Climate measures: Behind closed doors, EU officials talk about banning Bitcoin

For its fans, Bitcoin is the money of the future and the basis of a new economic system: digital and without central control. Anyone who wants to can join in. That’s because the network that runs Bitcoin is decentralized and runs on thousands of devices around the world. All it needs is an Internet connection, a computer and electricity.

But it is precisely the latter, Bitcoin’s hunger for energy, that is becoming a global problem. Instead of ordinary computers, crypto miners are using specialized high-performance devices, so-called ASICs. These are necessary to solve the complicated cryptographic problems that Bitcoin uses to protect itself against manipulation.

Critics consider this the currency’s Achilles‘ heel. U.S. Treasury Secretary Janet Yellen has said that Bitcoin is „extremely inefficient“ and consumes „staggering“ amounts of electricity.

Amid the Ukraine war and rising energy prices, this criticism seems pressing. While Ethereum, the second-largest cryptocurrency after Bitcoin, wants to switch to the much more frugal proof-of-stake method, such a switch is unlikely for Bitcoin. That’s because the decentralized structure that makes Bitcoin attractive to its fans makes updates nearly impossible.

Bitcoin consumes around 130 terawatt-hours of electricity annually, researchers at the University of Cambridge estimate in their Bitcoin Electricity Consumption Index. They expect that figure to rise. By comparison, the whole of Germany consumed around 488 terawatt hours of electricity in 2020. Even though this is only a rough estimate, few experts doubt that Bitcoin and other cryptocurrencies consume immense amounts of electricity.

Warnings that crypto could become a driver of climate change are causing unease among officials in Berlin and Brussels. Behind closed doors, the European Commission and the German government are considering a ban on bitcoin mining and trading in the cryptocurrency, according to documents unearthed by netzpolitik.org.

No one can say for sure where in the world bitcoin mining is taking place. China, where until last year many Bitcoin facilities were powered by electricity from coal-fired power plants, has banned cryptocurrencies across the board.

Since then, new Bitcoin data centers have been popping up in other parts of the world, most notably in the United States. Mining farms next to oil wells in Texas or in decommissioned coal-fired power plants in Pennsylvania, for example, made headlines. Such reports raise fears that a large portion of Bitcoin’s power needs will be met from fossil fuel sources.

For environmental activists and some researchers, one thing is certain: the world’s largest cryptocurrency is a climate problem. A campaign by Greenpeace USA and other NGOs is demanding that Bitcoin change its code. Because Bitcoin, like other cryptocurrencies, is based on the proof-of-work algorithm, transactions can only be stored in the blockchain if their validity is proven by a computer’s work. If Bitcoin changed its code, it could save 99 percent of its power consumption, NGOs say.

Last November, the Swedish Financial Supervisory Authority and Environmental Protection Agency became the first authorities across Europe to call for crypto mining using the proof-of-work method to be banned across the EU.

Bitcoin advocates, however, are resisting the proposal to impose a more energy-efficient mining algorithm on the cryptocurrency. „I think Bitcoin’s proof-of-work is a social achievement that can help us in times of total crisis,“ says Florian Glatz. According to him, alternatives such as proof-of-stake „don’t have the same resilience.“

The Berlin-based lawyer is co-founder of the European Crypto Initiative, and until recently he was also chairman of the German Blockchain Bundesverband. Instead of imposing legal requirements on Bitcoin, miners should rather use green power or buy CO2 certificates, Glatz says.

„No need to protect the bitcoin community“

European regulators have two tools at their disposal to curb Bitcoin’s hunger for electricity. One is to ban EU-wide mining of cryptocurrencies that use proof-of-work. However, the effect would be limited: Since hardly any mining happens in EU countries, this would have „almost no direct effect on the global mining industry – and thus the energy consumption“ of Bitcoin, says Michel Rauchs, who is a researcher at Cambridge University.

A ban would therefore have to hit not only mining, but also Bitcoin trading. Cryptocurrencies that use proof-of-work would then – as in China – be more or less outlawed in the EU.

Documents published by netzpolitik.org show how far such considerations have progressed in European authorities. They come from freedom of information requests to the EU Commission, the German government and Swedish authorities. Behind closed doors, officials exchange details about a possible course of action, as transcripts of their conversations show.

One document states a clear rationale for regulating Bitcoin:

If Ethereum is able to shift, we could legitimately request the same from BTC. We need to “protect” other crypto coins that are sustainable. Don’t see need to “protect” the bitcoin community.

These sentences were uttered at a virtual meeting between Swedish and EU officials in November 2021. It’s unclear who said it, as the Commission redacted the names of the speakers. Who did attend, however, becomes clear through an email exchange ahead of the meeting. For instance, a senior Commission official responsible for „blockchain innovation“ in Europe.

At the meeting, one of those present raises a crucial question. Bluntly, the person asks whether the EU shouldn’t generally ban the trading of cryptocurrencies that, like Bitcoin, use the proof-of-work method. The answer: redacted. The reason the Commission states for the redaction is to protect an „ongoing decision-making process“.

Officials at the meeting also discuss the consequences of a possible ban on investors. „How would disappearance of bitcoin affect consumers?“ asks one person involved, following up with an instant reply: those who own Bitcoin are aware of the currency’s large price fluctuations. „Do not need additional protection measures.“

The conversations suggest that a possible ban on mining or even trading Bitcoin is on the table, Alex de Vries says. An economist at the University of Amsterdam, he runs the influential blog Digicomist and was able to review the documents obtained by netzpolitik.org. „Pretty clear language there,“ he says.

„There is no excess energy“

Another conference call by the Commission with Swedish officials in February 2022 was joined by a senior official from Germany’s Federal Environment Ministry, according to emails disclosed under Swedish FOI law. The Commission’s minutes fail to record who made individual statements. But the document shows that officials find a key argument made by Bitcoin supporters to be implausible.

The crypto scene defends the sustainability of proof-of-work by claiming that mining can make productive use of surplus electricity when wind or solar plants produce more than the power grid can absorb, therefore contributing to climate protection by storing „worthless“ energy.

However, this is hardly the case in real terms, says one of the people present at the conference call. „Excess energy can be diverted to other markets. Methods of storing energy will improve. Hydrogen production can take excess energy. There is no excess energy.“

The document also disputes assertions that miners are satisfied with an energy surplus. „Miners want to be connected all the time. It is not in their interest to be intermittent user, as the machines are not earning anything when switched off.“

While these talks are underway at the official level, an attempt to limit cryptocurrencies‘ hunger for power is failing in the European Parliament. Currently, the EU is debating a law called Markets in Crypto-Assets that would regulate crypto trading.

In amendments to the regulation, some MEPs want to stipulate that only cryptocurrencies that meet clear environmental sustainability criteria may be traded. Currencies that consume a lot of electricity would only be allowed to a „small extent“ – a severe restriction on Bitcoin trading in the EU.

„Bitcoin’s guardian angel“

MEPs debated the quasi-revolutionary proposal in the Parliament’s Economic Affairs Committee last winter – at first virtually unnoticed by the public. But when a crypto news site reported on a possible „Bitcoin ban“, an outcry ensued. Crypto fans talked about a „scandal“ that could damage the European economy, even confidence in the EU itself. After conservative and liberal MEPs helped to defeat the proposal, German conservative MEP Stefan Berger accepted accolades as „Bitcoin’s guardian angel.“

The MEP who introduced the failed proposal for a greener Bitcoin is Sven Giegold. The Green party politician has since moved from Brussels to Berlin and has taken office as State Secretary in the Federal Ministry of Economics and Climate Protection in December. His ministry declined to comment on whether Giegold will continue to push for a Bitcoin trade ban.

The German government does not officially commit to taking concrete steps against crypto-mining. There is currently „an exchange at many levels on the question of how Bitcoin could be set up more sustainably,“ a press spokeswoman for the German Environment Ministry told netzpolitik.org.

To effectively regulate Bitcoin, however, as many countries as possible would have to get on board – especially countries where a lot of crypto mining happens. „What is needed here, therefore, is as international a solution as possible,“ the spokeswoman said.

The European Commission „is aware of the negative energy and environmental footprint of cryptocurrencies like bitcoin,“ it has recently said, but it likewise does not comment on possible specific measures.

Asked about the documents obtained by netzpolitik.org, a spokesperson said that the Commission is „aware that the Swedish and German authorities are investigating ways to ban it and will continue its regular discussions with Member States, including Swedish and German authorities.“

„Only targeting Bitcoin price is likely to work“

A first step could be taken by a new energy efficiency directive proposed by the European Commission. It would require member states to collect and publish data on the energy consumption of data centres. For the first time, there could then be labels for facilities that consume a particularly large amount of electricity – a characteristic that probably applies to many Bitcoin farms.

But for economist Alex de Vries, that is hardly an effective measure against crypto’s hunger for electricity. Improving „device efficiency has never reduced Bitcoin’s energy consumption“ de Vries says. „In this industry you can improve the machine, but at best that will just make people run two devices instead of one.“

The economist agrees that mining bans in Europe have little impact on Bitcoin’s energy footprint because mining is virtually location-independent. As long as Bitcoin’s price continues to rise, the same holds true for the cryptocurrency’s energy consumption, he says. „This is also why targeting the Bitcoin price is the only thing likely to work.“

De Vries argues that for this to happen, policymakers would have to tax transactions or restrict the trading of certain cryptocurrencies.

The debate on how to deal with Bitcoin and other crypto-currencies must be continued, Green MEP Rasmus Andresen tells netzpolitik.org. In order to curb climate change, ecological criteria are also needed for cryptocurrencies. „So the last word has not been spoken yet.“