The European Central Bank (ECB) has criticized Proof-of-Work (PoW) mining used by cryptocurrencies such as BTC in a new document.
According to the ECB report, this mechanism poses a significant risk with regard to climate change. Based on this, the ECB suggested banning PoW-based cryptocurrencies until the year 2025.
BTC PoW on the agenda at the ECB
Naturally, the document addressed the case of BTC, the largest cryptocurrency on the market. However, it also pointed out issues with ETH (ETH).
It is worth mentioning that the second largest cryptocurrency on the market is moving forward with its project to migrate from PoW to the Proof-of-Stake (PoS) consensus mechanism.
PoS is seen as a more sustainable mechanism as it does not require large amounts of energy like PoW.
The researchers compiled estimated carbon footprint data for the mentioned assets. In addition, they assessed whether they undermine the EU’s commitment to combating climate change.
Then they discussed policy measures to be implemented. In this case, they gave a deadline of up to the year 2025 to implement the “potential measures”.
Drawing on data from various sources, such as the Cambridge BTC Electricity Consumption Index (CBECI), the researchers said that mining BTC and ETH together uses more energy than “medium-sized countries” such as Spain, the Netherlands and Austria.
Estimated annual electricity consumption of BTC and ETH compared to selected countries
In addition, the data showed that estimated annual emissions as of May 2022 exceeded the greenhouse gas (GHG) emission reduction target for many eurozone countries.
PoW to PoS may not solve
About the case of ether, the text emphasizes that the transition from PoW to PoS is a valid initiative. After all, it will help reduce carbon emissions.
However, the researchers noted that while such initiatives are welcome, they are voluntary. That is, they may not have a big impact.
“[Essas ações] are incapable of imposing changes in the consensus method,” the ECB said.
Furthermore, the text emphasizes that even the search for renewable sources can compromise the green transition goals. This is because as “PoW assets migrate to renewable energy sources, they may exclude the other uses of renewable energy”. According to the ECB, this could jeopardize countries’ green transition goals.
Impact on institutions
As for a possible ban on PoW, the report highlighted the possible consequences, especially for institutions.
This is because there is a lot of institutional money invested in BTC and, to a lesser extent, ETH. Therefore, the financial sector would be exposed to the “risk of a green transition”.
In other words, an eventual “green transition” by the EU could affect asset prices and, consequently, the institutions that invest in them.
“Increased financial exposures to these crypto assets will likely contribute to increased transition risk for the financial system,” reads an excerpt from the text.
Finally, the text highlights that public authorities need to assess whether the carbon footprint of certain assets harms the green transition. However, the researchers note that authorities should not stifle innovation. After all, it is an engine of economic growth.
“While the benefit to society of BTC is dubious, blockchain, in principle, can provide as yet unknown technological benefits and applications.”
