3 Reasons The EU Should Not Ban Bitcoin

According to recent reports, the EU decision-makers are actively thinking about banning Proof of Work-based (PoW) blockchains, such as Bitcoin, within their jurisdiction. The primary motivation for their plans appears to be the perceived environmental harm that PoW causes.

If the EU goes through with a widespread prohibition of PoW, it will be a severe mistake. The world is increasingly choosing Bitcoin as its preferred savings and value transmission technology, and any entity that locks itself out of it will harm itself more than anyone else.

Here are three reasons why EU decision-makers should drop the planned ban.

According to reports, should the PoW ban happen, Proof of Stake (PoS) blockchains would be allowed. Public discourse on the differences between PoS and PoW often focuses on overly simplistic talking points, so it’s worthwhile to take a closer look at the inherent challenges of PoS.

PoW is the original blockchain validation method introduced by Satoshi Nakamoto in 2008. It brilliantly incentivizes free-market actors to secure the Bitcoin network by expending large amounts of electricity for block creation and transaction validation rewards. While it’s energy-intensive, it’s also an open and fair system where anyone can participate equally.

The openness of Bitcoin mining, and the affordability of running a full Bitcoin node, make it so neutral that people increasingly recognize Bitcoin as a global digital reserve asset, in some ways comparable to gold. With Bitcoin mining activity globally dispersed, Bitcoin’s blockchain validation process and monetary issuance have no single points of control or failure.

PoS, on the other hand, lets token owners become blockchain validators by staking their token holdings and getting rewarded for this activity. Depending on the PoS blockchain protocol, the validator typically gets a 4–12% annual yield in staking rewards for locking their tokens in the PoS system.

Dishonest network participants risk losing some or all of their staked tokens in a process called “slashing,” which in theory incentivizes network participants to adhere to the previously defined rules.

It’s easy to see why EU decision-makers initially see PoS as a better blockchain technology than PoW. When you look at the energy consumption aspect, PoS appears more environmentally friendly. However, when you look deeper, the challenges of PoS become very apparent.

The original innovation of Bitcoin was to create a fair and censorship-resistant monetary network that’s equally accessible to everyone and cannot be manipulated by anyone.

PoS concentrates wealth and power on entities that are already wealthy and powerful. Almost every PoS-based blockchain project started with a pre-mine of tokens for early investors and founders. In many cases, the pre-mined coins often make up close to 50% of the whole token distribution.

For example, Ethereum, the most well-known smart contracts blockchain, which is planning to move from PoW to PoS, requires validators to stake 32 ETH tokens to start earning a 4.4% annual yield. At today’s prices, you need approximately 76k€ worth of ETH to become an independent PoS validator. In contrast, the Bitcoin system allows you to buy an ASIC miner for less than 10k€ and start mining yourself wherever you want.

The PoS community has already developed methods for making staking more accessible with the invention of staking pools. An individual can stake almost any amount into a staking pool and get pro-rata staking rewards. Using the popular Ethereum staking pool Lido, an individual staker can earn a 4% annual yield, while the pool operator keeps the 0.4%.

If the EU embraces PoS and bans PoW, it signals that it’s not interested in openness and fairness in financial innovation. Instead, it would signal its support for technologies that replicate many unfair and rigged parts of the legacy financial system.

2. The Myth That Bitcoin Harms The Nature

Today Bitcoin serves over 100 million users. If the Bitcoin userbase were a country, it would be among the 15 most populous countries. In this context, it’s helpful to view Bitcoin’s energy usage in the context of global reserve assets. Today, the world’s primary reserve asset is US treasuries, backed by the United States’ political, economic, and military power.

If the US military were a country, it would rank in the top 40 in oil consumption. Despite the recent comments from the Biden administration that the US military will be made more green in the future, it’s hard to see how fighter jets and aircraft carriers could run on wind and solar power in the foreseeable future.

The total energy cost of the US treasury bill system includes at least the US military-industrial complex, political and diplomatic institutions, and a large part of the global banking system.

The details of this topic are outside the scope of this post, but here is one example: Many excellent sources of hydropower are far away from existing grids and large population centers. Think of a waterfall deep in the African jungle.

With no grid to sell the electricity to, in the past, there were no free-market incentives to build hydroelectric power plants (HPPs) in these remote sites. With Bitcoin mining, the HPP can earn revenue immediately after going online.

Once the operation becomes economically sustainable, positive trickle-down effects can create economic opportunities for the population close to the new HPP. Once a critical mass of similar HPP projects happens in the region, it can make sense to invest in building the regional electricity grid, which will, in turn, help the local population to upgrade their living conditions.

Today, millions of people with no access to electricity burn wood to cook their meals. With cheap electricity, they could cook their meals without burning any wood. Millions of people migrating from burning wood to using electricity would surely benefit the environment.

If the EU bans Bitcoin and PoW, it signals that it’s not supporting positive grass-roots economic development happening in the ascending world around bitcoin mining based on renewable energy.

3. Geopolitical Game Theory

Many politicians, and most newcomers to the crypto/blockchain scene, initially think Bitcoin and PoW are just a part of this emerging field. After being in this space for over five years, I’ve concluded that Bitcoin is in an entirely own league compared to other cryptos and blockchain projects.

Bitcoin is a strong candidate to be the end-state of humanity’s long search for the best neutral money. Sound money and free markets are the building blocks of human flourishing, and the world is waking up to the realization that Bitcoin is the best money we have yet discovered.

Talented teams worldwide are developing 2nd and 3rd layer technologies, such as the Lightning Network, Liquid, and Taro, on top of the Bitcoin base layer. The best innovations happening in Defi and Web3.0 will likely find their more sustainable implementations as Bitcoin’s 2nd and 3rd layer applications in the future.

If the EU kicks out Bitcoin and PoW, it can expect a significant brain drain of talented bitcoiners moving to friendlier jurisdictions. China’s 2021 bitcoin mining ban may offer some idea of what’s likely to happen: After the ban, around 40% of bitcoin mining businesses migrated to more welcoming jurisdictions, primarily the USA.

Banning Bitcoin and PoW would lock the EU away from the future growth of Bitcoin and related businesses and give more welcoming regions the upper hand. I sincerely hope EU decision-makers can see beyond trendy ESG soundbites and realize that embracing Bitcoin is 100% aligned with many of the EU’s core values: human dignity, equality, freedom, and human rights.

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