Currency is the financial market’s master, but can cryptocurrencies even aspire to be good servants?
According to data released in May, mining for Bitcoin alone used 150 terawatt-hours of electricity in one week, which is more than the entire annual energy use of the Netherlands. The European Parliament’s policy is clear: cryptocurrencies are only welcome if they appropriately address the environmental issues, says MEP Eero Heinäluoma.
These days, news items related to cryptocurrencies are ubiquitous. Generally, they centre on one of two perspectives: cryptocurrencies’ wild value fluctuations or a need for regulation. Those who swear by cryptocurrencies predict that the field will revolutionise today’s financial market, while critics warn of risks related to financial stability, money laundering, various hoaxes, investor protection and the environment. Also interesting is the critics’ notion that the people who believe in cryptocurrencies are those who believe others to believe in them.
There are currently around four or five thousand cryptocurrencies in circulation without any proper regulation. The EU must now find a balance between fostering innovation on the one hand, and ensuring investor protection and financial stability on the other. As the chief negotiator of my S&D Group, I am currently seeking such a balance in the ongoing Markets in Crypto-Assets (MiCA) negotiations.
Blockchain technology indisputably has innovative appeal. It has the potential to make the financial sector more efficient and user-friendly, for example with regard to cross-border payments. On the other hand, experiences gained thus far demand caution. The crucial question is to what extent the greater public would benefit from reforms to the current financial system.
Naturally, the traditional financial system is not perfect. Our system has many deficiencies, for instance, in its vulnerability to money laundering. At the same time, a system that presents itself as an alternative to tradition must ensure that the role of brokers is adequately fulfilled. Otherwise, there is a risk of increasing regulatory blind spots, which benefit the few and cause costs for the many.
The terminology used in cryptocurrency discourse must be clarified. Currencies like the euro or the dollar are user-friendly, relatively safe and fairly stable in value. These are not strictly speaking features that can be connected to cryptocurrencies. The value of Bitcoin, for example, has bounced up and down like an old-fashioned yoyo this year. Even after 12 years, it is not really accepted as an official payment method, and it is particularly popular in circles where official payment arrangements are generally avoided for one reason or another.
If financially sound, highly valued companies like Facebook want to present digital currencies such as Diem as a payment method, they will have to comply with rigorous requirements. It is also clear that central banks must not lag behind in the financial digitalisation trend. Luckily they are not doing so, as is proven by the European Central Bank’s development activities around digital currencies. Even though the advent of the digital euro is still many years away, the ECB’s initiative is a welcome one.
The EU is conducting efforts against climate change on many fronts, and therefore, environmental requirements are in place even for cryptocurrencies. If a cryptocurrency and its related mining consumes more energy than a whole EU member state – the Netherlands, say – one would be justified in asking who will ultimately pay for such a massive carbon footprint. According to data released in May, mining for Bitcoin alone used 150 terawatt-hours of electricity in one week, which is more than the entire annual energy use of the Netherlands. The carbon footprint of Bitcoin by itself has counteracted the CO2 savings made by the adoption of electric cars in the last decade, which means that the billions of euros spent subsidising these cars have effectively been lost. Therefore, the European Parliament’s policy is clear: cryptocurrencies are only welcome if they appropriately address the environmental issues.
Efforts to regulate the cryptocurrency market have been criticised for smothering innovation. Rather than smothering, I would say that consistent and properly communicated regulation will provide the field with much-needed coherence. Ordinary consumers must be able to comprehend the risks related to cryptocurrencies, which means that those who trade in them must make these risks clear.
By accepting healthy regulation, cryptocurrencies may find their place as a new and necessary servant of the financial market.