EU regulators consider cracking down on proof-of-work miners

By Raffaele Redi
• Updated

Blockchain providers should switch to proof-of-stake protocols, says ESMA vice-chair Erik Thedéen

EU flag outside an EU building in Brussels                                 
Proof-of-work crypto mining is an energy-intensive process – Photo: Shutterstock
                                

Erik Thedéen, who is vice-chair of the European Securities and Markets Authority (ESMA), has told the Financial Times that the EU should ban energy-intensive methods of crypto mining.

“The electricity consumption of crypto-assets needs to be reduced, either by existing crypto assets moving to more energy-efficient consensus mechanisms or through a transition to new crypto assets,” Thedéen said recently at a seminar arranged by the Swedish Investor Relations Association.

Speaking at the seminar in June, the ESMA vice-chair added that Swedish Financial Supervisory Authority, Finansinspektionen (FI), “is working with the Environmental Protection Agency and others to examine this issue more closely”.

The ESMA board appointed Erik Thedéen as its vice-chair in December 2021. Thedéen, who is director general of the Swedish Finansinspektionen, will serve a 2.5-year term.

Thedéen’s speech

According to Thedéen, the proof-of-work (PoW) protocols on which lead cryptos like bitcoin (BTC) and ether (ETH) are based are inefficient. Thedéen, who said he can see blockchain technology’s potential to create value for society, suggested that proof-of-stake protocols could be the only viable solution for developing new cryptos.

“The disadvantage of the proof-of-work model is that all participants have an incentive to work on each task simultaneously. It is an extremely inefficient method, and the computers that are used to guess the right answer use an enormous amount of electricity,” he said.

“The electricity that is used is primarily sourced from fossil fuels such as coal and oil. Electricity consumption also increases in line with the market valuation. This is because the pay-out that participants receive for getting the right answer also increases with the market valuation, which increases their incentive to use more electricity and computers for the task,” he added.

“There are, however, other crypto assets [which] use alternative consensus mechanisms, such as proof-of-stake, which require significantly less energy. An institution that describes itself as sustainable should think carefully before facilitating trade in or the holding of assets with such a significantly negative environmental impact,” he said.

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