‘Green’ crypto Ethereum wins applause in Brussels, Washington – POLITICO

Cryptocurrencies are facing scrutiny from lawmakers on both sides of the Atlantic. But a move from one of the largest crypto networks, Ethereum, to more environmentally friendly processing techniques is being welcomed by lawmakers.

While most cryptocurrencies rely on energy-intensive “mining” to authenticate transactions, Ethereum — the second most valuable cryptocurrency behind Bitcoin — completed a transition to a less demanding process on Thursday.

Under its old system, Ethereum required as much electricity as Chile does in a year to run its software to process and record crypto transactions on a public online ledger, known as a blockchain. Generating this amount of electricity comes with a large carbon footprint. Bitcoin, the most traded cryptocurrency, is even more voracious.

But after years of planning, Ethereum’s operators are switching to a new system that uses a tiny fraction of the energy consumed by the old one, without taking the network offline.

This switch – or “pooling,” as it is called by enthusiasts – has been widely anticipated by lawmakers in Europe and the US, who are concerned about cryptocurrency’s massive carbon footprint and energy needs at a time of soaring energy prices.

The merger, which is expected to cut Ethereum’s energy use by 99.95 percent, could serve as a catalyst for other cryptocurrencies to follow suit, winning cautious applause from policymakers.

“At a time where we’re talking about energy, energy, energy and reducing consumption and concerns about blockchain, this is positive,” the European Commission’s chief fiscal officer, Mairead McGuinness, told POLITICO. “Anything that reduces consumption in this area is welcome and the scale of the potential costs is quite huge and necessary.”

So-called proof-of-work systems for authenticating blockchain transactions have a bad reputation with lawmakers — so much so that a group of lawmakers in the European Parliament tried to push through an EU ban on the software earlier this year.

That initiative failed. But lawmakers in Brussels have continued to look for ways to rein in crypto’s carbon footprint, agreeing that crypto companies must disclose how much energy they use as part of the EU’s single rulebook for the industry, which comes into effect in 2024.

Policymakers in the U.S. are also closely watching Ethereum’s move to a new authentication, known as “proof-of-stake,” as they weigh new legislation and potential regulations that address the crypto’s energy use.

On Thursday, Senate leaders will hold a hearing on a bill that would give the Commodity Futures Trading Commission new powers over the Bitcoin and Ethereum markets. The measure includes a requirement for the CFTC to produce regular reports on energy consumption in digital commodity markets.

“Let this move serve as proof that the blockchain and crypto industries have better, more responsible alternatives at their disposal, and that burdening our electric grid and exacerbating the climate crisis is neither acceptable nor necessary,” Representative Frank Pallone, a New Jersey Democrat who chair of the House Committee on Energy and Commerce, said in a statement Tuesday.

The White House has also weighed in. A new report from the Office of Science and Technology Policy found that the industry could hinder the nation’s goals to curb emissions and improve grid stability if it continues to expand unchecked without clear standards or regulations.

“Depending on the energy intensity of the technology used, cryptoassets could hinder broader efforts to achieve net-zero carbon pollution consistent with US climate commitments and goals,” according to the report.

Mine collapse

Inside the crypto community, where people made a lot of money mining in the old system, Ethereum’s move to proof-of-stake is facing some criticism.

Under the old system, people win rewards for validating crypto transactions on the blockchain, a process known as mining that is energy-intensive and requires specialized computers to crunch equations.

The miner who gets the answer right is rewarded with a handful of digital coins, which in Ethereum’s case are currently worth around $1,500 each. The more computers a miner has, the greater the chance that he or she will get the right result – and a big payout.

This system encourages many people to participate in the blockchain, decentralizing the system. But it also created an arms race between large-scale mining to fill stockpiles of data servers alongside cheap energy supplies. While industry leaders say this could drive demand for renewables, some operators have brought old coal and gas-fired power plants back online to power their rigs.

The enormous energy needs of these warehouses have infuriated lawmakers. Top Democrats like Pallone and Massachusetts Democratic Sen. Elizabeth Warren, for example, have launched investigations into the amount of electricity required by mining startups — with a particular focus on groups that restarted old fossil plants to power their efforts.

Ethereum’s new proof-of-stake blockchain requires a much simpler piece of software on a regular computer and therefore uses much less power.

The incentive structure for running the software is built on a quasi-lottery program that proportionally rewards people, or companies, depending on how much they have of the platform’s native cryptocurrency, called Ether.

That won’t help proof-of-work veterans in Ethereum’s ecosystem, whose hardware is now useless and mining operations are dead.

“It’s basically the apocalypse,” said BitPro CEO Mark D’Aria, whose US firm specializes in reselling Ether miners’ used computing equipment. “I don’t see how that can’t be bad based on where this is going.”

The banks are taking notice

Ethereum miners may be licking their wounds over the merger, but banks smell an opportunity.

Crypto’s popularity skyrocketed during the pandemic as people stayed indoors with little to do, flush with money from government handouts.

It didn’t take long for some mainstream money managers, bankers and online exchanges to get involved, although most stayed away due to concerns over the crypto’s energy use and its unregulated markets.

Ethereum’s eco-friendly exchange may soon encourage traditional investors to look again at cryptocurrencies, according to Teunis Brosens, chief economist at ING Bank in the Netherlands.

Politicians’ enthusiasm for the merger could paint Ethereum as a safe bet for climate-conscious investors.

“Many banks have made sustainability a strategic goal. Offering crypto services that run on power-sucking proof-of-work is uncomfortable with that, says Brosens, who specializes in digital finance and regulation. “By concentrating on proof-of-stake in Ethereum, banks can avoid difficult discussions with their customers and investors.”