PayPal and PoS Protocols Seek to Influence European Crypto Policy

MiCA Regulations: What They Mean for the Future of Crypto Transparency

by Faruk Imamovic
PayPal and PoS Protocols Seek to Influence European Crypto Policy
© Getty Images/Justin Sullivan

In the ever-evolving landscape of cryptocurrency, the drive for sustainability has become a focal point, particularly as regulatory bodies begin to take a closer look at the environmental impact of digital assets. There have been efforts by PayPal and Proof-of-Stake (PoS) protocols, such as Tron, to influence European policy-making through commissioned reports. At the heart of these developments is the Crypto Carbon Research Institute (CCRI), a key player in Crypto-ESG reporting since 2021. CCRI's mission is to establish that PoS is significantly greener than the traditional Proof-of-Work (PoW) system.

2021: The Beginning of a New Narrative

The discourse on cryptocurrency’s environmental footprint began to take a definitive shape in 2021, spearheaded by the Dutch central banker and blogger Alex DeVries, alongside Ulrich Gallersdörfer, Lena Klaaßen, and Christian Stoll. They published "The True Cost of Digital Currencies: Exploring Impact Beyond Energy Use," a seminal work that underscored the negative impacts of Bitcoin beyond just energy consumption. This publication set the stage for the establishment of CCRI later that year by Gallersdörfer, Klaaßen, and Stoll. The institute focuses on contract research, IT services, and sustainability consulting, aiming to create a transparent and accurate picture of the environmental costs of digital currencies.

2022: Engagements and Collaborations

The year 2022 marked significant collaborations and engagements for CCRI. In partnership with South Pole, a company dedicated to emission reduction projects, CCRI published a comprehensive report developed in consultation with PayPal. This report investigated industry methodologies, identified gaps in existing guidance, and engaged with stakeholders in both cryptocurrency and Greenhouse Gas accounting for feedback. The insights gathered informed the creation of potential allocation solutions, which were subsequently synthesized into a proposed framework.

In January 2022, CCRI released its first contract work titled "Energy Efficiency and Carbon Footprint of PoS Blockchain Protocols," funded by Avalanche Inc. This was followed in September by "The Merge – Implications on the Electricity Consumption and Carbon Footprint of the Ethereum Network," funded by ConsenSys Software Inc. By October, CCRI had published a report on the "Energy Efficiency and Carbon Footprint of the Polygon Blockchain," backed by Polygon Technology. These publications were pivotal in establishing CCRI as a significant authority in the sustainability assessment of PoS protocols.

Cryptocurrencies© Getty Images/Jack Taylor

2023: Regulatory Developments and Challenges

The momentum continued into 2023 with critical regulatory developments. In September, the European Markets and Securities Authority (ESMA) issued a tender to develop sustainability standards for crypto-assets, citing significant environmental and climate risks associated with various consensus mechanisms. The contract for this initiative was slated to last 13 months, reflecting the urgency and importance of establishing robust standards.

By October, ESMA had released the second consultation paper on the technical standards for the upcoming Markets in Crypto-Assets (MiCA) regulation. This paper requested specific Environmental, Social, and Governance (ESG) disclosures from Crypto Asset Service Providers (CASPs), sparking a wave of concerns from industry stakeholders about data availability and reliability. Despite these concerns, CCRI supported the proposed Regulatory Technical Standards, emphasizing the positive impact such transparency would have on understanding the environmental footprint of crypto assets.

Alex DeVries, a central figure in this narrative, provided his insights on the upcoming MiCA regulations. He noted, "MiCA will contain environmental disclosure requirements for all crypto-assets offered by crypto-asset service providers in the EU. ESMA is tasked with working out the details of these requirements and the preliminary requirements can be found here. Whether tokens use proof-of-work or proof-of-stake; these sustainability indicators will have to be disclosed regardless."

DeVries’ commentary highlighted the potential drastic impact of these regulations, as they would compel all crypto investors to confront the environmental costs of digital assets. For platforms, the challenge would be in collecting and providing the necessary information, given that only a limited number of tokens currently have live sources of environmental data.

The Transparency Dilemma

The debate on transparency is nuanced, involving various stakeholders with differing perspectives. On one hand, Alex DeVries argues that calculating the network's energy consumption requires minimal inputs, a view that contrasts sharply with CCRI's detailed methodology. DeVries has been vocal about his criticism of the CCRI's business model, which relies heavily on contract research funded by the protocols being evaluated, suggesting a potential conflict of interest.

Requests for comments from Tron, Polygon, Avalanche, ConsenSys, and South Pole were met with silence, while PayPal asked for more information without further response. However, Alex DeVries provided detailed insights on MiCA’s environmental disclosure requirements, while Lena Klaaßen, co-founder of CCRI, elaborated on the organization’s development, methodologies, and the impending impact of the MiCA regulations.

Klaaßen emphasized, "Our mission is to provide transparency on the environmental impact of crypto assets. Before founding CCRI in 2021, my co-founders and I started looking into the electricity consumption and carbon footprint of bitcoin as academic researchers. Today, we provide the largest dataset of environmental aspects for over 30 crypto-assets. We rely on both techno-economic models for Proof-of-Work assets and primary data collection for Proof-of-Stake assets to ensure a high level of accuracy."

Despite these assurances, the trustworthiness of the numbers published by CASPs remains questionable, given their vested interest in presenting favorable data. This issue is further compounded by the involvement of financial entities such as PayPal, which adds another layer of complexity to the trust equation.

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