of politicians from different backgrounds, representing different parties from different countries and working on a variety of issues. Just finding a common vocabulary here is an impressive achievement. Don’t expect real expertise.
Or do the parliamentarians want to set an example above all? The EU decides pro climate! The EU does not allow “pointless” waste of electricity! It’s less about actually making a difference and more about elevating the site morally and knowing that even if you couldn’t avert doom, you’ll have done “the right thing” in the long run.
Or is the climate just an excuse to crack down on bitcoin after all? Left-wing politicians in particular often dislike the monetary policy that Bitcoin embodies, but they find it difficult to win over other parties to the long-simmering desire to prohibit it.
We do not know it. What we do know, however, is that such a ban would do far more harm than good.